Personal Property Securities and Leasing
How to avoid the Personal Property Securities Act getting the better of you when leasing out your planes, trains and automobiles.
Andrew’s company was leasing graders to Charlie’s company
Andrew’s company (ACo) borrowed money from a bank (BBank). BBank secured its loan to ACo, by registering its security interest on the Personal Property Security Register (PPSR).
ACo was in the business of leasing graders, diggers, scaffolding and other equipment used in the building industry (the Equipment) to its customers, including Charlie’s company (CCo).
CCo could never figure out how long it would need the Equipment it leased from ACo for any particular development so its leases were always for an ”indefinite term”, which meant that they were therefore PPS leases and ACo needed to register its security interest on the PPSR to protect the ownership interests of ACo.
Andrew hates paperwork
Andrew of ACo never liked paperwork and although he was told by his business partner that maybe ACo’s interest in the Equipment should be registered on the PPSR, Andrew ignored the advice. He had never had a problem with the PPSA before and so, he surmised, why start worrying about it now?
He should have seen Leigh Adams PPSA Leasing Lawyers at this point in time because we would have told him that ignorance is not bliss when it comes to personal property securities and leasing.
As things then stood CCo, upon leasing the Equipment from ACo, had what Leigh Adams PPSA Leasing Lawyers call “proprietary and personal rights” in the Equipment it had leased. Although Andrew of ACo didn’t realise it, all that ACo had was a “reversionary interest” in the Equipment once the lease was entered into. ACo had not registered its security interest in the Equipment on the PPSR and so its security interest was “unperfected”.
Charlie’s company borrows money to keep going
But CCo’s development got bogged down and it was taking far longer than expected. With these unforeseen delays, CCo got short of money so CCo decided to borrow from a finance company (FCo). FCo lent CCo as much as it thought it needed to finish the development and FCo secured its security interest over all CCo’s assets – including the Equipment. FCo registered its interest on the PPSR.
CCo continued to use the Equipment in an effort to finish the development under an extended timetable that it had managed to negotiate.
BBank has no idea!
During this time, BBank was blissfully unaware that its registered security interest over ACo’s assets no longer captured the Equipment because ACo had not registered its security interest in the Equipment when it leased the Equipment to CCo. This conclusion is mandated by section 46 of the PPSA: the Equipment is subject only to the security interest of FCo and the rights of BBank are subrogated to the rights of ACo under section 53 of the PPSA.
Andrew the wishful thinker
Andrew of ACo thought that eventually the development would come to an end and the lease of the Equipment would be terminated. If that happened, then the Equipment would be returned to ACo by CCo. This repossession would cause a “reattachment” of BBank’s security interest to occur.
All would be well. As a result BBank once again would enjoy its security interest as extending over and in the Equipment.
FCo misses out
Unfortunately for FCo, FCo would no longer have any rights over the Equipment as the proprietary rights of CCo in the Equipment (to which the security interest of FCo extended) would be wiped out when the lease ended.
Charlie the gambler
But none of this happened. The stress of the additional borrowing that CCo entered into was too much for Charlie. He became a gambler and gambled $250,000 of the money at CCo in 6 months. The strain on CCo’s cash flow was too much to bear and CCo went into liquidation.
Andrew found out too late
Andrew found out about this disaster too late. ACo’s unperfected security interest vested in CCo when a liquidator was appointed to CCo (s 267 of the PPSA). That meant that ACo’s security interest was extinguished and ceased to exist.
As it ceased to exist, it was no longer possible for the security interest of ACo in ACo’s Equipment to reattach to the Equipment when the Equipment lease came to an end. A clause in the Equipment lease provided that it came to an end when the liquidator of CCo was appointed.
No re-attachment and BBank licks its wounds
Because ACo’s security interest could not reattach to the Equipment, BBank’s subrogated rights were meaningless. BBank lost the benefit of its security and had no recourse against CCo. The other assets of ACo were not enough for ACo to meet its indebtedness to BBank and so BBank’s only recourse against ACo was to sue ACo as an unsecured creditor.
ACo wiped out
It did so and wiped out ACo altogether. ACo had a right to sue CCo as an unsecured creditor for the outstanding Equipment lease payments, but it was so short of money that it did not have enough money to carry on with the litigation and had to pull out with substantial costs being ordered against it.
Leigh Adams PPSA Leasing Lawyers received a call from Andrew after the dust had settled. Andrew is now running a caravan park in Queensland. A part of the business is involved in leasing out a number of the caravans to a large caravan company that sub-leases them to Mum and Dad customers.
Should Andrew register?
Andrew was wondering whether he should register his security interests in the caravans he hires out to the caravan lessee company. We discussed what he needs to think about before making a decision and listed some factors relevant to that decision.
- Due diligence should be undertaken to find out about the relevant financial details concerning the lessee. For example, is it solvent? How long has it been a customer? Does Andrew trust them? Should there be a term in the lease to the caravan lessee company to require adequate security to be given by the Mums and Dads when they sub-lease the caravans?
- What is the risk to Andrew’s caravan leasing businesses if the caravans are lost to the lessee’s liquidator or administrator? How much are they worth? What is their value as a proportion of the value of the total assets of Andrew’s caravan business?
- How hard is it (or will it be) to enforce this type of lease? And how hard will it be to recover outstanding lease payments, the caravans and associated legal costs? Is there a second hand market for the caravans? Do the caravans have a limited life? How fast do they depreciate?
- What is the risk that the transaction will go belly-up? Are the circumstances or the caravan leasing industry high risk? What is the proportion of failure in these types of arrangements?
- Will the retraining of staff on how to manage the Personal Property Securities Act and Personal Properties Securities Register be a problem? How much will it cost?
If you need cost effective preparation or review of your Personal Properties Securities Act leasing documents, then give us a call on 02 9964 0022 and ask for Leigh at Leigh Adams Personal Property Security Act Lawyers Sydney. We get you there.