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A QUESTIONABLE PRACTICE: PPS vesting provisions on appointment do not extinguish a financier’s perfected interest in leased equipment on the PPSR.

I recently had a piece published in the ARITA Journal with the above, rather lengthy, title.

The topic is the extent to which a financier’s security interest is really affected by the vesting provision, section 267, in the PPSA.  There is a current practice of letters being dispatched to the holders of any unperfected security interests in leased equipment, claiming vesting of all interest in the collateral in issue, without regard to upstream financier’s interests. The fact is that there are good arguments that the financier’s interest is not affected, even if the owner of the equipment who has provided the lease may lose its interest because of vesting.

This article deals with such an example where the argument of the VA in that case was defeated by the citation of a Canadian case on point. The issue hasn’t been dealt with by the Courts in Australia yet so is topical, and is relevant to major banks and equipment fleet financiers who can be affected.

A link to a PDF copy appears below.

ARITA Journal March 2016 Mark McKillop

 

PPS Leases explained, what is Regularly Engaged in the Leasing of Goods and what is a PPSA Fixture?

The courts continue to hammer out the meaning of various basic provisions of the PPSA.

The decision in Forge Group Power Pty Limited (in liquidation)(receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52 looked at two issues dealing with the reach of the PPSA to leases:

  •  What constitutes “regularly engaged in the business of leasing goods”
  • What is a fixture for these purposes?

Background

 The Personal Property and Securities Act 2009 (Cth) (PPSA) introduced a new national code for determining the priorities of security interests in personal property., where primacy is given to registered interests.

Prior to the introduction of the PPSA, a owner of personal property, as a lessor, had all the common law rights of an ownership against the world, including to recover that property.  Those rights were largely subject only to the terms of any transactions the owner entered with third parties affecting those rights: for example, by leasing, charging, pledging, bailing or selling the goods.

However, under the PPSA, the rights of ownership under a goods lease are affected when they are registrable security interests.  A security interest arises where, in substance, an interest in personal property provided for by a transaction secures payment or performance of an obligation: section 12(1) of the PPSA.

Ownership interests under a Lease – the PPS Lease

Difficulties arise in relation to leases under registration schemes, because it is necessary for legislators to distinguish between leases that are in substance a financing arrangement which secure a payment or obligation (finance leases), and leases that are pure leases exacting payment only for use of the property before it is returned (operating leases). Examples of the former might include a long-term car lease, over a period of 3 years, with no residual or an agreed balloon payment. An example of the latter might include a 7 day car-hire for a daily fee, with the vehicle returned at the end of the hire.

There is a grey area between the two concepts, and room to argue whether a security interest arises or not, depending upon the term and financial structure of a lease.

Under the PPSA, the interest of a lessor under a lease will be registrable in several circumstances:

  •  First, where in substance, the lease is a finance lease that creates an interest in the property that secures payment or performance of an obligation, and so falls within the general definition of a security interest. For example, a finance lease: see section 12(2)(i) of the PPSA;
  • Second, where the lease is a “PPS Lease”, irrespective of whether the lease is a finance or operating lease, but falls within the definition of PPS Lease: see section 13 of the PPSA.

The principal effects of failing to register are:

  •  Where the lessee is bankrupted or enters into insolvent administration, an unregistered registrable security interest vests in the liquidator or trustee; and
  • priority is lost to holders of security interests in the property who are registered, for example a financing bank.

Generally speaking, a PPS Lease is a lease of goods that endures for a period of more than 12 months or is in respect of goods registrable by serial number:

  • It does not matter whether the lease is a finance or operating lease. Both are caught;
  • It includes leases where, by renewal or extension, the lease may or does continue for more than 12 months;
  • It includes a lease of goods that may or must be described by serial number (eg cars, aircraft and aircraft engines, watercraft, boats, certain intellectual property: section 13(1)).
  • If the lessor is not “regularly engaged in the business of leasing goods”, the lease is not a PPS Lease.
  • Further, if the property is a fixture, rather than personalty, the PPSA does not apply – see PPSA section 8(1)(j).

So why is it necessary to have PPS leases in the legislation? Why not just rely on the substance of the lease to determine whether it falls within section 12? There appear to be several reasons:

  • First, to eliminate the grey area between operating and finance leases, but to preserve from registration short term leases that are likely to be operating leases;
  • Second, to bring property identifiable by serial number completely within the registration scheme;
  • Third, the interest of a lessor under a PPS Lease is purchase money security interest for the purposes of the priority rules, and so takes priority over other secured creditors who are registered – see section 14(1)(c). It is notable that the interest of a lessor under a short term finance lease of less than 12 months is not a PMSI.

The Limits of Regularly Leasing and Fixtures

In Forge, General Electric International Inc (GE) had by an operating lease dated 5 March 2013 provided four gas turbine electrical generators to the plaintiff (Forge). On 11 February 2014, Forge went into liquidation. Prior to 22 October 2013, GE had operated a business in Australia of renting gas turbine power generation units. From that date, it sold the rental business and had assigned the benefit of the lease and the turbines. It also continued to supply replacement turbines on a temporary basis and free of charge, to its customers who required maintenance on turbines that GE had supplied.

