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The introduction of the Personal Property Securities Act (PPSA) in Australia led to significant concern amongst business owners, financiers and various stakeholders on what rights they have under the legislation and requirements to ensure their rights are protected. To date there has been limited decided cases on the application of the PPSA to provide guidance to the finance industry however Hall Chadwick appointees have been involved in one of the first decisions made by the Supreme Court of New South Wales with respect to the PPSA.

In its judgement dated 27 June 2013, 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 Supreme Court of New South Wales dealt primarily with the rights of lessors, lessees and third party financiers on assets to which all claimed an interest. The decision is consistent with those previously made in Canada and New Zealand and confirm that the unregistered interest of a lessor will vest in an insolvent lessee and may be secondary to those of a third party financier who has registered their security interest over the lessee.

Background

• In May 2010 and August 2010 Queensland Excavation Services Pty Ltd (‘QES’) purchased caterpillar machinery via finance from Esanda and Westpac
• Following the purchase, QES leased the machinery to Maiden Civil (P&E) Pty Ltd (‘Maiden’)
• In May 2012 Maiden used this machinery as part of security to source a loan from a third party financier (‘FFS’)
• In July 2012, following a default on the loan FFS appointed Richard Albarran and Blair Pleash as Receivers and Managers over Maiden

The Dispute

• The Receivers and Managers argued that the machinery vested with Maiden as per the provisions of the PPSA, that FFS had a priority security interest with respect to the machinery and accordingly they were entitled to deal with the machinery
• QES argued that it had a prior security interest over the machinery and any claim by Maiden, FFS and the Receivers and Managers was secondary to theirs

The Decision

• Brereton J ruled in favour of the Receivers and Managers and ordered QES to deliver the machinery to the Receivers and Managers
• In coming to this decision Brereton J systematically worked through a number of key issues within the PPSA as follows –
• QES was the owner of the machinery but this is not relevant as the matter revolved around PPSA priorities
• Both QES and FFS had a security interest in the machinery however the security interest of FFS had priority over QES’s as it had been perfected whereas QES’s had not
• QES’s interest was not afforded the rights under the transitional security interest provisions as it had not registered its interest in the applicable register prior to the commencement date

Key Issues & Findings

• Who was the true owner
  • Brereton J ruled that Maiden was the owner of the machinery financed through Esanda as Maiden had been paying monthly instalments for the lease and had also paid the balance of the Esanda loan
  • Brereton J ruled that QES was the owner of the machinery financed through Westpac as QES was continuing to invoice Maiden for the lease of the machinery and paying Westpac
  • Brereton J however noted that ownership was not relevant in the decision as it was a matter of PPSA priorities
• Who had a Security Interest
  • The lease of the goods from QES to Maiden was a PPS lease pursuant to Section 13 and thus QES had a security interest in the machinery pursuant to Section 12(3)(c)
  • Maiden had rights in the machinery to which a security interest could attach pursuant to Section 19(5)
  • When Maiden and FFS entered into the security agreement, Maiden granted FFS a security interest in its assets and thus FFS had a security interest in the machinery pursuant to Section 19(2) and was enforceable against Maiden pursuant to Section 19(1)
• Who had a Priority Security Interest
  • FFS had a perfected security interest for the purposes of Section 21(1) of the PPSA
  • QES did not have a perfected security interest as it had not registered on the PPSR
  • FFS’s security interest took priority over QES’s security interest as per Section 55(3)
• Does QES have a Transitional Security Interest
  • QES’s interest in the machinery was a transitional security interest which would ordinarily result in QES’s interest having priority to the interest of FFS
  • Section 322(3) provides exceptions to the transitional security interest provisions, in this case being that if the interest was registrable on a register prior to the PPSA coming into effect and was not registered on this register, the protection provided by Section 322 did not apply
  • QES’s interests in the machinery was that of a lessor and as the machinery was classified as a ‘motor vehicle’ in the Northern Territory of Australia Registration of Interests in Motor Vehicles and Other Goods Act 2008, QES should have registered its interest in the Northern Territory Register of Interests in Motor Vehicles and Other Goods.
  • QES had not registered its interest in this register prior to PPSA coming into effect and thus was not afforded the rights available under the transitional security interest provisions
• Is there an enforceable right to possession
  • QES asserted that the lease to Maiden had terminated due to various factors and that QES had reassumed possession, thus limiting the rights Maiden, FFS or the Receivers and Managers could have to the machinery
  • Brereton J ruled that as the security interest granted by Maiden to QES in the machinery was unperfected at the time of the Receivership, the security interest belonged to Maiden (Section 267(2))
  • Thus Maiden held the goods subject only to the perfected security interest of FFS

Conclusion

In coming to his decision Brereton J has confirmed the requirements on lessors to ensure their rights over assets are protected. The most critical being that perfection of a security interest is paramount to ensure the lessor’s position is maintained over their assets that are subject to various leases. Failing to do so can enliven the PPSA provisions and allow lessees and third party financiers to trump the position of the original lessor.

The case reflects the intention of the PPSA regime to provide priority to registered security interests and thus provides certainty to the finance community. It will be a useful precedent with respect to the future interpretation of the Act.

Your Hall Chadwick contact is available to discuss the implications of the case if you require further information.

This information has been shared by Jovandeep Singh of Hall Chadwick Chartered Accountants and Business Advisors .