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Asset Protection, Risk Management, and the PPSA

The recent Supreme Court case of Maiden Civil (P&E) Pty Ltd; Richard Albarran and Blair Alexander Pleash as receivers and managers of Maiden Civil (P&E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd & Ors [2013] NSWSC 852 has confirmed the ‘priority’ of interests under the Personal Property and Security Act, (“the PPSA”).

The Case

The essential facts of the case are as follows:

  1. Queensland Excavation Services Pty Ltd (“QES”) owned 3 Caterpillar machines;
  2. QES leased the machines to Maiden Civil (P&E) Pty Ltd (“Maiden”);
  3. QES did not register the leases on the Personal Property and Securities Register (“the PPSR”);
  4. Fast Financial Solutions (“FFS”) loaned money to Maiden in exchange for a circulating security interest (a ‘fixed and floating charge’);
  5. FFS registered its interest on the PPSR; and
  6. QES alleged title to the machines, and the Receiver and Manager of FFS alleged that FFS’s interest took priority.

QES relied on the transition period in the PPSA to claim that its interest took priority. However, the Court found that QES had not registered its interest on an appropriate transitional register, (in this case, the Northern Territory motor vehicle register – or REVS in NSW,) and was therefore not entitled to the benefit of priority during the transitional period.

The Court held that even though QES owned the machines, FFS’s interest took priority.

The case confirms that ‘priority’ in registration on the PPSR trumps ‘title’ to the goods in circumstances that there are competing interests for the same goods.

The basic legal principle “Nemo Dat” (one cannot give what one doesn’t have) is subjugated by the operation of the PPSA.

The Implications

This case has significant implications for any corporate group utilising an asset protection structure in which a company that owns assets (a “Holding Company”) leases those assets for use in another of the group’s companies (a “Trading Company”.)

Holding Companies  who lease goods to a related Trading Company can often be relaxed as to the terms of the lease, and the protection of the Holding Company’s interest in the goods. This is generally because the Holding Company and the Trading Company are related entities, and the risk involved in the transaction has historically been low as a result of the protections afforded by ‘retention of title’ clauses.

This laissez-faire attitude must change immediately as a result of the decision in Maiden, and more generally as of 31 January 2014 when the transitional period in the PPSA ceases.

Holding Companies must register their interests in leased goods on the PPSR, regardless of who the lease is with.

If the Holding Company fails to register its interest, then priority in the interest in the goods will likely vest in the Trading Company in insolvency, and a claim by a creditor with a registered interest will take priority over the owner’s interest.