The Corporations Act 2001 (Cth) is amended to facilitate the introduction of the PPSA. One of the amendments is to introduce a new concept of "PPSA Retention of Title Property", defined in section 51F.

PPSA Retention of Title Property means (in essence) property used, occupied or in the possession of a grantor (company) pursuant to a security interest transaction where title to the property is owned by the secured party. Leases, commercial consignments and conditional sales (by retention of title) all fall within the definition. Accounts transferred to a secured party will not be PPSA Retention of Title Property – the personal property must be used or occupied by, or in the possession of, the grantor.

The idea behind PPSA Retention of Title Property is to facilitate the treatment as security interests of title- based transactions such as leases, conditional sales and consignments. The PPSA provides that security interests can attach to leased, consigned or other collateral without the grantor having anything more than a mere possessory interest in the collateral. When it comes to determine what property is “property of a company” for various purposes under the Corporations Act 2001 (Cth), the concept of PPSA Retention of Title Property is used to either include or exclude property which the grantor company only possesses or uses, without any further ownership interest.

The usage of PPSA Retention of Title Property in the Corporations Act 2001 (Cth) is intricate and requires careful attention.

Corporations Act 2001 (Cth) Part 5.2 (receivers and controllers)

The reason for this is not immediately apparent, as the following example demonstrates. If a secured party under a conditional sale (by retention of title) security interest transaction enforces the security interest by repossessing the collateral, would the enforcement constitute the appointment of a controller to the collateral? Does Part 5.2 of the Corporations Act 2001 (Cth) apply to the enforcement? For instance, does section 420A in Part 5.2 (realisation duty) apply to a sale of the collateral following repossession?

Upon commencement of the PPSA, leases, conditional sales, commercial consignments and other similar transactions will be security interests. These security interest transactions attach to PPSA Retention of Title Property - they must be registered, and accordingly it would be logical to assume that Part 5.2 would apply to repossessions of collateral. Application of Part 5.2 would mean that section 420A applies to enforcement sales of collateral to ensure that market value is obtained, to protect other secured parties holding security interests in the same collateral.

However, it appears that Part 5.2 would not apply to the enforcement of security interests against PPSA Retention of Title Property. The provisions of Part 5.2 (section 420A in particular) apply to property of a company, which excludes PPSA Retention of Title Property in Part 5.2.

The fact that Part 5.2 does not apply to security interests that relate to PPSA Retention of Title Property could be intended to preserve the treatment of leases, conditional sales by retention of title and similar transactions that applied pre-PPSA. To explain, before the commencement of the PPSA the enforcement of leases and conditional sales, which essentially entailed the repossession of the subject property, was not regulated by Part 5.2. Lessors and (conditional) sellers in these circumstances were not considered to be controllers.

There appears to be no sound policy justification for dis- applying the provisions in Part 5.2, which regulate the conduct of controllers, to enforcements against PPSA Retention of Title Property. It creates inconsistency and misunderstanding.

Corporations Act 2001 (Cth) Part 5.3A (administration)

For example, PPSA Retention of Title Property will be included when assessing whether a PPSA general (all-assets) security interest attaches to the whole or substantially the whole of the property of a company under section 441A of the Corporations Act 2001 (Cth) for the purposes of appointing receivers over the top of administrators during the 13 business day decision period.

One exception is that section 441A will exclude PPSA Retention of Title Property when determining whether a transitional (fixed and) floating charge attaches to the whole or substantially the whole of the property of a company for section 441A purposes.

Another relevant consideration is the application of the moratorium in section 440B upon the enforcement of security interests against a company in administration. Section 440B will be amended to extend to charges, liens and pledges (as it did previously) and all PPSA security interests as defined in section 51 of the Corporations Act 2001 (Cth), which excludes transitional security interests. What about transitional security interests such as trusts that secure an obligation? It is unclear but it seems that section 440B would not place a moratorium upon the enforcement of such security interests. See Table 8 below.

Corporations Act 2001 (Cth) Part 5.4B (winding up in insolvency or by the court), Part 5.5 (voluntary winding up), Part 5.6 (winding up generally), Part 5.7 (winding up bodies other than companies) and Part 5.7B (recovering property or compensation for the benefit of creditors of an insolvent company)

Care is required when dealing with the various Parts and provisions of the Corporations Act 2001 (Cth) as to whether property of the company either includes or excludes PPSA Retention of Title Property.

A related consideration is whether security interests that attach to PPSA Retention of Title Property such as PPS Leases, conditional sales (by retention of title) and commercial consignments are security interests, such that repayment of secured obligations under these transactions before the onset of administration or liquidation would be a preference or other voidable transaction, assuming the other conditions of voidable transactions are met.

To take one example, is the repayment of amounts owed under a conditional sale (by retention of title) or a PPS Lease within the six (6) months prior to the administration or liquidation of the grantor a preference under section 588FA? These transactions are newly treated as security interests under the PPSA. However, their treatment is not straight-forward under the Corporations Act 2001 (Cth).

Section 588FA (preferences) sits within Part 5.7B (Recovering property or compensation for the benefit of creditors of insolvent companies). In Part 5.7B, property of a company does not include PPSA Retention of Title Property unless a security interest in that property vested in the company because it was unperfected (PPSA sections 267 and 267A) or was not registered within 20 business days of grant (Corporations Act section 588FL). Assume for present purposes that the PPS Lease or conditional sale in the example were duly registered (perfected).

Happily, the important concepts under Part 5.7B are security and secured debt, generally not property of the company. Security interests that attach to PPSA Retention of Title Property are likely to be security interests for Part 5.7B purposes if the security agreements under which they arise were entered into after commencement of the PPSA¹. Only transitional security interests are excluded from being security interests for Part 5.7B purposes.

Does that mean that payments of secured obligations under transitional security interests such as leases or conditional sales (retention of title) are on risk of being voidable transactions under Part 5.7B, and in particular preferences under section 588FA? To take preferences under section 588FA as an example, they relate to payments of unsecured debts within six (6) months of the relation back day upon the grantor company entering into administration or liquidation. Is a payment of rent under a lease that is a transitional security interest an unsecured payment?

The point is not an easy one and there does not appear to be an answer. Payments of rent under leases were not generally considered to be unsecured payments pre-PPSA. However, unpaid rent could arguably be compromised under a deed of company arrangement (DOCA) pursuant to section 444D before commencemnent of the PPSA², which suggests that rent had the character of an unsecured debt. Section 444D provides that an owner or lessor does not have their rights in relation to leased property affected by a DOCA, but that does not mean rent, it refers to the leased property – rent arguably could be compromised under a DOCA.

Turning to DOCAs, given that many leases of goods will be PPSA security interests, the question arises whether the treatment of rent under a DOCA changes – is rent now a secured claim? This is a difficult question. There does not appear to be an answer. Consistent with a lease being treated as a security interest, the better view may be that secured obligations under a lease (arguably, rent) should no longer be able to be compromised under a DOCA.