AICM is regularly made aware of issues by councillors and members. This engagement is extremely important, so that our members' voice is heard when changes are intended to be made to important credit laws. Recently, PPSA expert and Qld Division AICM Vice President Peter Mills made AICM aware of intended changes to the PPSA which had been introduced into Parliament without public consultation.
Following discussion of the issues with the AICM Board, Peter, prepared AICM's lengthy and detailed submission to government in the short time available to urge the amendments be reconsidered.
This article is an abridged version of the changes, the submission, and how all businesses will be substantially affected. Specialised advice should be sought on how members' business' should best deal with the changes.
The federal government introduced a Bill to make changes to the meaning of "PPS lease"1 (the changes) in March 2017. At the time of writing, the amendments Bill had been read and passed in the Senate and House of Representatives; however a final reading is required in the Senate before moving to the Governor-General for Royal Assent. The changes have not yet become law, but might. AICM will keep members informed. If assented to, the changes will take immediate affect.
Generally, the changes vary the time period from one year to two years for the meaning of "PPS lease", and were sought by the Hire and Rental Industry Association Limited ("HIRA"), due to the:
1. Risk of loss of priority if a lessee goes into Voluntary Administration or liquidation2, and
2. Cost of PPSA compliance being too burdensome. The changes apply in relation to all leases or bailments entered into after the day on which the Governor General Assents to the laws. No transition or "honeymoon" period is provided for.
1. Will generally mean leases and bailments for a fixed term of more than 2 years will be "PPS leases", but only after 2 years of substantially uninterrupted possession has passed.
2. Certain leases and bailments for an "indefinite term", or of less than 2 years, will still be "PPS leases" if they "might" exceed 2 years. "Might" is not defined by the PPSA. "Might" is commonly used to express not a "more likely than not", or "on the balance of probabilities" outcome, but a remotely possible outcome. (eg "I might buy a boat if I win the Lotto").
3. Will create a third version of the meaning of "PPS lease" in less than 5 years, and which is not consistent with either:
(a) The recommendations made by the Whittaker Review;
(b) Most other countries’ PPS laws equivalent of
“PPS lease” (such as New Zealand and Papua New Guinea) and so cause specific confusion for registration requirements for goods coming from Australia or such other countries, or
(c) Australian and international accounting and finance standards3.
These differences enhance difficulty, inconsistency and additional compliance costs for credit and finance departments, especially where goods move between countries, and/ or common customer T+C’s are used in various countries;
4. Will require businesses to incur substantial costs, and lose rights and defences, as future hires will not be “security interests”:
(a) The most common type of lessors hire out goods for an indefinite term, or for a fixed term of greater than 1 year (but less than two years). Before the changes, they are entitled to, and normally register a PMSI, and have super priority over their goods and proceeds;
(b) Due to lack of honeymoon or transition provisions, businesses will likely incur substantial expenses, including:
(iii) Reviewing and suitable redrafting of new T+C’s;
(iv) Creating new registration protocols and compliance, and
(v) Have their existing PPS lease registrations discharged within 5 business days of the commencement of the changes or be likely committing an offence.
(c) PPS lessors have an automatic priority over and be secured over proceeds for the debt and all enforcement expenses. Under the changes most businesses will:
(i) lose these rights, as they will no longer hold a “security interest”;
(ii) not be entitled to require a liquidator, receiver or VA to acquit for any funds the liquidator, receiver or VA receive which are “proceeds”;
(iii) become an unsecured creditor as to the rental paid (normally in arrears) and so be even more exposed to unfair preference claims by liquidators. From 1 September 20174 this risk exposure will increase:
(iv) not be able to take the benefit of enforcing their super priority over proceeds payable by a third party to the grantor. Their sale of secured accounts receivable may therefore be less valuable to buyers of invoices under P2P or other business models;
(v) The PMSI holders of operating lease “inventory” will no longer receive notices from a grantor’s invoice financier, and so will need to set up alerts or regularly review customer’s registrations;
5. A buyer of accounts receivable from a lessor, or a
customer of a lessor, (which lease was a PPS lease) will:
(a) Need to consider processes and documentation to retain priority over future proceeds, and
(b) Will need to carefully their position as potential unsecured creditors and exposure to unfair preference claims (by the grantor's liquidator or the end debtors liquidator) if suitable documentation is obtained.
Special Counsel Thompson Geer Lawyers
firstname.lastname@example.org T: (07) 3338 7921
1 Personal Property Securities Amendment (PPS Leases) Bill 2017
(called “the changes”)
2 Section 267 PPSA and 588FL Corporations Act
3 The Australian Accounting Standards Board made Accounting
Standard AASB 16 Leases under section 334 of theCorporations Act 2001: A short term lease [means] A lease that, at the commencement date, has a lease term of 12 months or less. A lease that contains a purchase option is not a short-term lease.
4 Due to changes under the Insolvency Reform Act to the “relation back day” which commence on 1 September 2017