Introduction

The first significant Australian judgment relating to determining priorities between competing creditors under the Personal Property Securities Act 2009 (Cth) (PPSA) sends a clear message that what matters under the PPSA is having a "perfected" security interest in personal property not "title" to the personal property. The New South Wales Supreme Court in 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 [2013] NSWSC 852 (Maiden Civil Case) confirms that if an owner of goods leases them to someone else, then the owner:

"...cannot rely on its title to protect its interest in the goods, instead, the owner must register its interest on the PPS register. Failure to do so may result in the owner losing the goods to other creditors;..."

The Maiden Civil Case confirms the (unsurprising) reality of the PPSA and highlights the necessity for lessors who have a registrable security interest to perfect their security interest or risk losing their ownership rights. While the Court reached the correct result, it overlooked an important distinction between the two types of leases subject to the PPSA. On different facts, the Court's analysis would have led to an incorrect decision.

Maiden Civil Case – the facts in brief

In 2010, prior to the PPSA coming into effect, Queensland Excavation Services Pty Ltd (QES) purchased certain Caterpillar brand wheel loaders and excavators(Caterpillars) and leased the Caterpillars to Maiden Civil (P&E) Pty Ltd (Maiden) on an informal basis with no written agreement. QES did not register its interest on the relevant pre-PPSA Northern Territory register (Relevant NT Register). Had it done so, that registration would have been "migrated" across to the Personal Property Securities Register (PPS Register) when the PPSA came into force.

In about March 2012, after the commencement of the PPSA, Maiden sought short term finance from Fast Financial Solutions Pty Ltd (Fast). Maiden granted security to Fast over all its assets under a General Security Deed (GSD), and included the Caterpillars in the list of assets to be charged under the GSD. Fast registered its interest on the PPS Register. Maiden subsequently went into administration and then liquidation and both Fast and QES claimed the Caterpillars.

Decision

The Court found that both Fast and QES had security interests in the Caterpillars. The arrangement between QES and Maiden satisfied the requirements of a "PPS lease" as defined in s 13 which gave QES a security interest under s 12(3) of the PPSA. The Court held that by failing to register its interest in the Caterpillars on the Relevant NT Register, QES was not afforded temporary perfection under s 322(3) of the PPSA and regulation 9.2 of the Personal Property Securities Regulations 2010 (Cth)). QES also failed to register its security interest on the PPS Register when the PPSA came into force. Therefore, it held an unperfected security interest in the Caterpillars. Fast, on the other hand, had registered its security interest thereby perfecting its security interest in the Caterpillars.

Under the PPSA, ownership becomes irrelevant in determining who might be entitled to goods subject to two competing security interest. Rather priorities are determined based on the statutory rules – in this case, Fast's perfected security interest had priority over QES's unperfected security interest. QES essentially "lost" its ownership rights under the lease by failing to register. In addition, pursuant to s 267 of the PPSA, QES's unperfected security interest vested in Maiden upon the company going into administration. The Court confirmed that the practical effect of this section is that QES's security interest was extinguished and Maiden held the Caterpillars subject only to Fast's perfected security interest

Analysis of the nature of the security interest by the Court

The PPSA distinguishes between true "in substance" security interests and "deemed" security interests. A true security interest is described in s 12(1) as an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation. Any transaction creating such an interest attracts the application of the PPSA regardless of its form.

Deemed security interests, however, are brought within the PPSA by s 12(3) "whether or not the transaction concerned, in substance, secures payment or performance of an obligation". One such deemed security interest is the interest of a lessor or bailor of goods under a PPS lease. Section 13 provides an extensive definition of PPS lease which essentially includes any lease or bailment of goods:

  1. by a person who is regularly engaged in the business of leasing or bailing; and
  2. for a term of more than one year (90 days for serial numbered goods) or capable of extension to one year (or 90 days) by renewals or agreement between the parties.1

  3. Under the PPSA, therefore, a lease of goods can be either a true security interest or a deemed security interest. A finance lease secures payment of the goods and, therefore, is a true security interest. The hallmark of most finance leases is that the parties intend for the lessee to become the owner of the goods once the terms of the lease have been fulfilled. From an economic perspective, it is equivalent to having made a loan for an amount equal to the purchase price which is then paid back over time (the payments composing the purchase price or the "principal" plus a return or "interest"). In contrast, the lessee under an operating lease does not intend to become the owner of the goods but merely contracts for the use of the goods for a period that is generally less than the useful life of the goods. The lessor expects to get the goods back and re-lease them to the next lessee. As a result, an operating lease is not a transaction that secures payment or performance of an obligation. However, an operating lease will nevertheless be subject to the PPSA if it falls within the definition of PPS lease. The definition of PPS lease is needed to create and maintain a distinction between a lease that is a true security interest and a lease that is deemed to be a security interest.

    Operating leases are not secured financings and may seem out of place in legislation dealing with securities. Nevertheless, deeming them to be security interests lines up with the philosophy of the PPSA which considers the assumptions that a reasonable financier or buyer would be entitled to make about property in possession of a party other than the owner. A reasonable financier or buyer is less likely to assume that a lessee or bailee under a short term lease of goods is the owner of the goods. However, ownership becomes less clear with leases or bailments for longer terms. For that reason, the length of time of the lease or bailment is critical in determining whether or not a transaction should be subject to the PPSA.

    In contrast, the length of time of a financing transaction creating a true security interest, even though in the form of a lease, is (quite rightly) irrelevant. Similarly the PPSA should apply to a lease that creates a true security interest even if the lessor is not regularly engaged in the business of leasing goods. As a result, the definition of PPS lease should be interpreted to include only leases that do not secure payment or performance of an obligation.

