People tend to have a love/hate relationship with the PPSA. They love it when it saves them a lot of money and heartache, but they hate how complicated it is.
If you were to sit back and write up the pros and cons of the PPSA you would soon realise that it is a fantastic piece of legislation. It could be the one thing that protects your business from the insolvency of your customers.
So, why is the PPSA so important to your business?
If you’re in the business of hiring or leasing equipment, you’ll want to keep reading.
How the PPSA could save your business
To be fair, the PPSA has been a pain for equipment rental/hire businesses. However, the message is if you provide your equipment in such a way as to constitute a PPS Lease under the law, you simply have to comply.
Prior to the commencement of the PPSA, the insolvency of a customer whilst in possession of your equipment, had no impact on your ability to recover it. In fact, the appointed Insolvency Practitioner had to either return the equipment or continue its hire and the payment of your hire fees; there was never any intention they’d be able to keep your equipment.
The PPSA came along and changed all of this. Now, unless you comply with the PPSA, you will lose any equipment provided to your insolvent customer under a PPS Lease.
Possession can be far more critical than ownership – the adage that possession is 9/10ths of the law has never been truer.
What is the PPS Lease?
There have been three iterations as to what constitutes a PPS Lease and there are still some grey areas – particularly if your customer is likely to cross-hire your equipment.
This question is simply too hard to answer here, but for many businesses compliance with the PPSA provides peace of mind they will never have to argue over whether their hire/lease terms constitute a PPS Lease.
When you assess the value of your equipment and the cost of a legal dispute with an Insolvency Practitioner, the cost of complying with the PPSA is a minor investment. And if you were to compare your PPSA compliance costs with your equipment insurance fees, again, it is a very small fraction of the cost.
What could happen if you ignore the PPSA?
To give you an example of what can happen if you ignore the PPSA, consider the following case which appeared in the NSW Supreme Court. The decision in Forge Group Power V General Electric gives equipment hirers 50 million reasons to comply with the PPSA.
GE was leasing/hiring four gas powered turbines to Forge. Where the hire constitutes a PPS Lease, the owner should register on the PPS Register their interest in their own equipment.
GE was blissfully unaware of the existence of the PPSA and of their obligation to register their interest. Their nightmare began on 11 February 2014 when Forge went into Voluntary Administration. It became a $50 million (the value of the turbines) reality two years later when the NSW Court ruled GE lost their turbines on the appointment of the Administrators.
The PPSA makes it very simple – the four turbines become Forge’s property immediately prior to the Administrator’s appointment. That’s right. Under the PPSA, if you’re required to register your interest in equipment but fail to do so, your equipment will become your customer’s property immediately prior to the appointment of the Administrator.
Unfortunately, the GE case is not a one-off example. Many hundreds of items of equipment, worth hundreds of millions of dollars are estimated to have been lost due to owners failing to comply with the PPSA.
But even a win can be a loss. The 2020 case of OPS V Gold Valley is a great example of the lengths to which Insolvency Practitioners will go to ‘have a crack’ at taking your equipment. Now keep in mind, OPS could have avoided this entire nightmare by taking our recommended conservative approach to the PPSA and performed two PPS registrations over Gold Valley (cost in Gov’t charges = $12).
OPS entered into several lease arrangements with Gold Valley. In this case, the Administrators argued the lease was either a finance lease or a PPS Lease and in either event, OPS’s interest in the equipment should have been registered on the PPS Register. OPS had not performed a PPS registration because they believed a registration was not required.
The Administrators had three arguments to support their action, all based on their interpretations of the lease agreements and the intention of the PPSA. OPS had their view and after 10 months of argument the court settled in OPS’s favour.
Why go through all the pain, not to mention cost and loss of equipment for almost a year, when simply accepting the PPSA may apply and registering accordingly is a far cheaper and easier policy.
The introduction of the PPSA has been tough for hire and leasing businesses but ignoring the application of the PPSA is not an option. Compliance is an essential element of your businesses risk management strategy.
If you’re a business that’s involved in the hire or lease of equipment, contact PPSAdvisory today and see if the PPSA is for you.
Any advice provided in this article is general in nature only. PPSAdvisory advises on all matters to do with the PPSA and are not lawyers or accountants. This is not legal or accounting advice and you should obtain confirming legal and accounting advice before acting.