Equipment Leases – Don’t be caught out under the Personal Property Securities Act 2009 (Cth)
Do you hire out equipment as part of your business transactions? If so, consider whether your equipment leases give rise to a ‘security interest’ under the Personal Property Securities Act 2009 (Cth) (PPSA) and need to be perfected.
The recent decision of Gold Valley Iron Pty Ltd (in liq) v OPS Screening & Crushing Equipment Pty Ltd  WASCA 134 reminds us that failure by a secured party to perfect a PPSA security interest in equipment, runs the risk of loss of that equipment in the event of insolvency of its customer.
Case facts in a nutshell
Gold Valley Iron Pty Ltd (Gold Valley) entered into written hire agreements with OPS Screening & Crushing Equipment Pty Ltd (OPS) to hire mining equipment. They were to run for a minimum of 10 continuous months.
Included on the first page was an ‘Outright Purchase Price Option’ which specified a price for the equipment along with hire charges and other particulars. The Hire Particulars contained a clause that provided, ‘Hirer is granted to option to purchase the equipment, subject to receipt of an executed Special Terms & Conditions of Hire Agreement’. It provided that two months base rent paid in advance was required, which if the equipment was purchased during the hire would constitute a deposit.
The Special Terms & Conditions of Hire contained a first right of refusal for the hirer to purchase the equipment at an agreed price and with a sliding rebate scale.
On 17 February 2020, Gold Valley was placed into voluntary administration.
On 19 March 2020, Gold Valley went into liquidation.
By 22 March 2020, OPS commenced legal action for recovery of or access to the equipment.
Gold Valley argued that:
each hire agreement was a transaction that gave rise to a security interest which secured payment or performance of an obligation in accordance with section 12 of the PPSA
OPS should have perfected its security interest in each item of the equipment
as OPS had failed to perfect its security interest, then immediately before Gold Valley was placed into voluntary administration, OPS’ security interests in the equipment vested in Gold Valley, meaning that the equipment now belonged to Gold Valley (now in liquidation).
OPS argued that the hire agreements did not give rise to any security interests and that it was entitled to retake the equipment.
At first instance
The Supreme Court of Western Australia considered two questions:
Did the agreements grant an interest to OPS which in substance secured payment or performance of an obligation by Gold Valley?
If no, were the agreements PPS leases thereby deeming them to be PPSA security interests anyway?
His Honour Tottle J found that the answer was no to both questions. His Honour considered that a reasonable construction of the agreements was that they only provided for a first right of refusal to Gold Valley if the owner ever intended to sell the equipment and reference to an ‘option to purchase’ was intended to refer to this right.
His Honour reviewed the agreement terms against section 13 of the PPSA to determine if the hire agreements were PPS leases and if so, deemed to be PPS security interests. He concluded no, because there was no set term that exceeded 2 years and if these were leases for an indefinite term, Gold Valley did not actually have uninterrupted or substantially uninterrupted possession for more than 2 years as required by Section 13.
OPS were entitled to return of the equipment.
Not the end of the story – Gold Valley and its liquidators lodged an appeal!
The liquidators appealed the decision of the Supreme Court of Western Australia. The Court of Appeal reversed the first instance decision and concluded that the equipment vested in Gold Valley and OPS was not entitled to return of the equipment. The Court of Appeal made it clear that, ‘A commercial contract must be construed as a whole. The words of a clause in the contract are to be given the most appropriate meaning which they can legitimately bear’.
The four questions considered by the Court of Appeal were:
Was each agreement a hire purchase agreement within section 12(2)(e) of the PPSA?
The Court answered yes, and considered that the option to purchase clause and the first right of refusal were clauses that were expressly stated and one did not have to be substituted for the other, but that on construction the 'Special Terms & Conditions of Hire', which incorporate the first right of refusal, are to take precedence over the other terms and conditions of the agreement, which incorporate the option to purchase’.
If the answer to question 1 was yes, did the transaction the subject of the agreements provide for OPS to have a PPSA security interest, and what was the nature of that security interest?
The Court answered yes. Section 10 of the PPSA defines an ‘interest’ in personal property as including a right to that property, and the Court identified that the agreements created a right as hiree in the equipment and reversionary right in OPS (the right to the goods on certain conditions being met) and a right to possession in Gold Valley by way of hire of the equipment and the option to purchase.
If the answer to question 2 was yes, did the security interest in substance secure payment or performance by an obligation by Gold Valley (regardless of the form of the transaction or who had title)?
The Court answered yes. It saw OPS’ rights identified in question 2 as securing performance by Gold Valley of its obligations under the agreements.
If the answers to the above questions were yes, did the security interests of OPS vest in Gold Valley immediately before the administrators were appointed to Gold Valley?
As OPS had failed to perfect its security interest (for example, it could have registered its security interest in the PPS Register), the answer to this was yes.
You cannot assume that just because you are the owner of personal property, you are entitled to take it back on the insolvency of your customer.
It is important to review the term of your agreements or transactions including any leases, to determine whether it gives rise to a security interest.
If you have a security interest arising from an agreement, transaction or by law, it is important to take steps to protect that interest as against other secured parties with an interest in the same personal property should your customer enter into insolvency.
How can we help?
Bartier Perry are happy to review your agreements, transactions and dealings and assist and guide you with your PPSA needs. Please reach out to Rebecca Hegarty or any of our Corporate & Commercial partners.
Author: Rebecca Hegarty
 OPS Screening & Crushing Equipment Pty Ltd v Gold Valley Iron Pty Ltd (in liq)  WASC 412
 Gold Valley Iron Pty Ltd (in liq) v OPS Screening & Crushing Equipment Pty Ltd  WASCA 134 at 118.
 Ibid, at 213.