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10 January 2013

PPS leases – how the PPSA applies to your internal business structure

The PPSA (Personal Property Securities Act) will celebrate its first birthday on 30 January 2013.

The PPSA (Personal Property Securities Act) will celebrate its first birthday on 30 January 2013.

The PPSA introduced fundamental changes for business structuring arrangements. Assets that are subject to non-arms’ length lease or hire arrangements can be at risk if the entity that has possession of the property under the lease or hire agreement is placed in liquidation or receivership.

What is a PPS lease?

A ‘PPS lease’ is the lease or hire of property for a period (including options):

  • for serial numbered goods (for example, motor vehicles), that is longer than 90 days; or
  • for all other personal property, that is for more than 1 year.

Caution: Arrangements without a set end date are automatically caught under the PPS lease rules.

How do the changes affect your business?

Many businesses are set up so that one entity owns the assets of the business and another entity operates the business (and has the usual risks that go with operating a business).
If a liquidator or a receiver is appointed over the operating company, under the PPSA the operating company is deemed to own the property in its possession at the date of appointment. This would include property that the operating company possesses under a lease. The related entity that actually owns the property will generally rank as an unsecured creditor if it has not properly registered a PPS lease.

Where are the traps?

  1. You must have a written ‘security agreement’.
    Many internal lease or hire arrangements are undocumented. Prudent businesses should document internal arrangements and then register them on the PPS Register.
  2. To avoid the need for a new agreement each time the operating company leases new equipment from the related entity, your security agreement should adequately cover:
    (a) all property leased at the date of the agreement; and
    (b) all new property that is acquired and leased in the future.
  3. There are specific time frames within which a PPS lease is required to be registered.
    Failure to register within the time frames will mean that your PPS lease does not get ‘super’ priority over other security interests and the entity that owns the property may not be able to reclaim its assets from the liquidator.
  4. The temporary protection for agreements entered into before 30 January 2012 comes to an end on 30 January 2014. Also, any new equipment leased after 30 January 2012 will not be covered by the temporary protection.

Cooper Grace Ward’s PPSA team can assist you with identifying, documenting and registering PPS leases. We also offer training for you and your staff on how use the PPS register. Please click here to view our training services.

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This publication is for information only and is not legal advice. You should obtain advice that is specific to your circumstances and not rely on this publication as legal advice. If there are any issues you would like us to advise you on arising from this publication, please let us know.

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