    The Court in Maiden Civil, however, held that the arrangement between QES and Maiden was a PPS lease even though the facts presented indicated the transaction was a true security interest either a finance lease or hire purchase arrangement.

    The Court concluded that the parties intended that Maiden would own the Caterpillars once it paid the last instalment. These facts give the transaction the hallmarks characteristic of a true security interest. The Court stated that the "arrangements between QES and Maiden were not a mere lease, but included an agreement to transfer title on discharge of the finance." 2 Nevertheless, the Court proceeded to analyse the arrangement on the basis that it must satisfy the elements of a PPS lease before it was subject to the Act.

    The Court applied the definition of PPS lease:

    The hire was continuous, for a period of more than one year, and Maiden retained uninterrupted possession of the Caterpillars for more than 1 year. Accordingly PPSA, sub-section 13(1)(b) and/or 13(1)(d) was satisfied. ... It was not suggested that any of the exclusions in sub-section 13(2) applied. ... it was not established that QES was not regularly engaged in the business of leasing goods. It follows that the leases of the Caterpillars by QES to Maiden were PPS leases within the meaning of PPSA, s 13, and – as was ultimately not in dispute – that QES' interest in the Caterpillars, as lessor, was a "security interest" within PPSA, s 12(3)(c). 3

    If a leasing arrangement is a true security interest, as was the one in this case, the elements of the definition of PPS lease in s 13 do not apply. In analysing the security interest, the Court failed to appreciate the distinction between a lease that is a true security interest and one that is a deemed security interest. The better analysis is that the transaction was brought within the scope of the Act as a true security interest under s 12(1) of the PPSA.

    To qualify as a PPS lease, the contract for the hire of the Caterpillars would have needed to have a term of at least 90 days. This test was satisfied in this case causing the Court to find that the PPSA applied so nothing actually turned on the Court's failure to recognise the distinction. If, however, the lease had been for a period of two months, 4 then based on the reasoning applied in the Maiden Civil Case, the Court would have concluded that QES did not have a security interest and the PPSA did not apply. That conclusion would be in error.

    Admittedly the definition of PPS lease appears capable of being interpreted to include all leases for a term of more than one year (even if they are true security interests), but this would not produce the intended result. The correct interpretation is even more elusive because s 12(2) lists examples of true security interests including in s 12(2)(i) a "lease of goods ( whether or not a PPS lease )". The words in parentheses are confusing and unfortunate. Perhaps the drafters merely wished to confirm that a lease that is a true security interest will be subject to the PPSA regardless of the fact that it is for a term of less than one year. The words suggest, however, that a lease that is a true security interest is capable of a dual character as both a true security interest and a PPS lease if it is for a term of more than one year. This interpretation could lead to applying the elements of the definition of PPS lease to a lease that is a true security interest.

    Section 12(3) has equally unfortunate language. The sole purpose of s 12(3) is to bring the deemed security interests within the PPSA's scope because they do not otherwise fall within the definition of security interest in s 12(1). However, s 12(3) states that a security interest also includes the interest of a lessor or bailor of goods under a PPS lease "whether or not" the transaction concerned, in substance secures payment or performance of an obligation. The words "whether or not" again suggest that the interest of a lessor or bailor of goods under a PPS lease could include a true security interest.

    The unfortunate drafting in ss 12(2)(i) and 12(3) should be read down to clarify that a true security interest cannot be a PPS lease and that a PPS lease includes only leases that do not in substance secure payment or performance of an obligation. Any other interpretation will lead to the errors in analysis undertaken by the Court in Maiden Civil whereby the elements of the definition of PPS lease were applied to a true security interest. Since the Court held that the arrangement between QES and Maiden was a PPS lease, the Court analysed whether QES, the lessor, "was regularly engaged in the business of leasing". The analysis is completely unnecessary when the lease is a true security interest and could lead to a true security interest being excluded from the scope of the PPSA.

    The Court's mischaracterisation of the lease led to further analysis problems in connection with the PPSA's attachment rules. Section 19(2) provides that a security interest will not attach to collateral unless the grantor has "rights in the collateral". Drawing on well established New Zealand and Canadian authority, the Court confirmed that under the PPSA, a lessee under a PPS lease, upon taking possession of the goods, has a proprietary interest in the goods that satisfies the attachment rule. Again, however, the New Zealand and Canadian authority related to leases that were deemed security interests which create conceptual problems under the PPSA as to the whether the lessee has sufficient proprietary rights to support the attachment of a security interest. These conceptual problems do not arise in respect of the rights of a lessee under a lease that is a true security interest and, therefore, the New Zealand and Canadian authority are not on point.

    Conclusion

    The Court in the Maiden Civil Case came to the correct conclusion. QES lost its ownership rights in the Caterpillars because its interest under the lease was a security interest for purposes of the PPSA and, by failing to perfect its security interest, QES lost priority to another secured party who did perfect its security interest. The Court failed, however, to appreciate the distinction between a lease that is a true security interest and a lease that is deemed to be a security interest. On different facts, the Court's analysis would have returned the wrong result.

    1 The Personal Property Securities Amendment (Deregulatory Measures) Bill 2014 was introduced to Parliament on 19 March 2014 and proposes to remove the 90 day rule for serial numbered goods with the effect that the PPSA will apply on to a lease or bailment of serial numbered goods for a term of more than one year.
    2 Maiden Civil Case, para 17.
    3 Maiden Civil Case, para 24
    4 Assuming the Bill referred to in note 1 above passes into law, the error in the Court's analysis will have more significance because it would exclude from the scope of the PPSA any lease for a term of less than one year that is a true security interest.

    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.