The Personal Property Securities Act 2009 (Cth) (PPSA) is a law about security interests in personal property. Personal property is generally all property other than land, fixtures and certain statutory interests. A security interest is an interest in personal property which in substance secures payment of a debt or other obligation. This definition is broad and, whilst incorporating standard forms of security, such as mortgages and charges, it also covers some non-traditional security interests including financing or operational leases of personal property for a term exceeding 12 months (or 90 days for motor vehicles, boats or aircraft).
What are the benefits of the PPSA to lessors?
Under the PPSA, lessors will become secured parties with a security interest in the goods they are leasing. The PPSA provides clear rules to be followed in order for lessors to protect themselves in the event of a lessee’s default or insolvency. However, in order to maximise this protection, the secured party must register its security interest in the goods supplied.
Under the PPSA, lessors enjoy the benefit of what is known as a purchase money security interest. This is a certain type of security interest which raises the interest of the secured party to a higher priority relative to other interests. This means that a registered security interest of a lessor takes priority over all others, including earlier security interests in the goods where the requirements of the PPSA have been complied with.
A second benefit of a registered lease-based security interest is the protection it offers against a trustee in bankruptcy or liquidator. Under the PPSA, a registered security interest in the goods leased means that the goods will not be available to a trustee in bankruptcy or a liquidator. In the case of a lessee which is a company, if such a security interest is not registered on the Personal Property Securities Register (PPSR), it will vest in the lessee. The effect of this would be that the secured party could not seize the goods on the liquidation and their only recourse would be to prove the debt against the liquidator and be paid out as an unsecured creditor.
The registration of a lessor’s security interest on the PPSR also reduces the potential for innocent third parties to be deceived by the lessee’s possession of the property and therefore believe that no other interests exist in it.
It is important to note that the PPSA does not require a registration to be made in respect of all leases to the same lessee. A single registration may cover subsequent security interests in goods that are leased under later agreements. However, in all cases registration will be at the choice of the secured party, as it is not mandatory.
Considerations for lessors when deciding whether to register
In light of these potential benefits, lessors should consider their exposure and the relative benefits and risks of whether to register such security interests on the PPSR. Below is a list of factors that lessors might consider when deciding whether to register. The list is not in any particular order and is not exhaustive, and lessors should seek their own professional advice on whether to register.
- Pre-existing client relationship (eg Do the terms of the lease prohibit the grant of further security interests in the goods? What is the history of the lessor/lessee relationship and the degree of trust? What has the pre-leasing due diligence revealed about the solvency and other details of the lessee?)
- Risk profile (eg What is the degree of likelihood that the lease will be dishonoured? Are transactions of the type being contemplated often dishonoured? What are the numbers and value of dishonoured agreements in the lessor’s books?)
- Goods value (eg What is the value of the goods? What is the proportion of the value of the goods to the total assets of the business?)
- Commerciality of enforcing (eg What are the costs of enforcing against goods of this type? What are the practicalities of enforcement? Are the goods perishable? Is there a market for second hand goods of that value and nature? What is the likely depreciated value of the goods?)
- Cost of transitioning to and adopting PPSA practice (eg the cost of developing back office functions, up-skilling staff and transacting with the PPSR).
If you require further information on this topic or advice on whether you should register your own lease-based security interests, please get in touch with LegalVision today and one of our leasing lawyers will be happy to assist.
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