PPSA bites the hire industry again. But will the government tame the beast?

Recent decisions such as the Maiden Civil case (see our July 2013 bulletin: PPSA – reality bites in equipment hire) show that the Personal Property Securities Act 2009 Cth (PPSA) operates as expected.  But these outcomes continue to alarm businesses who find the legislation complex and harsh in the threat that it poses to ownership of their assets.  Nowhere is this more the case than for the hire industry.  We report below another instance in Western Australia.

In reaction to concerns voiced by the industry, the Government has introduced amendments to the PPSA to reduce its scope for shorter term hires.  The Government has also confirmed timing for a major review of the PPSA.  The hire industry will be hoping that the review will deliver more relief than offered by the amendments announced so far.

PPSA bites again

In White v Spiers Earthworks Pty Limited [2014] WASC 139, Spiers agreed to sell a business and equipment to BEM Equipment Pty Limited and also entered into a hire agreement with BEM in relation to certain vehicles and trailers. 

The hire agreement was entered into in 2010 and included terms under which BEM paid instalments in aggregate equivalent to the purchase price of the equipment plus a margin.  The agreed market value of the equipment was more than $1.4million.

The Western Australian Supreme Court found that this arrangement was an ‘in substance’ security interest under PPSA as well as being a ‘PPS lease’ (deemed security interest) under the legislation.

A contest arose in the case because BEM had given a charge over all its assets to NAB in February 2011.  BEM become insolvent and appointed voluntary administrators in July 2013.  Shortly after that, NAB appointed receivers.

The Court found that no PPSA transitional protection was available to Spiers because Spiers had not registered its interest under the predecessor to the PPSA in Western Australia, the Chattel Securities Act 1987.

The Court held that the equipment therefore vested in BEM which meant that it became effectively part of the NAB’s security, and Spiers lost ownership.

The vibe?

Fans of the movie ‘The Castle’ will recall the ultimate triumph of ‘the vibe’ (also known as the ‘just terms’ provision found in s.51(xxxi) of the Commonwealth Constitution).  Interestingly, in this case, Spiers attempted to invoke s.51(xxxi) and argued that the vesting of its interest in the hired equipment in BEM would result in an acquisition of its property, because the vesting would wholly extinguish Spiers’ proprietary interest in the equipment and vest it in BEM.  Spiers argued that such an acquisition of property was not on ‘just terms’ because Spiers would receive nothing in return. 

The Court referred to High Court decisions that a statutory provision is not one for the ‘acquisition of property’ within s.51(xxxi) of the Constitution where the provision is not one for the acquisition of property as such, but rather part of a general regulatory scheme aimed at the ‘adjustment of competing rights and liabilities’.   In this case the Court found that the vesting inflicted on Spiers was only adjusting the rights of secured and unsecured creditors. 

We can observe that Spiers would have the undoubtedly cold comfort of proving for its loss as an ‘adjusted’ unsecured creditor of BEM.

With PPSA now more than two years old outcomes like this are becoming quite common in our experience.

PPSA gets a trim - amendments introduced affecting serial number registrable property

The Government has introduced amendments to the PPSA contained in the Personal Property Securities Amendment (Deregulatory Measures) Bill 2014.  The Bill was introduced as part of the Government’s ‘repeal day’ package of red tape reduction measures.

The Bill proposes to amend the PPSA so that leases for 90 days or more of serial number registrable goods will no longer be deemed to be PPS leases for the purposes of the PPSA. Currently PPSA deems leases of certain items of such goods (such as motor vehicles, boats and aircraft) to be PPS leases where the leases are for 90 days or more. 

If this change becomes law, it will mean that hire businesses will not need to register hires with a term of less than 12 months.  It will align the PPSA with similar personal property securities regimes in countries such as New Zealand.   The Bill is not expected to face opposition in Parliament.

However it is critical for hire businesses to note that:

• the changes will not remove the part of the definition of ‘PPS lease’ that deems a hire for an ‘indefinite’ term to be a PPS lease security interest.  Accordingly if a hire business provides equipment for ‘as long as the customer needs it’ or on similar indefinite terms, this is still a PPS lease and still therefore a security interest from inception. 
• The changes do not affect any arrangement which as well as being a PPS lease is also an ‘in substance’  security interest – such as a hire purchase (as in the Spiers case discussed above) or a deferred purchase or ‘rent to buy’ arrangement.  So for example an agreement to hire goods with title to pass after three quarterly instalments are paid, or with an option to purchase during the hire can be an ‘in substance’ security interest even if the PPS lease time threshold is not exceeded.

Proposed changes to the definition of ‘motor vehicle’

The Explanatory Memorandum to the Bill also considers proposed amendments to the definition of a ‘motor vehicle’.  The Bill discusses limiting the definition of a motor vehicle, so that an item of personal property that otherwise meets the terms of the definition will only be considered a ‘motor vehicle’ for the purposes of the PPSA if it is also:

• capable of travelling at a speed of at least 10km/h, and
• has one or more motors with a total power greater than 200 watts.

