Another hard lesson learnt courtesy of the PPSA
Jun 2014 |
The recent Western Australian Supreme Court decision of White v Spiers Earthworks Pty Ltd [2014] WASC 139 (White v Spiers) once again emphasises the importance of entities in the business of leasing and hiring goods ensuring their interests in those goods are protected by a perfected security interest.
As with the case of Maiden Civil v QES [2013] NSWSC 8521 (Maiden Civil) (as discussed in the November 2012 Corporate newsletter ‘Impending expiry of transitional security interest protections under the PPSA’), White v Spiers demonstrates the unsympathetic nature of the Personal Property Securities Act 2009 (Cth) (PPSA), in circumstances where owners of hired or leased equipment fail to perfect their interests pursuant to the PPSA.
Facts
The defendants operated an earth moving business. In 2010 the defendants entered into a Plant Hire Agreement (Hire Agreement) with BEM Equipment Pty Ltd (Company). Pursuant to the Hire Agreement, the defendants agreed to hire vehicles and other commercial equipment to the Company (Hire Assets). The Hire Assets had an agreed market value of $1,401,500.00. In February 2011, the Company granted a fixed and floating charge to its financing bank. In July 2013, the board of the Company appointed administrators and the bank appointed the plaintiff Receivers.
As at that time, the defendants had neglected to register their interests in the Hire Assets on either the Register of Encumbered Vehicles (REVS Register) (as required by the Chattel Securities Act 1987 (WA)), or the Personal Property Securities Register (PPSR) (as a transitional security interest which at that stage was capable of registration).
The defendants notified the Company that the appointment of Receivers was an event of default under the Hire Agreement, terminated the Hire Agreement and repossessed the Hire Assets claiming they were the rightful owners.
The Receivers commenced proceedings seeking a declaration that, pursuant to s 267 of the PPSA, the defendants’ security interest in the Hire Assets had vested in the Company immediately before the appointment of administrators, and accordingly the Company holds the Hire Assets subject to the bank’s charge.
Section 267 of the PPSA provides that on the occurrence of certain events (including the appointment of an administrator),2 an unperfected security interest held by a third party over a grantor will vest in that grantor immediately before the occurrence of the event.
The Decision
His Honour, Justice Le Miere, found that the defendants’ interest in the Hire Assets had vested in the Company pursuant to the operation of s 267.
In reaching this conclusion, his Honour first considered whether there existed a ‘security interest’ to which s 267 could apply, and if so, whether it was an ‘unperfected’ security interest as at the time the administrator was appointed.
His Honour found that the defendants’ interest in the Hire Assets was a security interest within the meaning of the PPSA as:
a. The Hire Agreement, which provided that the defendants retained ownership in the Hire Assets until a repayment schedule of principal plus interest had been discharged, was ‘in substance’3 a security interest; and
b. The Hire Agreement satisfied the requirements for a PPS Lease, a ‘deemed’4 security interest under the PPSA.
His Honour next considered whether the defendants’ security interest had been perfected before the commencement of the administration. Although the defendants’ interest in the Hire Assets was a transitional security interest, the fact that their interest was not registered on the REVS Register and was not the subject of a financing statement registered on the PPSR lead his Honour to conclude that the PPSA’s transitional protections did not apply and the defendants’ security interest was unperfected at the time administrators were appointed.
The defendants’ contended that the operation of s 267 would lead to an acquisition of property other than ‘on just terms’, challenging the constitutionality of certain provisions of the PPSA. However this argument ultimately failed, as the Court ruled that s 267 operates to adjust the competing rights of secured and unsecured creditors by vesting unperfected security interests in a grantor, not to provide for the acquisition of property.
The consequences of the finding that the defendants’ interest in the Hire Assets had vested in the Company included that the defendants were regulated to proving their loss as unsecured creditors in the administration of the Company
Conclusion
The decision in White v Spiers comes as the Federal Government recently announced proposed amendments to the PPSA which, if passed, will repeal the provision that deems leases or bailments of serial-numbered goods (such as motor vehicles and aircrafts) for periods of more than 90 days, to be a ‘PPS lease’. Such an amendment would primarily benefit the equipment hire and leasing industry, as leases for one year or less would no longer require a financing statement to be registered.5 The Federal Government has also commissioned a broader review of the PPSA which is due to be completed by 31 January 2015 and could result in further amendments.
But for now, the decisions in White v Spiers and the Maiden Civil cases demonstrate the hard PPSA lessons that are still being learnt by leasing and hiring businesses who fail to act to protect their interests as owners of such equipment.
1 Full citation: 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.
2 Section 267(1)(a)(ii).
3 Section 12 PPSA.
4 Section 13 PPSA.
5 Although a lease for a term of one year or less may still give rise to the creation of a security interest if it ‘in substance’ secures payment or performance of an obligation.