GE argued that at the time of the liquidation it was no longer regularly in the business of leasing turbines. The submission was rejected, since:

  • the relevant date to assess that issue was at the date of lease, not the date of liquidation (at[136]) and a the date of the lease it had not sold its business;
  • in any event, after the sale, GE continued to provide turbines on a replacement basis in the market, albeit where maintenance required it (at[134]).

GE also argued the turbines were fixtures. Under section 10 of the PPSA a “fixture” means goods, other than crops, that are affixed to land. GE argued that the definition was a “bespoke” definition that differed from the common law.   That submission was also rejected and the court found that the concept of fixture in the PPSA was the same as at common law (at [77]).

The turbines were found not to be fixtures on the facts. The key points included that (at [134]):

  • The turbines were truly portable, in that they were designed to be quickly demobilized and moved to another site, and were on wheeled trailer beds for that purpose;
  • They could be removed without damage to the land;
  • The cost of removal was modest compared to the cost of the turbines;
  • The turbines were rented for a short period, being two years, with limited renewals and were clearly intended to be removed in the future;
  • GE retained ownership and the lease specified that the turbines were personal property;
  • Forge was obliged to return them at the end of the term;
  • Forge did not own the site where they were installed.

 

 

 

Court Injuncts Sham PPSR Registrations

Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217

 

Initial registration of a financing statement on the PPSR is very easy.  You simply go to the Personal Property Securities Register (PPSR) website and follow the links, enter the prescribed data, pay a small fee and hit a button or two.

The ease of registration, compared to a paper based registry such as land titles or the former company charges register, makes the PPSR more open to abuse.

In Sandhurst Golf Estates Pty Ltd v Coppersmith Pty Ltd [2014] VSC 217 three companies had financing statements registered in respect of their personal property without basis.  The registrations were maintained, in the face of demands to remove them, as leverage to pursue a claim one of the defendants had against Sandhurst and others.  The claim was not to a security interest in respect of personal property, but rather a claim to some equitable interest in certain land.  Accordingly, the claim was not registrable:  see paragraphs  [87] to [107] of the judgment of Robson J.

The financing statements following the administrative “show cause” process under the Personal Property Securities Act 2009 (Cth).

That was not the end of the matter – in this case the defendants threatened to, and did, make more registrations to pursue their claim.  Each time a new financing  statement, or financing change statement, is registered, then the administrative process has to be repeated.  The administrative process is time consuming and expensive.  In the meantime, before it resolves, the existence of a record of sham financing statements can adversely affect the innocent party, especially with its own financiers and may amount to an event of default.

In Sandhurst the plaintiff companies successfully sought injunctions restraining further financing statements, or financing change statements, from being registered by the defendants.  The injunctions were obtained by the exercise of the Court’s inherent injunctive jurisdiction, rather than under any express power given to the Court by the PPSA:  see paragraphs [108] to [119].   The application is the first of its kind in Australia.

An application had also been made by the plaintiffs relying on s182 of the PPSA, but the Court did not need to deal with it.  However it is notable,and perhaps an unintended omission from the PPSA,  that the section does not contain an express power to enjoin registration of a financing statement, but does contain an express power to restrain the making of an amendment demand.

Further,  having established the absence of any security interest in the plaintiff companies’ personal property, the Court found that the substance of the defendants’ claims to an equitable interest to be irrelevant.  This meant that discovery in respect of those claims was not warranted, and that evidence and argument about those claims, except insofar as it was necessary to demonstrate the absence of a security interest, was not permitted.   The finding prevented the disocvery process in the application itself from being used in an abusive manner.   See paragraphs [120] to [121].

The author appeared as Counsel in the proceeding for the plaintiffs, instructed by Minter Ellison.  Nick Anson, Partner and Jane Salveson, Special Counsel have prepared an interesting alert regarding this case and particularly the problems arising out of Sham registrations, which can be found here.

Regards

Mark

When is a defect in a PPSR registration fatal? A defect in the ACN of the secured party not misleading

Case Note – Future Revelation Ltd v Medica Radiology & Nuclear Medicine Pty Ltd [2013] NSWSC 1741

It is often the case that an error is made in the ACN, ABN or even name of a party, or in the serial number of collateral,  when registering on the PPSR.  The online nature of the registration process lends itself to typos or transcription errors.

The Supreme Court of NSW has found that a defect in the ACN of the secured party in a financing statement registered on the PPSR does not render the registration ineffective.

Section 153 of the  Personal Property Securities Act 2010 (“PPSA”) requires that a financing statement include certain details of the secured party.  If the secured party is a Body Corporate, the ACN must be entered – see item 2 in the table under para 1.3(4) in schedule 1 of the PPSR regulations.

In Future Revelations, the secured party’s ABN number was entered instead of its ACN number.

