The NSW Supreme Court has now confirmed the thrust of the national Personal Property Securities Act 2009 (PPSA) reforms in a lucid and thorough judgment which at the same time will send tremors through the sub-hiring business model seen especially in the mining industry. In summary, those reforms replace title-based security interests with a system of priorities based on registration.
In Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd  NSWSC 852 the judge, Brereton J, applied the priority schema of the PPSA to find that a registered general security interest (GSI) – equivalent to the old fixed and floating charge – gave priority to a lessee’s lender ahead of the lessor’s ownership rights to equipment the subject of the leasing agreements.
The downfall of the lessor, QES, was not that the leases were oral, nor the fact that they were entered into prior to the commencement of the PPSA. Rather, it was that they failed to qualify as temporarily protected security interests. The leased equipment had not been registered on the PPSA’s predecessor register for security interests in motor vehicles – in this case the Northern Territory’s Register of Encumbered Vehicles (REVS).
If the applicable Caterpillar excavators and loaders had been registered on REVS at the time QES leased them to the lessee, Maiden, QES’s ownership would have prevailed over the GSI in all of Maiden’s assets that it subsequently granted to its late arriving general financier, Fast Financial.
Even if QES had registered in a timely fashion, some PPSA house-keeping would have become necessary in preparation for the end of the PPSA’s two year transitional period on 30 January 2014. The leases from QES to Maiden would have had to have been documented in order for QES to obtain full priority over Fast Financial.
The case is particularly relevant to the mining industry because the scenario is commonplace. The lessor, QES was not the outright owner of the equipment, but rather a grantor of security to the two financiers at the top of the chain, Westpac and Esanda. The latter was paid out early on, presumably from the proceeds of Maiden’s business operations, while Westpac had recourse to other security granted by the principal of QES at the time of initial funding. However the overall arrangement is typical of the deployments of equipment between mining sites and operators which happen unpredictably and at times seemingly in defiance of documentation.
In this case, QES, being in the business of equipment hire, was free to part with possession of the equipment by leasing to a third party, Maiden. In so doing QES created its own registrable security interest in the equipment. The attitude of the head financiers, Westpac and Esanda is not known, but realistically they must have expected such an eventuality. In pre-PPSA days it wouldn’t have mattered, as their ownership rights were unchallengeable. Post-PPSA, QES’s failure (or inability) to perfect its security interest by registration left both extant secured parties, Westpac and QES, potentially exposed.
When Maiden went into administration, and subsequent liquidation, a worst case scenario was realised for QES. All its prior rights to the equipment were deferred to Maiden’s liquidators including Fast Financial pursuant to its registered GSI.
The message for the mining and other industries where financed and secured equipment is dealt with by the grantor of the security interest (whether in the normal course or otherwise), is that the PPSA secured parties higher up the chain must take a view on the risk of those possible dealings, and, if the downside is considered too severe, take further security.
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