Short term hire arrangements: further relief ahead?

Changes appear imminent in the Personal Property Securities Act 2009 (Cth) (PPSA) arena, as on 1 March 2017 the Personal Property Securities Amendment (PPS Leases) Bill 2017 (PPS Leases Bill) was tabled in the Federal House of Representatives.

The proposed changes significantly narrow the scope of PPS Leases under the PPSA, by:

• extending the minimum term to more than two years and
• excluding indefinite hire arrangements which conclude within two years.

As a result, fewer short term hire arrangements will be deemed ‘security interests’ under the PPSA. The amendments are a welcome relief for businesses engaging in short term hire arrangements, as fewer transactions will be caught within the scope of the PPSA regime.

Key takeaways

• The PPS Leases Bill was tabled in the Federal House of Representatives in March 2017. As it is yet to be passed, the commencement date of the amendments remains uncertain.
• The proposed reforms increase the minimum threshold requirement for leases or bailments to constitute a PPS Lease from ‘more than one year’ to ‘more than two years’.
• In contrast to the current regime, leases or bailments which extend for an indefinite period will not qualify as PPS Leases under the reforms, unless the hire arrangement actually extends beyond a two year period.
• The new regime would only apply to agreements entered after the commencement of the relevant Act. As such, there is likely to be a transitional period whereby different timeframes will apply to different agreements, depending on the date on which the agreement was entered.
• Until the PPS Leases Bill is enacted, businesses engaging in the hiring industry must continue to comply with the existing registration requirements and ensure that their security interests are registered on the PPSR if the hire arrangement extends for an indefinite term or the lease runs for a period of more than one year (including any permitted extensions).

Impetus for reform

Section 13 of the PPSA provides when leases and bailments of goods will be considered PPS Leases. A PPS Lease deems that certain leases, equipment-hire arrangements, consignments or bailment arrangements (collectively, hire arrangements) are ‘security interests’ pursuant to the PPSA and are capable of being registered on the online Personal Property Securities Register (PPSR). In these circumstances, the owner of the property must validly register it on the PPSR to prevent insolvency practitioners and other third parties from making ownership claims over their property.

One of the requirements to constitute a PPS Lease is the term of the arrangement. Originally, section 13 provided that leases and bailments of goods either for:

• an indefinite term
• a term of more than one year or
• 90 days for ‘serial numbered goods’

may be considered PPS Leases (subject to additional requirements). In October 2015, the 90 day timeframe was removed, such that all assets are now subject to the same rules, regardless of the nature of the asset. Currently, leases or bailments may only constitute a PPS Lease if they are for an indefinite term or more than one year.

However, on a practical basis issues continue to arise because some businesses conducting hire arrangements operate by providing goods to customers on an indefinite basis. In practice, such hire periods are often terminated (and the goods returned) after a few days, weeks or months at most. Currently, such arrangements are caught by section 13, requiring the hirer to properly register their interests on the PPSR or risk losing their interest in the property.

This concept has proven controversial for many businesses conducting short-term hire arrangements. Due to the complexity of the PPSA regime, many small to medium sized businesses engaging in hire arrangements are unaware of the impact PPS Leases have on their business and what their obligations are to protect their interests. Consequently, many businesses operating in the hire arrangements field have been caught out and have lost possession of their property.

For those who are aware of the regime, the necessity of registering a large number of short-term customers has increased their costs of business.

The case of Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52 is an example of big business falling foul of the PPSA by not registering a security interest in a short term hire agreement.

Proposed amendments of the PPS Leases Bill

The changes introduced in the PPS Leases Bill endeavour to remedy the issues arising in the hiring industry due to the broad definition of ‘PPS Leases’. The reforms introduced by the PPS Leases Bill seek to achieve this by again amending section 13 of the PPSA, in order to:

• extend the minimum duration of PPS leases from more than one year, to more than two years and
• provide that leases of an indefinite term will not be deemed to be PPS leases unless and until they run for a period of more than two years.

In introducing an extended minimum term, the reforms seek to ensure that fewer hire arrangements are captured under the PPSA. This aims to simultaneously minimise the regulatory burden and costs incurred by smaller to medium sized businesses engaging in hire arrangements, whilst ensuring that longer term, high value hire arrangements are caught within the scope of the PPSA.

The Explanatory Memorandum to the PPS Leases Bill further clarifies that the amendments would not modify the operation of the PPSA in relation to leases which are in-substance security interests (ie. certain leases which would remain subject to the PPSA even if they are not deemed to be a ‘PPS Lease’).

Whether the PPS Lease Bill will be enacted will turn on whether it passes the second reading debate in the House of Representatives. While the commencement date of these amendments, therefore, remains uncertain, it would be surprising if the Bill did not receive support.

Application of multiple regimes

Importantly, if enacted, the changes provided under the PPS Lease Bill will only apply to those arrangements entered into after the commencement date. The October 2015 amendments similarly only applied to lease arrangements entered after 1 October 2015.

As a result, it is possible that there will be a practical transitional period parties may be caught between the three different regimes. They are described in the table below:

Accordingly, it is possible that circumstances will arise where a business has hire arrangements which are covered by the old, current and new regimes. Although this overlap may prove confusing in the short term, it will ultimately afford greater levels of protection and certainty to hire businesses.

The full text of the legislation is available here.