The PPSA codifies which defect in the register make the associated registration is ineffective.  It is important in practice to be aware of them:

  • Section 164 provides that a defect in the register will render the relevant security interest ineffective if it is “seriously misleading”, excepting defects prescribed in the regulations, or it if is defect mentioned in section 165.
  • The defects in section 165 are:
    • defects preventing disclosure of the registration by searching the serial number of the collateral where that detail is required for registration.  An example would be omission of the serial number or an error in it;
    • where the serial number is not required, where a search by reference to the grantor’s details is not capable of disclosing the registration.  An example might be an error in the name of the grantor, such as recording the name of a partnership as that of an individual partner, rather than that of the partnership;
    • where the registration is said to be in respect of a PMSI, but in fact is not;
    • otherwise as specified in the regulations.
  • At present no regulations have been made under sections 164 or 165.

What makes a registration defect “seriously misleading”?  Since the PPSR is a register designed to enable the public to identify security interests in collateral, or security interests given by a grantor, errors are seriously misleading if they  hinder or prevent a search turning up security interests by reference to the identifying details of the collateral or grantor.

In Future Revelations, Brereton J said at [5] to [7]:

  1. The suggested defect in this case is not one of a kind mentioned in s 165. The question then is whether it is “seriously misleading”. That term is not defined in the PPSA, nor is there any guidance in respect of its meaning in the explanatory memorandum or the second reading speech. However, as is well-known, the PPSA is modelled on and derived from similar legislation in Canada and New Zealand and, as was observed in Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd [2013] NSWSC 852, the Commonwealth Parliament in enacting legislation that was modelled on the New Zealand and Canadian legislation should be taken to have intended approaches and interpretations applied by the Courts of those countries to their legislation to apply in Australia. A similar view has been taken in New Zealand.
  1. Canadian case law suggests that the test for whether a defect is “seriously misleading” is whether it will result in the registration not being disclosed on a search [see Re Lambert (1994) 7 PPSAC (2d); GMAC Leaseco Ltd v Moncton Motor Home & Sales (2003) 227 DLR (4th) 154 at [58]]. That makes sense, as the purpose of registration is to enable the existence of the security interest in the collateral to be searched and ascertained. A person searching in the PPSR is likely to be concerned with the identity of the grantor and/or the collateral. In terms of searching the PPSR, while there is facility to search by reference to the identity of the grantor and the collateral, there is no facility to search by reference to the identity of the secured party.
  1. In the present case, a search by reference to the identity of the collateral or the grantor would have disclosed the relevant security interest. Such a search would have identified clearly enough the secured party, namely Suncorp, even though its ABN and not ACN was stated. In my view, it is very clear that this defect was not seriously misleading or indeed for that matter misleading at all. Accordingly, it seems to me by operation of s 164(1) that the registration is not ineffective by reason of the defect that has been identified.

So errors in the details of the secured party will be not be fatal, provided the details in the registration in respect of the serial number of the collateral, or the grantor, as the case may be, is correct.

However, an error in the ACN or name of a grantor, where the serial number of the collateral was not required, may well be fatal – see for example a case where the name of the grantor was recorded as “Grandstand” rather than “Granstrand”.

Practitioners need to be careful in checking transcription of the identifying details of the grantor and the collateral (particularly the serial number) when entering details on the PPSR website.

It is also worth noting that the application in Future Revelations was made urgently and  ex parte, without formally filing process.  The application was urgent since the borrower had just defaulted.  Leave was granted to file process in Court, and an order was made giving liberty to apply to any administrator, liquidator or unsecured creditor to claim their interests could be affected by the order of the Court.

Regards

Mark

 

Ironman Melbourne ticked off bucket list

On 24 March 2013 I completed one of my bucket list ambitions, an Ironman triathlon.

Thanks to a number of donors I managed to raise $1,580 for the red cross in the process.  Thanks to all of you who donated.

Here are some pics from the event, which I managed to complete in 15 hours, 9 minutes and 8 seconds.

It was a great day, lots of adrenaline and a massive sense of achievement.   Also the hardest 7 hours and fifty minutes ever on a push bike riding into 35 km/h head winds, and a tough way to run a marathon for the first time.

Some special thanks to my wife and family for their patience and support over 12 months of preparation, to Bayside Triathlon Club athletes (esp IM athletes) and coaches Rob McNamara and Clint VB.

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Seasons Greetings and a New and Very Difficult Challenge

Dear readers

A combination of a very busy 3 months and some technical issues with my domain name markmckillopbarrister.com have kept my posts to a minimum in the past few months.  The technical issues are now fixed so the link to my site should be fully functional.

With Chistmas almost upon us I will have some time to add some new material which will largely be published in the New Year.

I wanted to take this opportunity to wish everyone a safe and happy holiday season, and to plug a non professional endeavour I will be up to on Sunday, 24 March 2013.

I am doing the Melbourne Ironman Trialthlon race on that day, based at Frankston.  It is a 3.8km swim, a 180km bike ride and a marathon at the finish.  I hope to finish in about 13 to 14 hours.  Some information about the event can be found here. I have signed up to fund raise for the Red Cross for the event. So as well as supporting my webpage you may wish to give some support to the Red Cross!

Please help them if you are able, they are a great organisation and always at the front line for any big disaster that comes along (Bushfires, Tsunami, bombings etc).  And I guarantee that every donation made will help inspire me to finish.

A link to the fundraising page can be found here.

Merry Christmas

Mark