PPSA reforms from 15 October 2015: Beware if leasing or hiring goods.
The definition of ‘PPS lease’ under section 13 of the Personal Property Securities Act 2009 (PPSA) has been amended.
From 1 October 2015:
- There will no longer be a 90 day period test for the existence of a ‘PPS lease’ security interest that had previously applied to serial number goods.
- The period is now one year and will apply to all types of goods, regardless of whether they have a serial number.
As the changes are not retrospective, leases of serial numbered goods for a term of more than 90 days should still be registered on the Personal Property Securities Register.
The changes were introduced to save compliance costs for small business. While this has been welcomed by businesses entering leasing and hiring of goods transactions for periods of less than a year, the changes have created new challenges.
Where your terms provide for the hiring and leasing of goods for more than a year these transactions will still be treated as ‘PPS leases.’ Option terms extending lease or hire periods need to be taken into account when calculating the 365 day period.
Transactions entered into from 15 October 2015 for a period of 365 days or more will be treated as PPS leases and must be registered to receive the protections available under the Act.
Such protections are primarily around the loss of title in the event of insolvency of the recipient of the goods or a wrongful third party sale by the recipient or customer of the goods.
Those transactions which were for a period of 90 days or less that were registered prior to 15 October 2015, will continue to be treated as PPS leases for the purpose of the PPSA.
In the case of serial number goods which are registrable, careful consideration needs to be given whether to make the registration.
If there is an unspecified or indefinite period in the existing terms and conditions and the period is for 365 or more businesses should err on the side of caution by registering the lease to receive protections under the Act.
An unspecified or indefinite period may arise where a short term lease has been extended for 12 months or more. In this scenario a failure to register will result in the lessor losing title in the goods should a PPS registration not be made and an insolvency event occurs to the lessee.
Agreements that do not specify the lease or hiring periods should still be registered or businesses and possibly also their financiers risk losing title in the goods.
Risk management & what to do
- Security interests for leases of serial numbered goods for a term of more than 90 days entered into before 1 October 2015 should still be registered.
- Businesses that have entered into transactions after 15 October 2015 will no longer have the protections otherwise available under the PPSA for goods leased from 90 to 365 days.
- In light of the recent changes, where necessary businesses may need to take the following measures:
- Amend clauses in their contracts to ensure that the term of leasing or hiring of goods is specified where appropriate;
- Review credit and risk management practices for lease and hire terms under 365 days
- Ensure that if a registration is not made, the term of hiring does not exceed 365 days.
- Ensure registrations are made if the terms are renewable or extended, beyond 365 days after the period of hire commences.
- Ensure that transactions with terms for indefinite or undefined periods should still be registered
- Review PPS policies and practices, to ensure that they are not making unnecessary registrations following the commencement of the new rules.
In addition businesses should:
- Review existing contracts to check if they create a security interest and what steps to take to perfect those interests
- Identify what goods and services can and should be registered
- Make sure your retention of title rights are in writing, signed by the customer and adequately describe the goods supplied
- Register your security interest on the Register before the purchaser obtains possession of the goods as soon as possible and for non-inventory goods within 15 business day.
- Adapt your documents to use PPSA concepts and terms
- Ensure the correct identify and details are recording for the contracting party to enable a valid registration
Kreisson’s PPS team can assist with commercial advice, tailored business needs.
We provide with a risk management focus advice to clients from a broad range of industries on how to protect their business. The client sectors to who we provide advice include suppliers, construction, financiers and manufacturers.
Our PPS team can assist with:
- Preparing and reviewing security agreements including trade documents including commercial credit agreements tailored to their industry
- Advising on steps to protect the interests of secured parties.
- Advising on PPS Registrations
- Advising on PPS transactions and disputes.