Think ownership will protect your assets? Not anymore.

Just because you own an asset, doesn’t mean it’s yours to keep. If your business hires or loans equipment to third parties and you don’t comply with the PPSA, you have little protection over your equipment should your customer go broke. The collapse of Kentor Minerals proves spectacularly how security interest now beats legal title.

When Administrators were appointed to Kentor Minerals (WA) Pty Ltd in March 2013, the fallout was huge. Equipment hire companies who had supplied goods and equipment to Kentor were scrambling to recover their assets.

Kentor Minerals had owned and operated the Murchison Gold Project in remote Western Australia and had dealings with many equipment suppliers. It was the suppliers who registered with the Personal Property Securities Register (PPSR) that came up trumps. Those who didn’t register wished they had. 

• The owner of a $300,000 water tanker lost it in the insolvency and still owes the equipment financier. This company hadn’t registered on the PPSR.
• A hire company had on-hired excavators to Kentor without the equipment owner’s permission. The hire company has spent a long time locked in negotiations with the Administrator. If not successful, it is liable to the equipment owner for the replacement cost of the machines. This company hadn’t registered on the PPSR.
• Some of the equipment companies were able to recover their plant and equipment successfully. These companies were EDX clients whose interests had been registered on the PPSR and in a manner fully compliant with the Personal Property Securities Act (PPSA).

Australia’s first major legal case on the PPSA – Maiden Civil (P&E) Pty Ltd v Queensland Excavation Services Pty Ltd – shows how registering on the PPSR carries a lot more weight than proving you’re the owner of the goods.

Ownership offers no protection

Many suppliers had hired or provided equipment to Kentor, but the absence of a secured financier meant that there was no competing interest in Kentor Minerals’ property. The Administrator had to determine what property was rightfully Kentor’s.

The PPSA is clear: third-party property that is not protected by the PPSA will vest in the insolvent company – see section 267. Any supplier of equipment that should have complied with the PPSA – but hadn’t – would lose its equipment to Kentor. 

The Administrator’s role is to recover the insolvent company’s property for the benefit of the company’s creditors. While sympathetic to the plight of the suppliers, the Administrator has no choice but to perform his duty.

The Administrator made two points:

1. No supplier could recover goods supplied to Kentor Minerals under Retention of Title (ROT) provisions, because they failed to comply with the PPSA adequately.
2. Several suppliers of mining equipment lost their equipment because they failed to adhere to the PPSA properly.

Case study #1: A Win for Boondy Earthmoving

Boondy Earthmoving provided several equipment items to Kentor Minerals under its general hire agreement. Proactive advice from Boondy’s finance broker saw the company become an early adopter of the PPSA, registering its security interests on the PPSR and fully complying with the PPSA.

Following the appointment of the Administrators to Kentor Minerals, Boondy presented its registrations and supporting hire documentation, and had all its property returned.

On recovering its property, Boondy’s first comment to the company’s finance broker was “when I get back to Perth I’m going to give you a big kiss”.

Case study #2: HGA Hire loses a $300,000 water tanker

In November 2012, HGA Hire provided a $300,000 water tanker to Kentor Minerals on a ‘dry hire’ basis. Unfortunately, there was little in the way of paperwork between the parties.

HGA had acquired the water tanker specifically for this hire contract and had obtained equipment finance from Cato Bank. Neither the bank nor HGA’s finance broker had mentioned the existence of the PPSA. 

Section 267 of the PPSA outlines that where the PPSA has not been properly aligned, an interest in property vests in the grantor (in this case, Kentor Minerals). Because HGA failed to comply with the PPSA, its interest in the water tanker now vested in Kentor Minerals.

Consequently, HGA lost its water tanker.

And that’s not all HGA lost

HGA owes $300,000 to Cato Bank for the water tanker it no longer owns.

On financing the water tanker, HGA granted Cato a security interest in the water tanker. The bank complied with the PPSA and registered its interest against HGA – but not specifically against the tanker by its serial number.

Unfortunately for Cato Bank and HGA, the PPSA throws up another controversial issue: the ‘taking free’ provisions – see section 46. The PPSA tells us that Kentor Minerals can take the water tanker free of the security interest given by HGA to Cato Bank because the property could have been registered on the PPSR by its serial number but wasn’t.

Lesson: Comply with the PPSA and correctly document your terms and agreements.

Case study # 3: On-hiring equipment  

Country Wide Excavations had hired several expensive equipment items to TMB Hire. Under Country Wide’s terms of hire, TMB was prohibited from on-hiring Country Wide’s equipment.

However, TMB on-hired the equipment to Kentor Minerals without Country Wide’s written authority. TMB became locked in negotiations with the Administrator as it attempted to recover its own and Country Wide’s property.

This unfortunate situation would not have occurred if Country Wide insisted that TMB comply with the PPSA and register its interest in Country Wide’s property when it was on-hired.

Lesson: If your customer is going to on-hire your property, make sure they comply with the PPSA. Ask them for a copy of the PPSR Verification Statement for their registration of your property.

Case study # 4:  Making mistakes in PPSR registration

Machinery Hire Pty Ltd provided Kentor Minerals with several ‘dry hire’ vehicles. Machinery Hire was aware of the PPSA and had attempted in various ways to comply with it, including by registering its security interests on the PPSR.

By the time the Administrators were appointed, Machinery Hire had managed to register some but not all its property. Unfortunately for Machinery Hire, not all the registrations were correct.

Not only had the company failed to register its interests within the strict timeframe allowed under the PPSA, but the registrations had also failed to create the priority Purchase Money Security Interest (PMSI) status necessary to protect Machinery Hire’s interests – see PPSA section 14. 

Consequently, Machinery Hire lost several of its vehicles to the Administrator because of its failure to properly comply with the PPSA.

Lesson: Complying with the PPSA can be confusing, but it’s important to get it right.

Don’t make the same mistakes outlined in these case studies – contact our PPSR experts to find out how you can protect your property by complying with PPSA.

Disclaimer: The information contained in this article is general in nature and does not take into account your personal objectives, financial situation or needs. Therefore, you should consider whether the information is appropriate to your circumstance before acting on it, and where appropriate, seek professional advice from a finance professional such as an adviser.