PPSA treatment of leases must be clarified

The review of the Personal Property Securities Act has addressed what it describes as "perhaps the most challenging question raised in submissions" in its latest consultation paper - but it has not come up with any firm recommendations.

The issue in question relates to the effect of a lease of goods on a security interest that has previously been granted over the goods by the lessor. The review panel said submissions argued it was unclear what effect a sublease could have on the interest of a lessor further up the lease chain.

Submissions also argued that it was unclear whether the interest of such a lessor would be compromised if the sub-lessee sold or granted security over the goods, or the sub-lessee became insolvent in a way that engaged the vesting of insolvency rule.

The review said: "There is no doubt that the Act does not provide clear guidance on this question. It is an important one and should be clarified."

In a sale, the seller's security interest is extinguished because the security interest attaches to the sale price - the proceeds of the goods.

However, it is not clear whether a lessee with a short-term lease has sufficient rights in the collateral to grant security over the goods. Another question is whether a finance lease should be treated in the same way as a sale or a short-term lease.

The PPSA, which came into effect in January 2012, replaced state and territory laws with a national regime for the creation, registration and enforcement of security interests in personal property.

The Act also created the Personal Property Securities Register, which consolidated more than 40 commonwealth, state and territory registers used to provide notification to third parties of security interests in personal property.

In its first consultation paper, issued last month, the review panel called for an amendment that would stop short-term leases being captured by the Act.

It said: "A good deal of leasing activity relates to operating leasing, where a company wants to acquire the use of an asset for a period of time but then return it to the lessor at the end of that period. A lessor might ask why its commercial arrangements should be caught up in legislation that deals with secured finance."

The latest consultation paper also looks at concerns that the Act does not define what it means by a person having "rights" to collateral. People have rights if they own the collateral but the position is less clear in other circumstances such as leases.

"The Act clearly contemplates that a purchaser of goods subject to retention of title, or a lessee of goods can have sufficient rights in goods to support attachment of a security interest," the review panel said.

Another area of concern relates to "perfection" - the mechanism that allows parties to determine definitively and without difficulty whether a grantor may have encumbered its property. Perfection can be established in different ways, such as by possession of the collateral or control.

However, the review panel agreed with submissions arguing that control was an uncertain concept where intermediated securities were involved.

For example, under a system such as Australian Securities Exchange's CHESS system, individual investors are not registered on an issuing company's books as the holder of shares. Rather, an intermediary is registered as the holder of all the shares and maintains accounts for the end investors.

The treatment of intermediated securities such as this is still relatively new in Australian legislation. The review panel said the PPSA needed to be more consistent in its approach to intermediated securities.

The review panel also recommended that the Act be amended so that the collateral covered by a security interest must be described with sufficient clarity to enable it to be identified.

Under the Act as it stands, the security agreement must only identify the class of property that the collateral belongs to.  

"The terms of the security agreement need to be sufficiently certain to enable a court to identify what property is subject to the security," the review panel said.