At what time do you need to register indefinite hire under the PPSA?

This article was published by Hire and Rental News, May 2018, Vol 19. Page 16.

Since the introduction of the Personal Property Securities Act 2009 (Cth) (PPSA) ownership is no longer a guarantee of recovery of property, without timely registration.  

This is particularly the case for equipment hire.  Equipment worth many tens of millions of dollars has been lost.  See this bulletin for an example.

A recent Court decision reassures hire businesses that they do not have to guess, in advance, which hires might last for more than two years. 

We discuss the decision and implications for the equipment hire industry.

The amendments to the PPSA in May 2017, to remove ‘indefinite’ hire from the ‘PPS lease’ definition and to extend the PPS lease time threshold to two years, took much of the sting out of the PPSA for the equipment hire industry.  But the amendments still leave long term hires exposed to the Act, as our article here explained.

Hire businesses that fall within the PPSA’s reach still need to rely on their PPSR registered ‘purchase money security interest’ (PMSI) ‘super priority’ status.  If PMSI super priority status is not achieved, an earlier registered security interest takes priority.

This raises an important question for any hire business.  Should you register before you deliver the goods ie at the outset of the hire?  Or is it safe to wait up to two years when the application of the PPSA is looming?

The answer to the above questions is in the PPSA and also (if the customer is a company) in section 588FL of the Corporations Act 2001 (Cth).   

Section 62 of the PPSA confers priority status, where there is a PMSI registration before the ‘grantor obtains possession’.  Where the goods are not ‘inventory’ there is a 15 business day grace period.  The time a ‘grantor obtains possession’ is clearly a critical moment as it sets the time for registering a security interest as a PMSI.  Leave it too late to register and the bank may take the equipment!  It can be difficult to fix a late-registered PMSI.

A recent decision of the South Australian Supreme Court – Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd [2017] SASC 163 (Allied Case) adopts a common sense interpretation of section 62 and one that is consistent with the approach overseas. 

The Allied Case

The South Australian Supreme Court has now held that the reference in section 62 to a grantor obtaining possession of goods is a reference to obtaining possession as a grantor rather than in some other capacity. The facts in the case were complex but can be boiled down as follows. 

In 2014 Samwise registered on the PPSR a general security interest over all Bill’s Motorcycles’ assets.

On 12 April, 2016, Bill’s executed a Bailment Agreement for floor plan finance from Allied. 

On 14 April, 2016, Allied made a PPSR registration against Bill’s to protect the goods bailed to Bill’s from time to time.

On 18 April, 2016 notices were issued the effect of which was to bring 40 motorbikes under the Bailment Agreement with Allied.

The critical complication was that before Allied registered, Bill’s was already in possession of the motorcycles.  That possession was a result of arrangements between Bill’s and its outgoing financier CDF.   

On 16 June 2016, Bill’s Motorcycles was placed into administration.  As PMSI holder, Allied no doubt expected its PMSI priority easily to trump Samwise’s non-PMSI security interest.  But Samwise saw the opportunity to argue that Allied had not registered before Bill’s obtained possession. 

Allied won the case.  Blue J held that section 62 relevantly refers to the grantor obtaining possession as grantor of the purchase money security interest in the property in question.  The fact that Bill’s had possession of the bikes in some other capacity, before actually becoming a PPSA ‘grantor’ to Allied, was irrelevant.

Implications for hires that may cross the two year threshold

Some commentators have written that registration would be needed at the outset of an indefinite hire.  On this view, one could not wait until the two year PPS lease threshold becomes imminent. 

However there are a number of problems with that very literal interpretation, including the following.

• Cases on similar legislation overseas don’t support that view.
• Section 62 refers to possession being obtained by the ‘grantor’ which is a term defined in the PPSA in a way that assumes there is already security interest – not just the possibility of one.
• The view leaves unanswered how one can register something that is completely outside the PPSA and might never be subject to it because it might never be a PPS lease. Many hire businesses genuinely have no idea when a given customer might end up keeping the goods on hire for more than two years.
• The expressly stated purpose of the 2017 amendments to the PPSA was to relieve hire businesses from the PPSA until they cross the PPS lease time threshold. In the Minister’s second reading speech he said (emphasis added) – ‘The Bill will amend the Act's definition of PPS Lease to ensure that it captures only leases which are long enough to necessitate registration on the PPS Register to meet the Act's policy objectives. Leases with an indefinite term will only require registration once they have exceeded two years in length.’  

Now, applying the Court’s reasoning in the Allied Case to the scenario of an indefinite hire, a hirer will not, in our view, be in possession as a grantor of a PMSI until such time as a PPS lease actually arises.  It is true that Allied was not a case about the PPS lease but the following remarks by Blue J support the application of the same analysis to simple hires that turn into security interests.

By contrast, the person who subsequently becomes the grantor of a purchase money security interest might hold possession of the property before acquiring ownership of the property financed by mortgage finance. For example, the person might simply be hiring goods on a weekly basis. That person might later negotiate with the owner to purchase the goods and obtain mortgage finance to finance the purchase. Lenders to the hirer who become security holders during the period in which the hirer is hiring the goods do not obtain a security interest over the ownership of the goods because the ownership is retained by the owner. Such lenders would not be prejudiced by the subsequent grant of a security interest to the mortgagee lender providing the finance to the hirer to acquire ownership of the goods. Such lenders would not be misled by the hirer’s possession of the goods.

What about section 588FL of the Corporations Act?

Section 588FL can invalidate a security interest if registration is not made within 20 business days of the date of creation of the security agreement.  This article explains.  To survive section 588FL, at least six months have to pass between the registration and any insolvency. 

Section 588FL may (we trust) be gone soon if the recommendations of the Whittaker Report are enacted.  See our bulletin on the Whittaker Report here.

In the meantime, it is clear enough that the 20 business day period doesn’t start to tick until there is a ‘security agreement’.  Our view is that a contract for an indefinite hire simply is not a ‘security agreement’ - again until the two years PPS lease threshold is breached.  We think that the points noted above would, along with the approach in the Allied Case, apply here too.

It may well be excessively cautious to think that an indefinite hire could be a ‘security agreement’ from day one even though the PPSA does not yet apply to it.  If one registers six months before there is a security interest – ie just prior to 18 months into the hire, then arguably section 588FL can’t operate anyway because there will always have been a registration six months before any insolvency that could threaten any security interest. 

Conclusion - when should you register when a hire starts as indefinite?

• If there is a subsequent agreement that the hire will last more than two years (including any option) - at the time the parties agree to that because that is when a security interest arises; or
• If the hire is indefinite but could possibly exceed the two year threshold - just before 18 months into the hire.  The 18-month timeframe is adopting the most cautious view of section 588FL - until section 588FL is repealed. 

However, the PPSA is complex and registration strategies typically differ between hire businesses. Hire businesses should always seek advice about their own particular circumstances.

Author: Oliver Shtein & Alfredo Amado