July 2017

Relief for Australian hire industry but ‘PPS lease’ trap remains

This article was originally published by the Law Society of New South Wales on 1 July 2017.  It is an extended version of our May article titled PPSA - Australia's hire industry is now largely out of the woods.


Snapshot

  • The Personal Property Securities (PPS Leases) Amendment Act 2017 (Cth) commenced on 20 May 2017.

  • It narrows the definition of ‘PPS lease’ in the Personal Property Securities Act 2009 (Cth) and greatly reduces the number of deemed security interests arising under that definition.

  • The amendment has been sought and welcomed by the hire industry and will also benefit other lessors or bailors of goods, but the PPSA will continue to trap the unwary.

Australia’s hire industry has been seeking relief from the draconian effects of the Personal Property Securities Act 2009 (Cth) (‘PPSA’) since 2011. The PPSA has resulted in many hire businesses losing ownership of equipment when they fail to register correctly under the PPSA and their customer becomes insolvent. The reported losses are already high, but those are doubtless just the tip of the iceberg. (See, for example, Power Rental Op Co Australia LLC v Forge Group Power Pty Ltd (in liq (receivers and managers appointed) [2017] NSWCA 8 where losses exceeded $60 million.) Victims have mainly been hire businesses that have either been unaware of the PPSA, or have not managed to grapple with the complex registration regime.

The Government has now acknowledged the overreach in the original PPS lease definition and has passed the Amendment Act. Under the amended law, a lease or bailment only becomes a ‘PPS lease’ when:

  • the agreed term, including any options, exceeds two years; or

  • it continues for more than two years.

The two-year threshold replaces the former one-year term. Critically also, the amendments also remove leases and bailments ‘for an indefinite term’ from the definition. A hire for an unspecified term (so common in the hire industry) is now not caught until it lasts more than two years.

These changes vastly reduce the regulatory impact of the PPSA on short-term hire and rental business. Hire businesses should consider whether it is necessary to register at all.

The amendments are, however, not retrospective and only apply to leases and bailments entered into from 20 May 2017.

Bailments for value

The amendments offer some relief to businesses that bail goods to others but are not (or do not see themselves as) lessors. As well as leases, the definition of ‘PPS lease’ in s 13 of the PPSA catches bailments where the bailee provides ‘value for the bailment’. ‘Value’ as defined in s 10 only has to be nominal.

This has created worries (some perhaps unnecessary) about loss of goods in arrangements where bailment is part of the business model. Warehousing and outsourced processing arrangements are examples. PPSA risk is very high, for example, in IT managed services agreements where IT equipment is bailed incidentally to the provision of IT services in exchange for a composite fee.

Longer-term leases and insubstance security interests still within PPSA

The Amendment Act doesn’t take lessors and bailors entirely out of the woods. The PPSA will still catch any lease or bailment which is, in substance, functioning as a security – such as a rent-to-buy or deferred purchase agreements. The PPSA will still apply to virtually all finance leases written by the finance industry. Some hire agreements have been known to exceed two years – for example, hires in connection with major building projects.

The PPS lease – all that risk for what reward?

While the bulk of the hire industry may be breathing a sigh of
relief, the PPSA will likely continue to trap equipment lessors and bailors, including finance companies and banks.

A stunning example of how even professional financiers can get it wrong is in: In the matter of OneSteel Manufacturing Pty Limited (administrators appointed) [2017] NSWSC 21 where a registration made against a lessee ABN instead of its ACN led to Alleasing’s loss of equipment worth some $23 million. 

The Government’s 2015 review of the PPSA by Ashurst banking partner Bruce Whittaker supported the PPS lease. His report saw little problem with continuing the priority rules that see leased equipment lost to the lender (which is usually a bank) of an insolvent lessee customer.

In the writer’s view, even in its narrower form, the PPS lease still represents overreach by the legislature. Many businesses have been and will continue to be damaged by it. The stated rationale for the creation of the ‘PPS lease’ is that creditors and buyers see a leased asset in the physical possession of a business and assume, to their detriment, that the business owns the asset. In my view, that is highly questionable – creditors and buyers are not so naïve. Nor is misrepresentation at all common. But in any event, any supposed benefit to creditors or buyers is far outweighed by the losses we are seeing being suffered by owners from failure to master the legislation.

Author: Oliver Shtein