Christmas comes early for businesses overwhelmed by PPS leasesOct 2015 |
Personal Property Securities Amendment (Deregulatory Measures) 2015 Act (Cth)
In a long-awaited reprieve for businesses whose commercial activities involve the regular leasing or hiring of motor vehicles and other serial numbered goods, the commencement of the Personal Property Securities Amendment (Deregulatory Measures) 2015 Act (Cth) (Amending Act) will remedy one of the hire industry’s major gripes with the Personal Property Securities Act 2009 (Cth) (PPSA).
The effect of the Amending Act will be to modify what has come to be known as the ’90 day rule’, in which leases of serial numbered goods (including motor vehicles) for a term of 90 days or more (or an open ended term) are ‘deemed’ to be a PPS lease. Unless the lessor effects a valid registration on the Personal Property Securities Register (Register) in the statutory time period, the lessor risks their deemed security interests vesting in the lessee in the event of the insolvency of their customer and being relegated to the status of an unsecured creditor.
In easing the reach of the deeming provisions relating to the creation of a PPS lease, the Amending Act is expected to relieve the administrative burden on businesses by generally only requiring registration in relation to goods being leased to customers for a period of a year or more.
PPS leases under the PPSA
To provide brief context, section 12 of the PPSA lists a number of interests which will be deemed to be security interests for the purposes of the PPSA regardless of whether or not the underlying transaction, in substance or form, secures payment or performance of an obligation. One such deemed security interest is listed as ‘the interest of a lessor or bailor of goods under a PPS lease’.1
Section 13 unpacks the meaning of a PPS lease, listing the types and characteristics of leases (or bailments) of goods that will be deemed a PPS lease. To date, one of the broadest reaching limbs of that section stated that a PPS lease includes a lease or bailment of goods:
e. for goods that may or must be described by serial number in accordance with the regulations, if the lease or bailment is:
- for a term of 90 days or more;
- 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
- 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).
The effect of the above provisions was that any lease or bailment of goods for a period of 90 days or more was deemed to be a PPS lease, requiring perfection (most commonly by registration) in order for the lessor/bailor to be adequately protected under the PPSA regime. In calculating the 90 day period, options for renewal and/or any other additional periods in which the lessee remained in actual possession of the items are also to be included. Given the nature of commercial leasing of goods for use in, for example, the building, construction and civil engineering industries, many leases of motor vehicles, earthmoving equipment and mobile machinery fell within this broad definition.
Clearly frustrated by the administrative burden this created, an overwhelming number of submissions tendered in respect of the recent statutory review of the PPSA were made by stakeholders of the commercial leasing industry and many cited the administrative workload being imposed on them by in particular subsection 13(1)(e) and the serious consequences they faced as a result of errors or omissions which inevitably arise in administering high volumes of registrations.
Changes to PPS leases under the Amending Act
In terms of actual amendments to the PPSA, the Amending Act altogether repeals the above subsection 13(1)(e) and therefore excludes it as an instance of a PPS lease. A consequential amendment is also made to s 268(1) in the context of the vesting of unperfected security interests in the grantor or another related party.
The impact of these amendments is that as of 1 October 2015, a lease or bailment of a serial numbered goods will be treated the same as non-serial numbered goods, and will only be a PPS lease where its term is:
- For more than one year;
- For a combination of shorter periods which may cumulatively exceed one year; or
- For less than one year but where the lessee continues to retain actual possession so that the period does in fact exceed one year.
While it appears to be a simple amendment, the Federal Government has projected that it will result in cumulative savings of over $11 million per year by small to medium sized businesses, primarily through reduced administration costs.2 The amendment is also expected to reduce the impact on small to medium business of the aforementioned deeming provisions of the PPSA – widely identified as a source of confusion for these enterprises and their stakeholders.
Business beware: important caveats to the Amending Act
While undoubtedly an amendment which will reduce administrative burden to certain businesses, all businesses must be mindful that the relief afforded through the Amending Act is certainly not ‘across the board’ and therefore should not be viewed as an excuse to relax registration policies and procedures.
Most notably, security interests that act to secure payment or performance of an obligation (eg ‘in substance’ security interests) still require perfection through registration even where the term of the lease or bailment is for 90 days or less. In addition, the terms and conditions of leasing arrangements should be reviewed to determine whether registration is required (or prudent) as an ‘indefinite term’ lease due to automatic hold-over or renewal provisions which have the ability to extend the lease beyond a one year term.
Businesses should also note that the Amending Act does not act retrospectively. As such, security agreements that were in place prior to 1 October 2015 are still subject to the same perfection and registration requirements as though s 13(1)(e) was still in force.
1 Section 12(3)(c) PPSA.
2 Commonwealth, Parliamentary Debates House of Representatives, 19 March 2014 (David Gillespie MP).