The current definition of ‘motor vehicle’ covers goods that satisfy either of the above tests and so covers a wide variety of items beyond what one may typically regard as a ‘motor vehicle’.  For example things such as scissor lifts, boom lifts and even pedestrian-operated compacting plate equipment (which has no wheels at all) can be motor vehicles under the current definition.  By combining the two parts of the definition (i.e. speed and power output), the Government intends that fewer items would come within its scope and the application of serial number registration provisions in the PPSA will be reduced.  

If the changes proposed in the Bid become law the definition of ‘motor vehicle’ will not be relevant in determining the time threshold for a PPS lease, but it will still be relevant in allowing serial number specific registration.  Registering by serial number offers additional protection to a hire business where its customer wrongfully leases or sells the goods.  For certain consumer property it is mandatory.

No retrospective effect

We understand that the changes may take effect in July this year.  It is important to note that the amendments will not apply retrospectively and would preserve the operation of the law for any interests created under pre-existing leases.  Accordingly for hire arrangements in force at the time the amendments do become law there will be no change to the PPSA risks.

The impending review of the PPSA

The Government clearly sees PPSA reform as a work-in-progress.  The Government has appointed a commercial lawyer, Mr Bruce Whittaker to undertake a review of the operation of the PPSA. 

The terms of the review are wide and the Government has said that it should consider matters including effects of the PPSA on:

• Australian businesses, particularly small business
• Australian consumers
• the market for business and consumer finance in Australia
• the level of awareness and understanding of the Act at all levels of business, particularly small business
• the incidence and, where applicable, causes of non-compliance with the requirements of the PPS Act particularly among small businesses
• opportunities for minimising regulatory and administrative burdens, including costs, on businesses, particularly small business, and consumers
• opportunities for further efficiencies in the PPSA regime including (but not limited to) simplification of the Personal Property Securities Register and its use
• the scope and definitions of personal property covered by the PPSA
• the desirability of specifying thresholds for the operation of the PPSA regime in respect of particular types of personal property
• the interaction of the PPSA with other legislation including the Corporations Act 2001,

as well as ‘other relevant matters’.  The Government has directed that the review include consultation with relevant stakeholders.  An interim report is to be provided to the Attorney-General and the Hon Josh Frydenberg MP, Parliamentary Secretary to the Prime Minister, by 31 July 2014.  The interim review is to focus on the impact of the PPSA on small businesses with recommendations on any priority actions (including legislative) that should be considered by Government in respect of issues raised in the review that concern small business stakeholders.  The final report on the review, which should include recommendations on how to improve the PPSA, including simplification of the Act where appropriate, is due by 30 January 2015.

A hire industry perspective

Hire businesses will be hoping that the Whittaker review eventually leads to an outcome ameliorating the impact of PPSA -  by either excluding typical hires from it or addressing the problems which arise because ‘indefinite’ hires are automatically PPS lease security interests from inception. 

At the heart of the debate are the considerations that have usually been cited by the legislators as the main policy drivers of the PPS lease concept:

• the concern that financiers and others who deal with other businesses may be misled into thinking that they can buy or obtain security over goods in the possession of the businesses when those goods are actually owned by hire businesses or leasing companies.
• the need for a ‘bright line’ to divide typical short term hires from longer term ‘in substance’ security arrangements (such as finance leases or hire purchase) which may be used as an alternative means of financing. 

The Explanatory Memorandum to the amending Bill states that:

Generally, short term leases of personal property will be unlikely to meet the [in substance] definition, but as lease terms becomes longer, especially as they begin to approximate the useful life of the leased property, they become increasingly likely to be a security interest. 

So why did the previous Government consider it necessary to include leases of an ‘indefinite’ term as deemed PPS lease security interests?  Under the PPSA scheme an indefinite hire becomes a PPS lease security interest from inception regardless of how long it actually lasts.  The Explanatory Memorandum to the amending Bill says:

To ensure that the effect of [the time threshold] rule is not undermined by parties entering into leases and omitting to specify a term, the PPS Act provides that leases of an indefinite term are also PPS leases. 

Later the Explanatory Memorandum refers to the difficulty that hire businesses may have if they are unsure when and whether they may register and the fact that an unjustified registration can lead to financial sanctions under the PPSA.  We are aware that some hire businesses have made all their hires ‘indefinite’ to be sure that they can make blanket registrations across their entire customer base.  To evaluate hires on a case by case basis would have been difficult for these businesses.

The Government also suggests in the Explanatory Memorandum to the Bill that hire businesses can largely stay out of PPSA by including default ‘caps’ or limits on the hire period.  So for example, a customer can hire equipment for as long as the customer needs it but there would be a term of the agreement that specifies a ‘longstop’ or default maximum term of one year.  Assuming that such an agreement would not be regarded as ‘indefinite’ (bearing in mind that the hire business would not know at inception exactly how long the hire would last) the hire business would still have to prove the customer had agreed to the ‘default term’.

Conclusion

The urgent focus of the review on small business presumably arises from the demonstrable difficulty that small businesses particularly in the hire industry are facing in grappling with the complexity of the PPSA.  Failure to appreciate the need for PPSA compliance or small mistakes in registration carry the sanction of loss of capital assets and even potential financial ruin for affected hire businesses.  It is to be hoped that the review will question some of the policy rationales previously accepted.

Bartier Perry is pleased to be working with the hire industry in the forthcoming review.

Author: Oliver Shtein