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The PPSA - the big bad wolf?
The Personal Property Securities Act 2009 (Cth) (PPSA) commenced operation at the start of 2012, a year when mining investment was generating a significant amount of the growth in Australia’s economy. As the steam came out of the mining boom and a large number of mining companies and their providers had controllers appointed to them due to solvency concerns, equipment suppliers who hadn’t strictly complied with the registration requirements of the PPSA began to feel its teeth.
In particular, two recent Australian Court decisions demonstrate how a failure by companies to properly register their interest in the equipment they supply on the Personal Property Securities Register (Register) can result in those companies losing assets. Those companies have been left to prove for the value of those assets (over $70m collectively) as unsecured creditors in the liquidation of the lessee company.
Against that background, as mining industry investment begins to show signs of reviving, it is imperative that entities are well aware of the registration requirements of the PPSA and ensure their interests are adequately protected.
How the PPSA works?
The PPSA applies to “security interests” over almost all types of property other than land, fixtures and water rights (Collateral), and includes both physical assets and intangible property. A security interest is an interest in property created by a transaction that, in substance, secures payment or performance of an obligation.
The PPSA also provides for a particular form of a security interest known as a “PPS Lease”, whether or not the relevant transaction secured payment or the performance of an obligation. A PPS Lease includes a lease or bailment of goods in circumstances where:
- the arrangement exists for an indefinite period, or a term of 12 months or longer (including options to renew);
- the lessor/bailor is regularly engaged in the business of leasing goods; and
- in the case of a bailment, the bailee provides value.
In the context of a PPS Lease, the lessor/bailor is referred to as the “secured party” and the lessee/bailee as the “grantor”.
A secured party can enforce its security interest against the grantor if the security interest has “attached” to the Collateral. In a PPS Lease, that will occur when the asset passes into the possession of the grantor pursuant to a written agreement. The final step for the secured party to protect its asset is for its security interest to be “perfected”. For a PPS Lease, that occurs when the security interest is registered on the Register. The Act and the Personal Property Security Regulations 2010 (Cth) (Regulations) stipulate what information is be included when registering a security interest.
If a PPS Lease isn’t “perfected” at the time an administrator or liquidator is appointed to the grantor company, the underlying equipment will vest in the grantor. That is, the equipment will become an asset of the grantor company to be dealt with as the relevant controller sees fit.
The Court’s enforcement of the PPSA
The decisions of Power Rental Op Co Australia LLC v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) and In the matter of OneSteel Manufacturing Pty Ltd (administrators appointed) both concerned a failure by a lessor of equipment to properly register PPS Leases.
In Forge, GE International leased to Forge four “mobile gas turbine generators” (Turbines) valued at approximately US$44m which had been installed on site by Forge in the course of it constructing a power plant in Port Hedland. Power Rental and a related entity, who acquired part of GE’s business, including the Turbines, did not register their interest in the Turbines on the Register before administrators were appointed to Forge.
Forge sought a declaration from the Court that the lease agreements for the Turbines were “PPS Leases”, so that the rights to the Turbines were deemed to have passed to it upon the appointment of administrators. Power Rental argued that the Turbines were fixtures to the land and were outside the scope of the PPSA and therefore it should retain its interest in the Turbines.
The NSW Court of Appeal gave a detailed analysis on what is meant in the PPSA by the reference to “fixture”, ultimately agreeing with the first instance decision that the Act adopted the “common law” meaning of fixtures. That is, the question ultimately depended on the facts of the case, but was informed by the “objective intention with which the item was put in place, having regard to the degree and object of annexation”.
The first instance decision, upheld on appeal, found that the Turbines were not fixtures because, among other things, the Turbines were:
- designed to be portable (notwithstanding there was a fairly involved demobilisation process, which, notably, wouldn’t destroy or damage the land or the Turbines, and wouldn’t cost more than the value of the Turbines);
- not intended to be onsite permanently, were to be returned to the lessor at the end of the lease period, and the lease agreement expressly provided that they would not pass to the owner of the land; and
- only attached to the land to prevent damage to the Turbines themselves rather than to benefit the land.
The Court of Appeal found that the pipelines connecting the Turbines to the underlying infrastructure on the site were affixed to the land for the benefit of the land. However, that connection wasn’t so “substantial or enduring” to change the Court’s view that the Turbines were not fixtures.
As a consequence, the Turbines were held to fall within the scope of the PPSA, and Power Rental’s failure to register its security interest in the Turbines meant that the Turbines vested in Forge upon the appointment of administrators to it. This allowed Forge’s liquidators to deal with the Turbines, thereby providing a windfall gain to Forge (or, more precisely, for any prior ranking creditors).
In OneSteel, Alleasing Pty Limited (Alleasing) rented crushing and screening equipment (Equipment) to OneSteel valued at approximately $25m. The parties agreed that the rental agreement was a PPS Lease.
Before administrators were appointed to Onesteel, Alleasing had registered its security interest on the Register, but registered against OneSteel’s Australian Business Number (ABN) rather than its Australian Company Number (ACN) (as required by the Regulations). OneSteel argued that the registration was therefore defective and had not been perfected, meaning that the Equipment had vested in OneSteel upon the appointment of administrators to it.
The Court agreed on two grounds, stating that:
- the registration was defective as the Regulations require that security interests be registered in a particular way (that is, against OneSteel’s ACN), and the failure to comply meant that a search of the Register wouldn’t reveal the registration; and (in those circumstances)
- the defect was also seriously misleading and in contravention of the PPSA.
Alleasing also argued that the PPSA was unconstitutional as the vesting of unperfected property amounted to an acquisition of property on unjust terms within the meaning of paragraph 51(xxxi) of the Constitution. But, the Court referred to an earlier decision of the WA Supreme Court, holding that the PPSA was not contrary to the Constitution in that respect, putting that question to rest for the time being.