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30 Jun 2016

What is a PPS Lease?

4 years later and people are still getting it wrong!

Despite the fact that the PPSA has been in place for some four years we are still amazed at how many people are either unaware of the PPSA or are misinterpreting it.

Recently, we received a claim from a leasing company that leased some equipment to the insolvent company we were appointed to. They claimed that they held security over those assets and therefore we must release them. As the leasing company did not hold a registration on the Personal Property Securities Register (PPSR) we pointed out to them that Section 267 of the Personal Property Securities Act 2009 (PPSA) provides that an unregistered security interest vests in the insolvent company as a result of our appointment.

The leasing company disputed this on a number of grounds.

Two arguments were that the arrangement was a “rental” agreement, which is not subject to the PPSA, and that they had financed the assets from a major bank that had registered a security interest over the leasing company (in respect to those assets) and therefore, a registered security interest over those assets existed.

In respect to the first argument, the leasing company supplied the goods to the company under a five-year finance arrangement and allowed recovery of equipment in the event of non-payment. The following sections apply to this scenario:

  • Section 10 of the PPSA defines a grantor as a lessee under a PPS lease.

  • Section 12(3)(c) provides that a security interest includes an interest in a PPS lease.

  • Section 13(1) defines a PPS lease to be a lease or bailment of goods for more than one year or for an indefinite term.

  • Section 13(2) provides that a PPS lease does not include a lease by a lessor not regularly engaged in the business of leasing goods.

Given the arrangement by the leasing company, it’s apparent that the transaction satisfies the definition of a PPS lease, because it is a finance agreement in respect to goods leased for five years. Despite the leasing company attempting to refer to it as a “rental” agreement or incorporate words to that effect, the PPSA provisions captures this arrangement.

From a practical perspective, it would be very unusual for any entities to so easily circumvent the requirement to register just by merely labeling a transaction by another name, when for all intents and purposes its nature is something entirely different. Section 13 was specifically included to unequivocally define what is a PPS lease (regardless of its label) to prevent such an occurrence. Many would be aware of the material impact that applying this section can have in light of Forge Group Power Pty Ltd (In Liquidation) v General Electric International Inc [2016] where GE lost its interest in a turbine worth $60 million, because of its failure to register its interest on the PPSR, in what was held to be a PPS lease.

In respect to the second argument, the following PPSA sections are relevant:

  • Section 46 provides that a lessee (or buyer) of personal property takes the property free of a security interest given by the lessor: if the property was sold or leased in the lessor’s ordinary course of business.

  • Section 53 provides that in the event of the above, the secured party is subrogated to the transferor's rights.

While the bank had a registered security interest over the leasing company, neither the bank nor the leasing company held a registered security interest over the insolvent company. The leasing company had leased the asset to the insolvent company and clearly met section 46's requirements of 'ordinary business'. Therefore, the insolvent company had taken the asset free of the bank’s security interest (when the lease was established). And neither the bank, nor the leasing company, could maintain a security claim over the asset, because of the operation of the PPSA sections above. The bank’s only right is to be subrogated to the leasing company's role, which is the right to prove as an unsecured creditor in the liquidation.

Therefore, we believe this serves as a timely reminder that it is not possible to avoid the PPSA by merely being creative with labels. And that when supplying assets (due to be supplied to a third party), it is your responsibility to ensure that you or the other entity registers a security interest over the third party. And as always, registration on the Personal Property Securities Register is paramount in all things relating to the PPSA.

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