The PPSA continues to catch out the unwary

Geoff Hardy 102X154                 As lawyers, we are all familiar with the personal property securities regime that has been a feature of the legal landscape since the Personal Property Securities Act 1999 came into force. Unfortunately that familiarity is not as widespread throughout the commercial sector.
  • By Geoff Hardy, Principal, Madison Hardy, Auckland

Financiers and traders that habitually sell valuable items on credit are well versed in the proper procedures to follow under the legislation, even if they might not fully understand the rationale. Those that are not as well versed are the people who very rarely have cause to rely on the PPSA, and as a result they can occasionally be caught out badly.

As the case law illustrates, they are a very diverse group. Their most common characteristic is that they confidently and understandably assume that their ownership of the asset in question will be sufficient to defeat the claims of anyone else who might have an interest in that asset. Under the PPSA, that is no longer the case.

Some of the confusion derives from section 16 of the PPSA which defines a “lease for a term of more than one year” and section 17 which defines the term “security interest”. A lease for a term of more than one year includes a hire agreement and a bailment of a similar duration.

Most leases for more than one year are finance leases, where there is either an optional or an automatic transfer of title to the lessee at the end. Like the conditional sale and hire purchase agreements of old, they are effectively a sale where the vendor or trade financier chooses to retain title while the payments are being made, as a more effective form of security than merely being a creditor holding an enforceable debt.

However, not all long term leases – and very few long-term hire agreements or bailments – contemplate the ultimate transfer of ownership of the item in question to the lessee/hirer/bailee. Finance leases are to be contrasted with operating leases, which are leases in the true sense – the owner of the asset derives a return by way of rent, in exchange for permitting the lessee to use the asset temporarily.

But notwithstanding the fundamental difference between the two forms of lease, in enacting the PPSA Parliament simply made an arbitrary decision that operating leases for more than one year were to be caught within the PPSA web.

Apart from the (rather flimsy) justification that most long-term leases are finance leases, there are two other rationales for this. First, leaving a customer in possession of your asset for more than one year creates the impression that he/she is the owner of that asset, which in turn makes it easier for the customer to fool potential purchasers, lessees or financiers into thinking that he/she is free to deal with it.

Secondly, the true owner can correct that mistaken impression by the simple expedient of giving notice of their ownership (or more accurately, their “security interest”) on the PPSR.

Of course, that may seem like a “simple expedient” to us lawyers, but it is far from a satisfactory solution to asset owners who remain blissfully unaware of the PPSA – and the case law suggests there are many in that category.

Not many of them get caught out, simply because very few long-term asset leases are operating leases, and of those, only in rare situations does the lessee become insolvent or unlawfully attempt to deal with the asset in a manner that is inconsistent with the lessor’s ownership.

Nevertheless the net is cast wider than you would think, simply because of the expansive nature of the definition of “lease for a term of more than one year”.

Not only does it include leases (and hires, bailments) with a fixed term greater than 12 months, but also a lease for an indefinite period (even if it can be terminated earlier than one year by either party), a lease for one year or less that is either automatically renewable or renewable by one party beyond one year, and a lease for one year or less where the customer remains in possession for more than one year with the lessor’s consent.

There are three specific exceptions: leases by people not regularly engaged in the leasing business, leases of household furnishings or appliances as part of a lease of land where the use of the goods is incidental to the use and enjoyment of the land, and leases of prescribed goods (I am not aware of any in the latter category as yet).

Those exceptions have come to the rescue of the asset owner in at least one New Zealand judgment so far, but generally the secured creditor holding the registered security interest prevails.

A brief summary of the New Zealand case law to date illustrates the point:

  • In Graham v Portacom New Zealand Ltd (2004), Portacom leased five portable buildings to NDG Pine Ltd (which subsequently went into receivership) for an indefinite period. The Bank had registered, whereas Portacom had not thought to do so. The Bank won.
  • NZ Bloodstock Ltd v Waller (2005) involved the hire purchase of a stallion to a stud agency which became insolvent. The financier who registered won; the owner of the stallion lost.
  • In Arcus Springs Ltd v Jeffreys (2009), three mobile units were leased for indefinite term. The lessee’s Bank won; the owner lost.
  • In Rabobank v February Syndicate (2011), the owners of the racehorse won, but only because (having campaigned the horse until recently putting it out to stud), they were deemed to be not regularly engaged in the business of leasing horses.
  • Mainzeal Receivers v Hobson Gardens (2013) was another recent case where, upon the receivership of the construction company, the body corporate representing the owners of the apartments under repair gained ownership of certain construction equipment including two substantial on-site hoists. The Bank (who registered) won; the body corporate lost.

Like Groundhog Day, asset owners throughout the world are destined to fall into this trap over and over again.

Our 1999 PPSA was based on Canadian and American laws. Ten years later Australia adopted its own PPSA which came into force on 30 January 2012.

Sure enough, within a year, the owner of some Caterpillar excavators and loaders (Queensland Excavation) who had hired them to a construction company (Maiden Civil) for more than one year, lost them to a financier who had registered its security.

The larger asset lease and hire companies will gradually over time learn to recognise a lease for a term of more than one year and overcome the mental block of familiarising themselves with PPSR registration, but most small-to-medium enterprises won’t.

Horse racing syndicates and inadvertent asset owners like Hobson Gardens will never make the connection.

There will be genuine cries of injustice each time, and I can’t help thinking we are asking a bit too much of our commercial clients to become conversant in a law that challenges even our profession’s understanding on a regular basis.

Geoff is the proprietor and senior lawyer at Madison Hardy, and a former partner at Simpson Grierson. He was an ADLS Councillor from 2006-11 and Vice-President from 2009-10, and has been the Convenor of ADLS’s CLE Committee since 2010.

 

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