Businesses operating in the hiring industry fail to mobilise and protect their assets in the face of ongoing exposure to the PPSA via agreements with no contractual end date. A failure to register will mean a failure to recover your goods.

Industry background In early 2014, significant lobbying by the Hire Industry occurred as a result of hire agreements for an 'indefinite' term (ie a hire contract with no end date) being captured by various sections of the Personal Property Securities Act 2009 (PPSA). Concern was also raised by this industry at this time as to what constituted a 'Motor Vehicle'. As a result of this pressure changes were passed by the Federal Government which came into effect from 1 July 2014.

However, those changes were aimed squarely at the definition of what a 'Motor Vehicle' was rather than addressing the concerns of the industry regarding the industry wide usage of agreements for an 'indefinite' term. And it is this 'indefinite' term which continues to cause problems for the Hire Industry (and many others) and has resulted in the loss of hired equipment in the reported case of Carrafa & Others v Doka Formwork Pty Ltd.1

The wording

The Doka contractual terms that caused its supplied formwork to be captured by the PPSA provided that the rental duration was as follows:

"The duration of any rental period commences on the date which the ordered material leaves the Doka warehouse. Any rental period will end on the date the rented material is returned to the Doka warehouse. Any partial return and/or delivery of material shall be deducted pro-rata according to agreed rental rates" 2

Therefore, it was found that the Doka terms in the lease was for an indefinite period only ending when the formwork was returned to Doka.

The case

In this case, Relux Commercial Pty Ltd (in liquidation), over which Mr Carrafa and his fellow partners were appointed as liquidators, operated a construction business specialising in pouring, laying and erecting large concrete slabs and panels. It rented formwork and associated equipment from Doka Formwork Pty Ltd from time to time.

At the time of the appointment, being on 7 April 2014, there was over $1million of Doka supplied equipment in the possession of Relux. All the leased equipment supplied by Doka was delivered by Doka to Relux prior to 21 January 2014 except for two orders for equipment, which were delivered by Doka on 26 February 2014 and on or about 14 March 2014.

On 20 February 2014, a security interest claimed by Doka in commercial property held by Relux (that was further described as 'Equipment Rental and Sales especially in Formwork') was registered on the Personal Property Securities Register (PPSR).

Each lease was initiated by a written order from Relux describing the required equipment. The commencement date for each lease was the date the equipment left the Doka warehouse or when Relux took delivery of it and incorporated Doka's General Terms & Conditions printed on the back of each invoice. This case however hinged upon the fact that the lease was for an indefinite term. That is, the lease agreement had not specified an end date. It may be presumed that Relux was unsure of how long it would need the formwork and so therefore the contract was 'open ended'

As a result of the leases being for an 'indefinite term' they fell within the definition of being a PPS Lease3 for the purposes of the PPSA. Upon being described as PPS Lease it is a requirement to have any security interest associated with it registered on the PPSR.

Accordingly, the 'registration time' for the security interest had to be the later of:
a) 6 months before the critical time; or
b) the earlier of 20 business days after the security agreement that gave rise to the security interest came into force, or the critical time.

Whilst the registration of Doka was within 6 months of the 'critical time', being the date of the appointment of the Voluntary Administrators/Liquidators, it was the second limb of this section that caused Doka trouble.

Section 588FL of the Corporations Act 2001 (Cth) provides that if security interest granted by a company is unperfected (e.g. not registered) at the critical time, it may vest in the company that is being wound up or in administration under section 267 or 267A of the PPSA

The Finding

The Judge in this case held that by reason of section 588FL(4)(a) of the Act, Doka's PPSA security interests in the equipment supplied under leases commencing before 21 January 2014 vested in Relux because they were not perfected by registration within 20 business days, (i.e. by 19 February 2014) of the relevant agreement. Unfortunately for Relux it lodged its registration on 20 February 2014.

In the reasoning provided by the judge in this case, it was stated that:

"This can lead to seemingly draconian outcomes, particularly where the property is valuable such as in this case where the Formwork Equipment was valued at over a million dollars. The impact of these provisions is compounded by the broad scope of the PPSA and the large number of interests covered by it. Despite these consequences, as noted in the Explanatory Memorandum, these provisions are needed 'to prevent security interests being granted fraudulently with knowledge of an imminent administration, liquidation or deed of company arrangement'. Moreover, in order to avoid these consequences, security interest holders can simply ensure they register their interests as soon as possible after they are granted."4

It was not all bad news for Doka though as it was able to recover its equipment that related to the lease agreements commencing 26 February 2014 and 14 March 2014 as these supplies were made after registration had taken place.

The lessons for all

Those suppliers that fail to take heed of the tough lesson learned by Doka in this case will continue to suffer in a security interest dispute with an insolvency practitioner. Any suppliers who desire to recover their goods supplied to a customer in the event that the customer doesn't pay must protect their position by complying with all aspects of the PPSA.

Liquidators and their solicitors are becoming increasingly well versed in the operation of this area of law and continue to defeat suppliers that chose (out of ignorance or otherwise) to continue to ignore the implications of not registering on the PPSR.

FOOTNOTES: 1 Carrafa, Gountzos & Lofthouse (as liquidators of Relux Commercial Pty Ltd (in liq)) & Anor v Doka Formwork Pty Ltd [2014] VSC 570 (14 November 2014)
2 As above at [25]
3 Section 13 of the Personal Property Securities Act 2009
4 Carrafa, Gountzos & Lofthouse (as liquidators of Relux Commercial Pty Ltd (in liq)) & Anor v Doka Formwork Pty Ltd [2014] VSC 570 (14 November 2014) at [60]

Adrian Hunter has presented nationally on the PPSA, is an Official Liquidator and a Director with the restructuring and insolvency firm Brooke Bird. Ph: (03) 9882 6666 www.brookebird.com.au

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