In the case of OneSteel Manufacturing (OneSteel) (Administrators Appointed)  NSWSC 21, a commercial lessor, Alleasing Pty Ltd (Alleasing), forfeited ownership of their leased equipment valued at $23 million, upon the lessee, OneSteel, going into administration due to a technical defect in the registration of the lessor’s security interest.
In the lessor’s financing statement, under the “grantor details”, the lessor inserted the lessee’s Australian Business Number (ABN) instead of inserting the company’s Australian Company Number (ACN), which was considered a defect that was unable to be cured later on by amending the financing statement or through a Court order.
The decision is a strong reminder that when referring to grantor details, you need to comply with the requirements under the Personal Property Security Act 2009 (Cth) (“PPSA”) and Personal Property Security Regulations 2010 (“PPSR”), and that the Court has no power under section 588 of the Corporations Act to permit a late registration of a security interest.
- Alleasing leased mining equipment, worth approximately $23 million, to OneSteel for using in its mining operations. Shortly after the lease commenced, Alleasing registered its financing statement. In the financing statement, Alleasing wrote the company’s ABN instead of their ACN.
Under the Personal Property Security Act 2009 (Cth) (PPSA), Allleasing’s interest in the leased commercial goods (mining equipment), is a security interest in the lessee that is capable of registration on the PPSR.
- Upon Administrators being appointed to OneSteel in 2016, they asserted that the security interests registered by Alleasing were defective and therefore ineffective under the PPSA.
The financing statement was defective, because pursuant to section 153 of the PPSA, it must consist of data that complies with the requirements of section 153 of the PPSA. The requirements vary, but for a corporate grantor, the prescribed details are the ACN, not an ABN. Pursuant to section 165 (b) of the PPSA, a registration will be ineffective when no search of the PPSR by reference only to the grantor’s details (under s 153) would be capable of disclosing the registration.
- As a result, OneSteel’s administrators argued that the ownership of the leased mining equipment was vested in OneSteel by virtue of section 267 of the PPSA.
Section 267 of the PPSA provides for the vesting of unperfected security interests in the grantor (OneSteel) upon the grantor’s winding up or bankruptcy.
- Alleasing argued that the acquisition by OneSteel of the mining equipment was unconstitutional, as it was not on ‘just terms’. However, the Court refuted that argument and held that section 267 of the PPSA does not affect an acquisition of property, but rather prescribes the consequences in certain circumstances of entering into a PPSA lease.
- Despite Alleasing lodging amended financial statements and trying to rectify this error after the administrators were appointed, the Court determined there is no power under section 588FM of the Corporations Act 2001 (Cth) for the Court to permit a late registration of Alleasing’s security interest. The Court ultimately held that the ownership of the leased mining equipment vested in OneSteel pursuant to section 267 of the PPSA, as the registration of the security interest was defective, seriously misleading, and therefore ineffective.
It is very important for businesses to understand the requirements under the PPSA to ensure registration of their security interests is effective. The PPSA is not solely a system of priority by way of registration; it consists of forfeiture mechanisms in the event that lessors neglect to properly register their security interests on the PPSR.
If this occurs, compensation can be sought by the lessor under section 269 of the PPSA, by way of an entitlement to the monetary value of the forfeited equipment. However, this entitlement ranks amongst those of unsecured creditors. There is no doubt that for an insolvent company, this interest will always be less than the value of the leased equipment and is generally worthless.
It is therefore crucial that creditors, lessors and other secured parties who are registering their security interests ensure that they use the correct identifier for the grantor, whether corporate or otherwise, in the manner prescribed under the PPSA and PPSR. As illustrated in the OneSteel case, the consequences of a simple mistake, such as referring to a company’s ABN instead of ACN, could cost you millions. Are your interests properly registered and protected?
Important Note: Next week we will be writing an article on the most recent changes under the PPS Leases Amendment Act which altered the definition of a PPS Lease and extended the minimum duration from one to two years. Leases of an indefinite term will also not be deemed PPS Leases unless they run for a period of more than two years. (This change does not affect agreements entered into prior to 20 May 2017).
If you would like more information or advice on the effects that the PPSA has on your business, get in touch with Cristian Fuenzalida or the rest of the team at Rockliffs Lawyers for a confidential discussion.