The nuts and bolts of the PPSA considered: Maiden v QES [2013] NSWSC 852

The only Australian case to date to comprehensively consider the Personal Properties Security Act 2009 (Cth), particularly PPSA leases, transitional security interests and priorities is In the matter of Maiden Civil (P&E) Pty Ltd; Richard Albarran and Blair Alexander Pleash as receivers and managers of Maiden Civil (P&E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd & Ors [2013] NSWSC 852 (‘Maiden v QES’). This was a priority dispute before Brereton J of the New South Wales Supreme Court.

This matter concerned a lessee (Maiden) of 3 Caterpillar construction vehicles (the ‘Caterpillars’). The lessee granted a charge over his property, including the Caterpillars. The charge was given by the lessee to the chargee (Fast) pursuant to a General Security Deed. By reason of the operation of the PPSA, the lessor (QES) of the Caterpillars had a security interest (ss12, 13) but did not perfect that interest by registration (s21). However, the chargee registered the charge as a security interest on the PPSR. The lessee defaulted and the chargee appointed receivers and managers over the assets. The lessee went into liquidation one month after the appointment of receivers and managers. The chargee asserted priority over the Caterpillars. Brereton J found for the chargee and not the lessor.

First, Brereton J held that the lease from QES to Maiden was a PPS lease (s13), and thus a security interest (s12(3)(c)), because:

• the lessee retained continuous possession of the Caterpillars for more than one year (ss 13(1)(b) and 13(1)(d); 
• the Caterpillars are goods described by serial numbers and were in the lessee’s possession for more than 90 days (ss 13(1)(e)(ii) and (iii)); 
• The income from hiring the Caterpillars was QES’s only income and thus it was not established that QES was not regularly engaged in the business of leasing goods (s13(2)). 

Second, Brereton J considered s19(5) which provides:

(5) For the purposes of paragraph (2)(a), a grantor has rights in goods that are leased or bailed to the grantor under a PPS lease, consigned to the grantor, or sold to the grantor under a conditional sale agreement (including an agreement to sell subject to retention of title) when the grantor obtains possession of the goods.

His Honour reviewed the New Zealand and Canadian authorities on the cognate provision in those jurisdictions and held that a lessee under a PPS lease had proprietary, and not just possessory, rights in the Caterpillars to which a security interest could attach (at [26]).His Honour cited the seminal New Zealand PPSA case of Graham v Portacom New Zealand Ltd [2004] 2 NZLR 528, [28] in which Rodney Hansen J held ‘[a]s against the lessee's secured creditors, the lessee has rights of ownership in the goods sufficient to permit a secured creditor to acquire rights in priority to those of the lessor’ and ‘ostensible ownership - in the radical sense of bare possession or control of the collateral - has effectively replaced derivative title for the purposes of determining the scope of the secured debtor's estate at the priority level.’

His Honour also held that the General Security Deed was a ‘security agreement’ within the meaning of the PPSA and thus created a ‘security interest’ as the agreement created an interest in personal property that secured payment or performance of an obligation (s12(1)) (at [33], [34]). Because the funds were advanced, the security interest attached to the collateral and was enforceable against the lessee (s19), and the security interest was enforceable against third parties (particularly QES) because:

• it was attached to the collateral (s20(1)(a)); 
• the security interest ‘covered the collateral’ because: 
• the General Security Agreement was a security agreement evidenced in writing signed by the lessee as grantor (s20(2)(a)(i)); 
• it contained a description of the particular collateral (s20(2)(b)(i)); and
• it contained a statement that a security interest is taken in all of the lessee’s present and after acquired property (s20(2)(b)(ii)). 

Because the General Security Deed was registered and was enforceable against the grantor and third parties it was perfected (s21) (at  [39], [40]). As such, without more, the lessor’s interest was subordinated to the chargee’s interest by operation of s55(3) PPSA which provides ‘a perfected security interest in collateral has priority over an unperfected security interest in the same collateral’ (at [41]). His Honour also noted that the PPSA lease was arguably also vulnerable because it was not written, which is a prerequisite for it to be enforceable against third parties (s20(2)) and thus perfected (s21(1)(b)(ii)) (at [41]).

