How PPSA Impacts Equipment Renters and Others

This paper is written for a broader audience than businesses which rent out equipment as part of their business – since PPSA catches many other types of arrangement.

We say “catch” because the Act is very hard on equipment owners who do not comply with its requirements.

It can also cover:

• Leasing companies
• Companies which loan equipment to get customers to buy product – for example, a coffee supplier may loan a coffee machine to a café providing it buys their coffee (bailment)
• Companies which may put their tooling and dies with a business which manufactures their proprietary components

The potential impact is so severe that our starting point is “If your customrs have any of your goods or equipment in their possession – assume you are caught until a properly qualified person tells you otherwise”

So – what’s the problem

The current law conforms almost exactly to what we would expect. The lessor or person making goods available for hire will at all times own the goods. If the customer defaults, the equipment owner simply repossesses their goods, since they do not form part of the insolvent estate.

PPSA has the potential to completely reverse this position, which can be extremely harsh on equipment owners who do not register their agreements on PPSR.

In summary, if:

• A business rents or bails equipment to its customers, and
• The nature of the arrangement creates a PPS Lease, and
• The business fails to register the interest created by the PPS Lease on the PPSR, then:

  On an insolvency of the customer the security interest vests in the customer and the equipment owner may lose their goods even if title was never to pass to the customer

As a consequence it is critical to know whether your agreements create a “PPS Lease” and if so, to understand how to achieve compliance with minimum impact on the business.

Let’s back up a minute – we have just said that even if you own the goods – someone else may be able to seize and sell them – legally?

YES!

This goes against everything we have been brought up to believe and when we first say this to clients – they do not believe us.

We normally try and avoid legal analysis, since for many readers it is boring and confusing. The implications of what we have said are so unbelievable that in this case we go through the legal position.

If you do not want to read it – please call us to describe your typical business arrangements and we will let you know whether you need to be concerned. 

The Legal Framework

The Personal Property Securities Act (PPSA) is an ambitious piece of legislation which aims to harmonise the law governing a broad variety of commercial arrangements.

The common thread which runs through all types of agreement covered is:

• There is a creditor or equipment owner on one side (the secured creditor)
• There is a debtor or equipment user on the other (the grantor)
• There is personal property involved in which the secured creditor has an interest – either as owner, or to better secure payment from the grantor.
• This interest is known as a “security interest”.

 

A security interest may arise in two ways:

• By agreement between the parties. An example may be business borrowing where a debtor grants an interest in all its assets to the bank, or
• Because PPSA deems the arrangement to create a security interest.

 

An example could be a “PPS Lease” which we shall return to shortly.

There may be more than one secured creditor with a security interest in the same asset. There are rules to determine the priority between competing creditors, but the critical point is that the secured creditor with the highest ranking security interest can seize and sell the asset, irrespective of who owns it.

This means that unless you comply with the terms of PPSA, your business may be at risk of losing its equipment – even if it has simply been rented to a customer with no intent of title ever passing.

There are two considerations:

• Whether your terms of hire create a PPS Lease (since if they do not, you fall outside of scope of PPSA and need not be concerned, and
• If your terms do create a PPS lease, what it is that you have to do to ensure priority over all other creditors.

 

At first sight a PPS Lease appears quite straightforward in the it is a “lease for a period of more than 1 year”. Regrettably, this apparently “plain English” is a defined term within the Act. Due to its importance, we reproduce the full text of the definition below:

A PPS lease means a lease or bailment of goods:

(a)  for a term of more than one year; or

(b)  for an indefinite term (even if the lease or bailment is determinable by any party within a year of entering into the lease or bailment); or

(c)  for a term of up to one year that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms if the total of all the terms might exceed one year; or

(d)  for a term of up to one year, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of more than one year after the day the lessee or bailee first acquired possession of the property (but not until the lessee’s or bailee’s possession extends for more than one year); or

(e)  for goods that may or must be described by serial number in accordance with the regulations, if the lease or bailment is:

(i)   for a term of 90 days or more; or

(ii)   for a term of less than 90 days, but is automatically renewable, or is renewable at the option of one of the parties, for one or more terms if the total of all the terms might be 90 days or more; or

(iii)   for a term of less than 90 days, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of 90 days or more after the day the lessee or bailee first acquired possession of the property, (but not until the lessee’s or bailee’s possession extends for 90 days or more).

However, a PPS lease does not include:

(a)  a lease by a lessor who is not regularly engaged in the business of leasing goods; or

(b)  a bailment by a bailor who is not regularly engaged in the business of bailing goods; or

(c)  a lease of consumer property as part of a lease of land where the use of the property is incidental to the use and enjoyment of the land; or

(d)  a lease or bailment of personal property prescribed by the regulations for the purposes of this definition, regardless of the length of the term of the lease or bailment.

Bailments for value only

(3) This section only applies to a bailment for which the bailee provides value.

It is easy to see how businesses which rent or hire equipment can unintentionally find themselves caught by the provisions of PPSA.

For businesses which do find themselves caught by PPSA, the next question is what they need to do to ensure the highest level of priority. The rules of priority are complex and beyond the scope of this document. In simplified terms:

• If an equipment owner fully complies with all aspects of PPSA then it will always have the highest ranking in the equipment and be fully protected.
• If the equipment owner does not comply with all requirements – and in particular the requirement to register on PPSR then it risks:
• Losing its equipment to a competing creditor with a higher priority, or
• Losing its equipment to the customer on the insolvency of the customer.

 

As if this were not bad enough – the definition of “motor vehicle” is far broader than most people would ever imagine:

The definition of a motor vehicle in the PPS Regulations is:
The personal property:

(a)  is built to be propelled, wholly on land, by a motor that forms part of the property; and

(b)  either:

(i)  is capable of a speed of at least 10 km/h; or

(ii)  has 1 or more motors that have a total power greater than 200 W and

(c)  has any of the following:

(i)  a vehicle identification number; 

(ii)  a chassis number;

(iii)  the manufacturer’s number; and

(d)  does not run on rails, tram lines or other fixed path.

Or

The personal property:

(a)  weighs at least 200 kg; and

(b)  is capable, when being towed by, or attached to, a motor vehicle, of travelling at a speed greater than 10 km/h; and

(c)  is:

(i)  without motive power and designed for attachment to a motor vehicle; or

(ii)  a piece of machinery or equipment that is equipped with wheels and designed to be towed behind a motor vehicle.

The definition has been narrowed by a recent amendment since it could have included absurd items such as a battery installed in a forklift!

The key point is that this definition can include trailers and equipment such as portable generators designed to be towed behind a vehicle.

If your business arrangements create a PPS Lease then there is little choice – you comply with the requirements of PPSA or risk losing your equipment. It will be a “matter of when – not if”

For more information on the steps you may take to protect your position:

E-mail – enquiries @edxservices.com.au

Call – 03 9866 4559

We guarantee to return your call no later than the next business day.

 

Disclaimer

This document is intended to give a general indication of how PPSA may apply in Australia, drawing from New Zealand experience since 2002. It is not legal advice and the reader is not entitled to rely on it for an purpose. Neither EDX Australia Pty Ltd, its officers and employees accept any liability to any person, on any account whatsoever.