Australia: When a security interest beats legal title - only under the PPSA

Exactly 18 months after the PPSA came into force on 30 January 2012, Australia's first major case on the PPSA was delivered in Maiden Civil v QES [2013] NSWSC 852¹. The NSW Supreme Court found that a plaintiff with a registered security interest on the PPSR had priority over a defendant with an unregistered interest, despite that defendant being the owner of the goods.

For those unfamiliar with the workings of the PPSA, the result was surprising – but for those already dealing with the PPSR, the result confirmed the primacy of registration.

WHAT HAPPENED?

In 2010, Queensland Excavation Services (QES) purchased and leased 3 Caterpillar construction vehicles to Maiden Civil, comprising a wheel loader, a 20 tonne 320D excavator and a 30 tonne excavator. To finance the lease, Maiden Civil used Fast Financial (Fast) as its financier and also granted security in favour of Fast over all of Maiden Civil's property, including, specifically, the 3 Caterpillar vehicles.

Whilst Fast successfully registered its interest in the vehicles under the Personal Property Securities Register (PPSR), critically, QES did not register its interest under the PPSR (nor had it registered its interest in the vehicles under the appropriate register before the PPSR was introduced).

Throughout the period 2010 to 2012, Maiden Civil made part payments to QES under the lease and maintained possession and use of the vehicles. In 2012, before the lease period ended and with amounts still owing, Maiden Civil went into liquidation.

Under the "event of default" clause in its financing agreement with Maiden Civil, Fast took steps to enforce its security. In addition, Maiden Civil's liquidator demanded possession of the vehicles. In response, QES asserted its legal title to the vehicles. Accordingly, a dispute arose as to who was entitled to vehicles: Maiden Civil or QES.

COURT RULES THAT SECURITY INTEREST BEATS LEGAL TITLE

The outcome of the case turned almost entirely on the fact that QES failed to register its interest in the vehicles on the PPSR. Even though the Court declared that QES held legal title to the vehicles, the Court found that Maiden Civil's financier, Fast, had priority to exercise its security first on the basis that Maiden Civil's financier had registered its interest on the PPSR.

Such registration meant that Fast had perfected its interest under the PPSA and was entitled to priority over QES (notwithstanding that QES was the legal owner). The Court confirmed that its decision was consistent with the legislative intent and express order of priority stipulated by the PPSA.

SEVERE CONSEQUENCES FOR FAILURE TO REGISTER

The ruling underscores the importance of knowing and understanding the PPSA regime. Moreover, the case confirms beyond doubt Australia's legal position in regard to the PPSR: ignoring or neglecting to register an interest on the PPSR can potentially yield severe consequences, and may, as was the case with QES, leave an inferior secured party wholly out of pocket.

UNIFORM INTERNATIONAL STANDARDS

Those unfamiliar with the PPSA regime may conclude that the result was manifestly unfair, as QES was the party which held legal title to the goods. However, the case confirms Australia's position is now aligned with international standards and other countries that have implemented a register for personal property.

In particular, the court had regard to the Canadian decision of: Re Giffen [1998] 1 SCR 91; (1998) 155 DLR (4th) 332, and the New Zealand decision of: Graham v Portacom New Zealand Ltd [2004] 2 NZLR 528 where similar decisions were made, with the secured party obtaining priority over an owner.

DO EVERYTHING YOU CAN TO PERFECT YOUR INTEREST – REGISTER OFTEN, REGISTER EARLY

One of the idiosyncrasies of the PPSA is that registration on the PPSA can occur before a security interest arises. Namely, the PPSA allows a party to register an interest on the PPSR as long as it has reasonable grounds for believing that it is, or will become, a secured party.

Put another way, as long as a party has reasonable grounds for believing that it will become a secured party, it can register its interest on the PPSR. For example, a party could register its interest whilst negotiations in respect of a security document are in advanced stages.

KEY LESSONS FROM MAIDEN CIVIL V QES

1. It is imperative that a party's interest is registered on the PPSR.
2. Notification obligations in leasing and other financing agreements have additional importance in the context of the PPSA regime. In Maiden Civil v QES, Maiden Civil was able to deal with the goods under the lease, and grant a security interest to Fast, without notifying the title-holder of the goods. Had Maiden Civil been required under the lease to notify QES of Maiden Civil's proposed dealings with the vehicles (ideally in advance), QES could have taken steps to register its interest before Fast.
3. Financiers (such as QES' financier) should ensure in their finance documentation that the party they are financing (i.e. the borrower, lessor, etc) must take all steps necessary under the PPSA to protect its interests in the relevant personal property. In relation to Maiden Civil v QES, this would have meant that QES would have been required (under its arrangements with its financier) to register its interest in the vehicles on the PPSR.

Footnote

¹Full citation: In the matter of Maiden Civil (P&E) Pty Ltd; Richard Albarran and Blair Alexander Pleash as receivers and managers of Maiden Civil (P&E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd & Ors [2013] NSWSC 852

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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