Retention of title and leasing 

Application of the Personal Property Securities Act 2009 (Cth)

The PPS Act is a law about security interests in property other than real estate. A ‘security interest’ Section 12, PPS Act is an interest in personal property that in substance secures payment of a debt or other obligation.

This definition incorporates standard forms of security such as mortgages and charges. It also covers some transactions not currently considered a form of security and in particular:

• retention of title clauses in contracts whereby a purchaser has possession of property, however does not acquire title from the vendor until the full purchase price is paid, and
• financing or operational leases of personal property for a term exceeding 12 months (or 90 days for motor vehicles, boats or aircraft).

Under the PPS Act, retention of title suppliers and lessors will become secured parties with a security interest in the collateral, and will have a purchase money security interest (PMSI). This is a certain type of security interest which elevates the interest of the secured party to a higher status relative to other interests.

What are the benefits of PPS reform to retention of title or lease suppliers?

There are two main benefits to retention of title suppliers or lessors under the PPS Act. However in order to realise these benefits the secured party must register their security interest.

The first benefit is the PMSI super priority. A registered security interest of a retention of title supplier or lessor takes priority over all other security interests in the collateral. This is an improvement under the current law where it is still uncertain whether such a priority exists.

The second benefit of a registered retention of title or lease-based security interest is the assistance it provides in establishing such a clause against a trustee in bankruptcy or liquidator. It can be difficult under the current law to establish the efficacy of a retention of title clause to the level that the liquidator will allow the retention of title supplier to take the collateral on the basis of their ownership. Retention of title clauses have often been ineffective when disputed by a liquidator with much focus placed on the form of words that are used in the clause.

Under the changes brought in by PPS reform, if such a security interest is perfected and falls within the definition of ‘PPS Act retention of title property’ under the winding up provisions in the Corporations Act 2001, the collateral will not be available for the liquidator to distribute in the insolvency Section 513AA, Corporations Act. Accordingly, the secured party would be able to seize the collateral on the basis of their ownership and not be adversely affected by the liquidation.

‘PPS Act retention of title property’ is property which is owned by the secured party but is in possession of the receiver/ lessee of the goods Section 51F, Corporations Act. If such a security interest was not registered on the PPS Register it would vest in the company Section 267, PPS Act. The effect of this would be that the secured party could not seize the collateral on the liquidation and their only recourse would be to prove the debt against the liquidator and be paid out as an unsecured creditor.

In light of these potential benefits, the PPS Act offers an opportunity for businesses to review their practices, consider their exposure and the relative benefits and risks of whether to register on the PPS Register.

For details on the process of registration see the PPS Register and priorities information sheet. The PPS Register will be inexpensive and user friendly.

Set out below are some factors that retention of title suppliers and lessors might consider when deciding whether to register. The list is not in any particular order and is not exhaustive, and businesses should seek their own professional advice on whether to register.

There is no clear formula to determine whether a given business should register its security interests. All these factors are relevant but none in their own right are determinative.

More detail about retention of title supply and leases is available in the purchase money security interests information sheet.