An Important Reminder From The Court Of Appeal - Register Your Security Interest!

The West Australian Court of Appeal (Buss P, Murphy and Vaughan JJA) delivered their reasons today in the matter of Gold Valley Iron Pty Ltd (in liq) v OPS Screening & Crushing Equipment Pty Ltd [2022] WASCA 134.

The decision is one of the first decisions by an appellate court on the construction of the Personal Properties Securities Act 2009 (Cth) (PPSA), specifically what constitutes a security interest.  It will have important ramifications for hirers of equipment and insolvency practitioners alike.

Background

In 2019, Gold Valley Iron Pty Ltd (GVI) and OPS Screening & Crushing Equipment Pty (OPS) entered into a series of hire agreements (the Hire Agreements). The drafting of the Hire Agreements was less than ideal, in that the term of the agreements was arguably not set - but was held at first instance to be less than 2 years - as such this appeal does not concern the question of what is a PPS Lease.

The Hire Agreements also contained a first right of refusal and an option to purchase.

After the Hire Agreements were entered into OPS set about registering on the PPSR.  However, instead of registering a security interest against GVI or its ACN, OPS registered its interest against the Australian Scheme Number.

Administrators were subsequently appointed.  Upon learning of the administrators’ appointment OPS tried to register security interests against GVI - that is after the administrators’ appointment.

The PPSA sets out that it is an offence to register a security interest in circumstances where a party does not believe it has a security interest.

The issue

Section 267 of the PPSA sets out that in circumstances where a party has a security interest and that security interest is not perfected (ie registered on the PPSR) at the time of (among other things) the appointment of an administrator (or liquidator) then that security interest vests in the grantor.

Simply put, if you are a hirer of goods, your hire agreement creates a security interest, if you do not register your security interest on the PPSR and administrators are appointed, you will lose the hired goods to the hiree.

Notwithstanding its registrations, OPS claimed that the Hire Agreements did not constitute security interests under the PPSA.

First instance

At first instance, the trial judge (Tottle J) found in favour of OPS, principally because he did not consider the Hire Agreements included any option to purchase.

The administrators, now liquidators, appealed.

Appeal allowed

The Court of Appeal unanimously (3/0) allowed the liquidators’ appeal.  Buss P and Murphy JA provided the majority decision while Vaughan JA provided separate reasons also in favour of the liquidators'.

The combined reasons run to 122 pages and contain detailed analysis of the PPSA and the elements of what comprises a security interest.

In finding in favour of the liquidators the CoA found that there was an option to purchase, overturning the decision of the trial judge.

The CoA found [209] that during the hire period, OPS held a right of reversion (ie right to the return of the equipment) until GVI exercised its right of purchase.  This right of reversion secured performance of GVI’s obligations under the hire agreements [213-214].  It followed then that the hire agreements were security interests within the meaning of section 12 of the PPSA.

A link to the CoA’s reasons can be found here.

Lavan comment

The CoA made clear that it is the substance of the transaction that is relevant to determining whether a security interest arises under the PPSA.

That means that if you are entering into an agreement that includes a right of reversion (ie a right of return), if the right of reversion exists to compel performance of an obligation (eg payment or money) then it is likely that a security interest arises.

That is irrespective of whether the agreement is for a period of less than 2 years; and irrespective of whether you are in the ordinary business of leasing / hiring goods.

The take away for those parting with possession of goods is to ensure that they understand the basis upon which they do so, and ensure that they correctly register an interest on the PPSA; lest they risk parting with possession forever!

Disclaimer – the information contained in this publication does not constitute legal advice and should not be relied upon as such. You should seek legal advice in relation to any particular matter you may have before relying or acting on this information. The Lavan team are here to assist.