One of the many industries that the Personal Property Securities Act (PPSA) impacts upon is equipment hire, specifically hirings to the mining industry.

Such hirings usually comprise lease, chattel mortgage or term purchase contracts involving multi-million dollar “big-ticket” trucks and diggers, colloquially known as “yellow goods”. These goods constitute serial numbered property under the PPSA.  Hence the contracts deploying this kind of property require registration on the PPS Register if the deployments are to be for durations of 90 days or more.

Obviously, where a supplier/financer hires to (or takes direct security from) a mining company or contractor for use of the equipment on or about a particular mine site, no major issues arise apart from the need for PPSA registration within the specified time constraints.

However, the vagaries of the industry are such that the lessee/grantor may for operational reasons periodically find itself facing substantial down-time in equipment utilisation. No return is being generated, but the equipment is still incurring finance charges which must be met.  The user understandably looks to sub-lease or otherwise re-deploy the equipment, often irrespective of the terms of the hire contract.

As a result the original lessee/grantor loses rights to the equipment, possibly for 90 days or more. This may be with or without the consent of the owner/financier, but prior to the PPSA , as a legal matter at least, it did not matter. The owner/financier could always assert ownership of the equipment, wherever and with whomever the equipment may have been at the relevant time. This was important in a worst case scenario if the lessee/customer experienced financial distress, such that a receiver/manager or even a liquidator had been appointed.

Now, under PPSA’s so-called “extinguishment” rules the sub-lessee may deal with the equipment without the impediment of the owner-financier’s security interest registered against the head  lessee-grantor. If the sub-lessee gets into trouble its liquidator may lay claim to the equipment, despite ownership rights residing with the original lessor/financer.

If the sub-lessee is itself a plant-hire company, the PPSA’s extinguishment rules should not apply, so that the head lessor’s security interest prevails against such a third party sub-lessee.

However, the plant hire company may on-hire the equipment to one of its customers for direct use, which is well beyond the original remit of the original lessor. Given industry practice this could be without the lessor’s knowledge.  The equipment could be seized and sold without the true owner having a say in the matter.

A partial solution could be for the owner/lessor to register against the sub-lease as ”chattel paper”, but technical questions of “attachment” and timing of registration remain. The issue becomes even more problematic with sub-sub-leases. For commercial parties the legal position needs to be shored up with diligent management and monitoring.

For more information contact partners@pigott.com.au.

This article is intended to provide general information in summary form on a legal topic, current at the time of publication.  The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.