Imagine you are operating a generator hire business. All your capital is tied up in 20 large pieces of equipment. Your best customer takes 10 of them for a big mining project. Six weeks later you get a call from the liquidator of the customer. He tells you that because you made a small mistake on an online registration form (or forgot or didn’t know about the need to register) all 10 generators are no longer yours. They are assets of the liquidating company. And you will still have to pay your bank back any finance owing on the equipment you no longer own.
Impossible? Not in the hire industry.
This is because the hire industry must comply with the far reaching effects of the Personal Property Securities Act 2009 (Cth) (PPSA). The above scenario and variations on it are playing out all too regularly in the industry.
For example, the decision of the Victorian Supreme Court in Carrafa & Others v Doka Formwork Pty Limited [2014] VSC 520 handed down in November 2014 encapsulates everything that is wrong with the PPSA from the hire industry’s perspective.
In the Doka Formwork case, Doka hired formwork to Relux a construction business. No fixed period was put in the hire agreement which is common in the industry. Yet under the PPSA, longer term and ‘indefinite’ term hires are deemed to be ‘security interests’. Make a small mistake and these hired assets become fair game in an insolvency.
PPSA requires that to protect its ownership of its equipment Doka had to register its security interest on the Federal register within 20 business days of the hire agreement. The legislation is so complex that this requirement is not referenced in the PPSA’s hundreds of pages. It is found in in section 588FL of the Corporations Act – related but separate legislation. The PPSA proper has its own set of deadlines that can also apply with equally devastating effect.
In April 2014 Relux went broke. Its liquidators used section 588FL to claim ownership of Doka’s formwork – about a million dollars’ worth. They succeeded in getting some of it.
Doka had made a registration on 20 February 2014 but this was more than 20 business days after the hire agreement. And that wasn’t good enough under section 588FL because Relux didn’t survive 6 months from the date of the late registration. Doka’s equipment ‘vested in’ Relux.
In handing down his decision Sifris J noted that PPSA leads to ‘seemingly draconian’ outcomes – the loss of ownership of the hired equipment being obviously one of these. His Honour appears to have applied the law correctly, with respect. But there is a lot wrong with the legislation that delivered this outcome. What is the rationale for a law that deprives an owner (Doka) of its right to its own formwork that it simply hired to a construction business?
The real policy of section 588FL is to ensure that ‘security interests’ over a company’s property become visible at least six months before its demise.
The view that would doubtless be propounded by those who decided that the PPSA should extend to the hire industry is the need to battle the ‘evil of apparent wealth’. That theory holds that those dealing with Relux would have been lured into providing it credit by the fact that, as it headed towards insolvency, it appeared to own the formwork when that was in fact the property of Doka.
But the liquidators didn’t have to show anyone actually thought that. Under PPSA Doka failed to register on time and so, according to the law’s architects, Doka deserved to lose its formwork when Relux went broke.
Doka could have proved that everyone who dealt with Relux knew the formwork was owned by Doka. The formwork could have had ‘property of Doka’ in prominent lettering all over it. None of that would have made any difference to the outcome. Nor does it matter that everyone who deals with construction companies knows they use hired assets (like formwork) extensively.
His Honour noted that Doka could have avoided all this by making a prompt registration. Doka at least seems to have known about PPSA – but maybe not about section 588FL. Registration was one day late to save ownership of some of the formwork.
Lawyers who work with PPSA will attest to the fact that hire businesses that approach the task of registration without good legal advice will usually get their registrations wrong anyway, such is its complexity.
In the writer’s opinion, Australia’s PPSA regime needs urgent amendment. The current law:
- reflects a Quixotic agenda – tilting at an ‘evil of apparent wealth’ which appears largely illusory in the Australian hire industry context;
- is full of complexity that favours the banks and the well-advised and traps those least equipped to comprehend it;
- cuts across assumptions about legal ownership that are hard-wired into commercial thinking and the way Australian businesses assess risk in this area.
Advocates of extending PPSA to the hire industry argue that similar regimes exist in other jurisdictions, notably Canada and New Zealand. But that does not mean Australia should go the same way. Indeed the NZ experience is that unsuspecting hire businesses have lost, and continue to lose, assets including expensive racehorses and portable buildings.
The US Chamber of Commerce has written to the Federal Government’s review looking into the reach of the PPSA. The Chamber urges a revision of the PPSA to protect US companies’ ownership in their property. That correspondence arises from a widely reported case now before the courts where a US company may lose ownership of gas turbines with a value of about $60 million leased to the now insolvent Forge Group. In its submission the Chamber argues that reach of the PPSA ‘undermines Australia’s reputation of offering investors a safe and reliable commercial environment under the rule of law’ and that it ‘may potentially lead American companies to reassess their investments in the country’.
An otherwise commendable piece of consolidation and rationalisation of State and Federal laws is spoiled by imposing the PPSA upon the equipment hire industry. The sooner all the impacts of the PPSA regime on the hire industry are removed, the better.
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About the Author:
Oliver Shtein is a commercial lawyer whose clients include hire businesses and the Hire and Rental Industry Association.