The lessor argued that although its interest was not registered, it was perfected as a ‘transitional security interest’ (ss 308, 322), and was afforded priority for a period up to 24 months after the commencement of the PPSA by reason of it being a ‘temporarily perfected’ security interest (ss 320, 322). However, Brereton J noted that the exception to the perfection of a transitional security interest set out in the regulations was a security interest registrable on a transitional register (being a register maintained under a law of the Commonwealth, a State or a Territory from which data was provided to and accepted by the PPS Registrar), and the Northern Territory, in which the Caterpillars was used, had such a register (at [50] – [55]). Further, the Caterpillars were registrable on that register, and therefore the security interest was not perfected as a transitional security interest. QES submitted that there was a Queensland register that was exclusively applicable; however, this submission was rejected by Brereton J noting that the relevant provision was not engaged by the facts of the case (at  [58] – [65]).

QES submitted that the lease of the Caterpillars was terminated for repudiation and the lessee, and thus the chargee, no longer had a right to possession. Referring to s267(2), Brereton J noted that immediately before the commencement of the winding up or voluntary administration of the grantor, an unperfected security interest held by a secured party vested in the grantor (at [70] – [72]). The consequence of this was that on the commencement of the administration or winding up of the lessee, the lessor’s unperfected security interests in the Caterpillars vested in the lessee, and thus was extinguished (at [72]).

Further, His Honour held that a PPS lease gives possessory and proprietary rights in the collateral to the lessee, and therefore a lessee may grant security interests in the collateral sufficient to defeat the lessor’s interests (at [73]):

The Canadian and New Zealand cases already mentioned demonstrate that a PPS lessee on taking possession of the collateral acquires not only a possessory right but also proprietary rights to the extent that it can grant security interests to third parties, so that the lessor's interest if unregistered is vulnerable to being defeated by security interests so granted to such third parties. The PPSA treats the lessee under a PPS lease as the grantor of a security interest with rights in the collateral, and the lessor as a secured party, because it sees the transaction as, in substance, a security transaction, though in form it is a lease. As the cases mentioned show, it recognises that the lessee may validly and effectively grant security interests in the collateral to third parties, that can take priority of the lessor's unperfected interest, because the lessee is regarded for that purpose as having rights in the collateral

QES further submitted that the PPSA does not grant rights beyond that which the grantor has because of the operation of s112(1), which provides:

In exercising rights and remedies provided by this Chapter, a secured party may deal with collateral only to the same extent as the grantor would be entitled to so deal with the collateral.

The QES argument went that because Maiden was a lessee under a lease that had been since terminated, Fast, which took no interest greater than the lessee, could not deal with the Caterpillars. That is, QES was saying nemo dat quod non habet (no one can give what he does not have). Brereton J said that s112 should be interpreted in a manner consistent with the approach taken to title and priorities in the PPSA, which is contrary to the nemo dat rule which QES was arguing for.

Brereton J held that the purpose of s112 is to confirm that limitations and restrictions imposed by law on a grantor's ability to deal with collateral apply also to the secured party in enforcement action under Chapter 4 (at  [78]). For instance, requirements that a license not be assigned without the consent of the licensor, or pre-conditions to the grantor dealing with the collateral. Further, Brereton J considered that Chapter 4 was concerned with remedies under that chapter and not remedies exercised pursuant to a security agreement. In support of this His Honour referred to s18(1) which provides that ‘a security agreement is effective according to its terms, and s110 which provides that the PPSA does not derogate from the rights and remedies of the secured party. Finally, Brereton J noted that Chapter 4 does not apply to property while there is a receiver and manager (s116).

Because Brereton J's reasons were so comprehensive and because this is the first Australian case to comprehensively consider the PPSA, QES v Maiden is likely to play a guiding role in the construction and application of the PPSA to security interests in priority disputes.