The Supreme Court of NSW has decided a PPSA priority contest against the owner of leased Caterpillar equipment, in a fight with the receivers and managers of the equipment’s insolvent lessee.
The case is a warning to those used to ownership and title retention based forms of security. The fact is that an owner/ lessor of equipment can lose its property to a secured creditor of a lessee upon VA or liquidation.
It also shows why it pays to get important agreements documented by a competent lawyer.
The case is Albarran and anor v Queensland Excavation Services Pty Limited & Ors  NSWSC 852 (link).
The facts are available at the link in paras 1 to 10, which include at para 10 a useful statement of the issues and Brereton J’s conclusions on each of them.
Some of the more interesting facts are these:
- the owner and lessor companies had a common shareholder, who appears to have informally financed the Caterpillar equipment and other vehicles from mainstream lenders;
- the leases between the owner and lessor were not in writing, but were for more than one year. There seems to have been an arrangement whereby the owner purchased the equipment on finance, and then passed possession on to the lessor in return for payment of the finance costs plus 10%;
- the leases predated the transition to the PPSA;
- that probably explains why the owner did not register its interest in the Caterpillars and why no written lease existed to make provision for the PPSA.
The decision is not unexpected given the circumstances:
- the owner’s interest was a security interest in the Caterpillars – see s12(2)(i) and s12(3)(c) since the leases were PPS leases;
- the equipment owner had failed to register its security interest, as owner;
- lessor had executed a General Security Deed with its secured creditor which expressly gave security over the Caterpillars;
- under s19(5) of the PPSA, leased equipment forms part of the lessor’s collateral capable of being subject of a security interest;
- the secured creditor had registered the General Security Deed ;
- the secured creditor prevailed because it had registered and the owner had not – s55(3).
See generally paragraphs 20 to 34 for the discussion of the nature of the security interests held by the owner and the secured creditor respectively in the Caterpillars. See generally paragraph 35 to 41 for the discussion of the priority contest.
The decision referred to many of the cases from other jurisdictions regarding priority at paragraphs 26 to 31. The case that this reminds me of the most is Waller v New Zealand Bloodstock Ltd  3 NZLR 629, discussed and approved at paragraph 30: just switch the horse for an excavator.
There are some other interesting points in the decision:
- An attempt to argue that the transitional provisions applied failed, because the Caterpillar equipment was registrable in the Northern Territoty (where the vehicles were used) on a local motor vehicles register – this triggered an exception to the transitional provisions which would otherwise have protected the position of the lessor as an owner with rights under the lease predating the registration date – see paras 47 to 56 in particular;
- The rights to possession of the owner under the lease on default by the lessee company are lost once the VA or liquidation commences, so the owner cannot repossess – see s267. In other words, no residual rights of true ownership survive because they vest in the company – see paragraph 72 ff.
There are some useful articles discussing the decision that I have seen so far, see:
The owner of the goods was always going to lose out in this one. The lack of documentation is typical where company structures were historically used by owners to estate plan. Whilst it was always the dream to shelter assets away from creditors, often this is undone over time as the owner forgets to keep the documentary “walls” up between their companies…