By Ariel Borland, Partner, and Jennifer O’Farrell, Associate

One of the most common mistakes we see when examining the validity of security interests falling within the ambit of the Personal Property Securities Act 2009 (Cth) (PPSA) is the failure to register “PPS Leases” within the timeframes specified by section 13 of the PPSA.  Failure to register a PPS Lease can be fatal to a lessor’s position in an insolvency.

The PPSA provides that, security interests vest in a grantor (in the case of a PPS Lease, the lessee or bailee) upon the appointment of an insolvency practitioner (voluntary administrator, liquidator or bankruptcy trustee).  Whilst this has the benefit of enlarging the pool of assets available to meet creditors’ claims, it has serious consequences for the lessor or bailor.  We have reported on its consequences here and here.  Breaking the news to a lessor or a bailor that a leased or bailed asset is no longer theirs can be difficult, particularly when the asset is valuable.

On 1 March 2017, the Federal Government read Personal Property Securities Amendment (PPS Leases) Bill 2017 (PPS Leases Amendment Bill) in Parliament for a second time.  The PPS Leases Amendment Bill proposes the following amendments to section 13 of the PPSA:

             (1)  A PPS lease means a lease or bailment of goods:

(a) for a term of more than one year 2 years; or

(b)  for an indefinite term (even if the lease or bailment is determinable by any party within a year of entering into the lease or bailment); or

(c) for a term of up to one year 2 years that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms if the total of all the terms might exceed one year 2 years; or

(d)  for a term of up to one year 2 years, or a lease for an indefinite term, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of more than one year 2 years after the day the lessee or bailee first acquired possession of the property (but not until the lessee’s or bailee’s possession extends for more than one year 2 years).

In his second reading speech, Minister for Justice Michael Keenan MP stated that legislative reform was “urgently needed… to minimise the impact of the PPS regime particularly on small to medium Australian businesses”.  It was noted that the definition of PPS Leases “created a disproportionate risk to small business in the short term hire and rental sector”, which has a turnover of $6.6 billion annually.

Empirically, we see a lot of small businesses fail to register leases or bailments on the PPSR in circumstances where their lease agreements are drafted for an “indefinite term” (so that they are caught by section 13(1)(b) of the definition of PPS Lease).  Under the proposed reforms, the “indefinite term” requirement would be abolished, so that lease arrangements for indefinite terms would only have to be registered when they continued for a period of 2 or more years.  Similarly, the rest of section 13 will be amended, so that leasing arrangements of periods of less than two years need not be registered on the PPSR.

The amendments are yet to be debated in the Senate, however they appear to be relatively uncontroversial and are therefore likely to pass.  However, it is unclear when the PPS Leases Amendment Bill will take effect if (or indeed, when) it is passed by Parliament.  Importantly, the PPS Leases Amendment Bill makes clear that the amendments will only apply in relation to leases or bailments entered into after the proposed reforms commence.  So practitioners will have to take note of when the lease or bailment arrangement was entered into: if before the reforms take effect, then leases or bailments of 1 year or more (or for an indefinite term) will be caught by section 13; if after the reforms take effect, then only leases or bailments of 2 years or more (whether for an indefinite term or not) will be caught by section 13.

We will keep you updated as to when the legislation passes.