The PPS Act and the PPS lease

The PPS Act is a threat to the asset protection benefits of some business structures.

Many businesses operate a structure whereby the equipment for the operation of the business activity are owned by one entity and leased or licenced to a trading entity. This gives the trading entity the use of the equipment put provides protection in the event that the trading entity suffers solvency issues as creditors, unless they have taken specific security from the asset owning entity, will generally not be able to seize the equipment to discharge the debts of the trading entity.

However, unless the asset owning entity has taken steps to protect its assets in accordance with the requirements of the Personal Property Securities Act 2009 (‘PPS Act’) a creditor of the trading entity can, through the appointment of a receiver or liquidator, seize and sell those assets to satisfy debts owed by the trading entity.

The PPS Lease

The PPS Act has introduced a new concept of a PPS Lease[1] which is:

  • A lease of goods
    • that is capable of lasting more than 1 year or
    • where the goods are motor vehicles, watercraft, aircraft or specified intangible property[2] and the lease lasts or is capable of lasting for more than 90 days and
  • from a lessor who is regularly engaged in the business of leasing goods.

The majority of equipment leasing arrangements that are put in place for asset management purposes will satisfy the requirements of the definition of a PPS Lease as:

  • the definition of goods will include any assets that are not land or a fixture to land
  • the leases are usually for the effective economic life of the asset and will therefore satisfy the minimum term requirements and
  • the requirement to be regularly engaged in business will usually be satisfied if any of the following apply:
    • the only or predominant activity of the asset owning entity is leasing assets to the trading entity;
    • the asset owning entity leases more than 1 piece of equipment to the trading entity; or
    • the circumstances are such that it would be reasonable to assume that the asset owning company could lease other equipment in the future.

Where a PPS Lease exists, unless the requirements of the PPS Act have been complied with, a liquidator or receiver appointed to the trading entity can seize and dispose of the equipment owned by the asset owning entity to pay the debts of the trading entity. This results in the asset owning entity, even though they are the legal owner of the equipment, losing all right to the equipment and being reduced to the status of an unsecured creditor.

In a recent case it was held that receivers appointed to Maiden Civil (P&E) Pty Ltd (‘Maiden’) by its creditors could legally dispose of 3 Caterpillar excavators and apply the proceeds to pay off debts owed by Maiden because the appropriate steps under the PPS Act had not been taken by the owners of the equipment. This was notwithstanding that Maiden had only hired the excavators from Queensland Excavation Services Pty Ltd who in turn had finance outstanding on the excavators in favour of 2 different lending institutions.[3]

How does this affect business structures?

The provisions of the PPS Act will effectively undo the benefits of having a business structure separating the asset ownership from the trading activities unless:

  • a written agreement is in place between the asset owning entity and the trading entity in respect of the equipment and
  • appropriate registrations are made on the PPS Register identifying the equipment, where necessary by serial number, and the nature of the transaction.

How can we help?

We have assisted a number of businesses to protect and maintain their asset owning structures by implementing appropriate and flexible lease structures and advising on the form of registrations that are required to be made on the PPS Register.

For more information contact:

Christine Murray — Partner — Property, Commercial and Finance
(02) 6279 4402

John Morrissey — Associate — Property, Commercial and Finance
(02) 6279 4439