The PPSA in Action

31 October 2013

Case law is continuing to emerge following the commencement of the Personal Properties Securities Act 2009 (Cth) (“the PPSA”) in January 2012, which established a national online registration system for the creation and enforceability of security interests in personal property.

Set out below is a summary of some recent issues that courts have considered in the implementation of the PPSA, which should be kept in mind by businesses seeking to protect their interests through the PPS Register (“the PPSR”).

Register on time!

Security interests must be registered within twenty business days of the relevant security agreement coming into force.  Under the Corporations Act 2001 (Cth) Courts have a discretion to extend this twenty day period, if they are satisfied that the failure to register the security was:

-        accidental, or due to inadvertence or some other sufficient clause; or

-        of such a nature as to prejudice the position of creditors or shareholders.

In two recent cases of Barclay’s Bank[1] and Cardinia Nominees[2], the New South Wales Supreme Court considered the circumstances in which the time period to register a security interest may be extended.  

In the Barclay’s Bank case, registration was almost two months out of time.  The Court agreed to an extension based on the fact that the secured party’s legal representative had minimal experience in financial transactions, had received limited training on the PPSR system and that the delay in registration was not likely to affect business creditors or affect any accrued or accruing rights.

However, it is worth keeping in mind that in this case:

-        The application for an extension was not opposed by the other party; and

-        It was a relatively short delay caused by an inexperienced lawyer. 

In the case of Cardinia Nominees, a security interest over a $725,000 loan was registered twenty five business days after the date of the security agreement.  The Court found that the five day delay was due to a mere inadvertence, warranting an extension under the Corporations Act 2001 (Cth) and that there was some uncertainty as to which party was to attend to registration of the interest under the relevant deed. 

The secured party was required to show to the Court that the borrower was solvent at the time of entering into the security agreement, and would be solvent in the foreseeable future, in order to protect any unsecured creditors.  Businesses should therefore be aware that a failure by them to register on time may trigger a requirement to prove the solvency of the grantor.

This case also highlights the need for security agreements to clearly specify who is responsible for registration on the PPSR and that ultimately, the facts and circumstances concerning the delay in registration will be paramount to the Court in exercising its discretion to grant an extension.

The importance of registration by lessors

In the case of Maiden Civil[3], the Court confirmed that in situations where financiers and lessors do not register their security interests, and proceed to lend money or lease property to an insolvent borrower, that the unregistered interest will vest in the borrower.  If the borrower then grants interests over the property to a third party, the third party’s rights to the property will “jump the queue” and effectively take priority over the unregistered financier or lessor.  

In this case, the financier came out second best as it failed to register its security interest in hired machinery.  This meant that the borrower ultimately retained the benefit of the machinery (subject to the third party’s interests) and the financier was not able to recover the machinery.

Lessons learned

Businesses which lease personal property, or sell goods via retention of title, must register their interests in a timely manner in order to maintain their priority in respect of the goods.  It should also be kept in mind that the question of whose interest prevails is not determined according to who is the legal owner of the goods.

If you have any questions in relation to how the PPSA impacts upon your business practices and how you can ensure that your interests are adequately protected, please contact us for assistance.

[1] Re Barclays Bank plc [2012] NSWSC 1095.

[2] Cardinia Nominees Pty Ltd [2013] NSWSC 32.

[3] 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.