Equipment lease leaves owner empty handed when hirer becomes insolvent - Insolvency/Bankruptcy

In a recent decision handed down in Gold Valley Iron Pty Ltd (in liq) v OPS Screening & Crushing Equipment Pty Ltd [2022] WASCA 134, Liquidators succeeded in establishing an 'equipment lease with an option to purchase' clause as being a security interest under the Personal Property Securities Act 2009 which needed to be registered by the owner.

Key takeaways

Where an equipment hire agreement contains an option to purchase, the owner should register their interest on the Personal Property Securities Register (PPSR) to avoid the risk of losing priority in the equipment if the hirer becomes insolvent.
Courts will look at the substance of the agreement to determine whether it is an agreement for the hire of equipment only or a mechanism by which the hirer obtains a proprietary interest akin to a retention of title arrangement.
An option to purchase equipment in a hire agreement is not determinative of an agreement that gives rise to a security interest under the PPSA, but it is a significant feature.

The Court of Appeal in Western Australia recently handed down its decision in Gold Valley Iron Pty Ltd (in liq) v OPS Screening & Crushing Equipment Pty Ltd [2022] WASCA 134. This decision reverses the initial ruling that an equipment hire agreement did not constitute a hire purchase agreement which gave rise to a security interest under the Personal Property Securities Act 2009 (Cth) (PPSA).

The Court of Appeal had to consider whether the hire agreements constituted hire purchase transactions that provided for an interest in personal property (the equipment) in favour of the owner of equipment. Further, the Court had to consider whether that interest, in substance, secured payment or performance of an obligation by the hirer to the owner of the equipment and what the nature of that interest is for the owner of equipment.

Buss P, Murphy JA and Vaughan JA considered the indicia of what features of an agreement are capable of providing for an 'in substance' security interest and unanimously found that the hire agreements containing an option to purchase satisfied the requirements.

The questions of whether the owner of equipment failed to register the security interest and, as a consequence, had the security interest vest in the hirer, have been remitted to the trial division.

The relevant facts

OPS Screening & Crushing Equipment Pty Ltd (OPS) hired various pieces of mining equipment out to Gold Valley Iron Pty Ltd (in liq) (Gold Valley Iron) under five written agreements which are materially identical.

Each agreement referred to a 'monthly hire rate' and also contained a special condition that granted the hirer an 'option to purchase the equipment' during the term of the hire for the 'outright purchase price option' amount. There was a separate special condition that provided the hirer with a 'right of first refusal to purchase [the equipment]' for a specified purchase price during the term of the hire.

During the term of the hire, while Gold Valley Iron was in possession of the equipment, it became insolvent and liquidators (the Liquidators) were appointed to the company.

First instance decision

The Liquidators contended at trial that OPS' interest in the equipment vested in Gold Valley Iron immediately before it entered voluntary administration because OPS did not register (or otherwise perfect) its PPSA security interest. OPS argued that the equipment should be returned to it on the basis that the hire agreements did not provide for any security interest, meaning there was nothing to perfect and, therefore, nothing that could vest in Gold Valley Iron.

At first instance, Tottle J agreed with OPS. Justice Tottle considered the agreements provided for a right of first refusal only and the references to an 'option' were intended to refer to the right of first refusal, such that Gold Valley Iron's only way to acquire the equipment was by exercising the right of first refusal if OPS chose to sell it, which never happened.

The Court of Appeal unanimously disagreed.

Reasoning at the Court of Appeal

President Buss and Justice of Appeal Murphy wrote a joint judgement and Justice of Appeal Vaughan agreed substantively with the reasoning and entirely with the outcome in a separate judgment.

The Court considered four major questions in determining its decision.

Question one: is each hire agreement a 'hire purchase agreement' within section 12(2)(e) of the PPSA?

Answer: yes. Properly construed, the agreements contain both an option and a right of first refusal. The option is defeated by OPS choosing to sell but it persists unless and until that happens. This makes the hire agreement into a 'hire purchase' in the general law sense which is the meaning adopted for the PPSA. This is a type of transaction that the PPSA recognises as being capable of providing for a security interest.

Question two: if each hire agreement constitutes a 'hire purchase agreement', does each agreement provide for OPS (as the 'secured party') to have a 'security interest' within section 12(1) of the PPSA?

Answer: yes. Gold Valley Iron's interest as grantor is the rights of the purchaser under a hire purchase agreement including a proprietary 'equity' in the equipment, while OPS' interest is that of the hiree of the equipment who holds the right of reversion (the equipment returns to OPS if not purchased by Gold Valley Iron by the end of the hire period).

Question three: assuming each agreement is a 'hire purchase agreement', and it provides for OPS to have a security interest in the equipment, does the security interest secure payment or performance of an obligation?

Answer: yes. The obligation comprised Gold Valley Iron's promises to OPS in each hire agreement to make payments and to perform obligations as stipulated in the hire agreement.

Question four: assuming all the above, did the security interest held by OPS vest in Gold Valley Iron immediately before administrators were appointed?

Answer: this question was remitted to the trial division.

Comment

The PPSA sets out a system of priority, not ownership. The way its rules operate can cut across the conventional understanding of the rights that flow with ownership (such as whether you can take back equipment you hired to someone in the event of insolvency).

If an existing security interest is not perfected, the consequence may be that the 'true owner' of the equipment loses priority to secured creditors in the case of insolvency. The Court's construction of the 'option to purchase' clause in this case should give pause to companies who are in the business of hiring equipment and goods to ensure they obtain advice on their own template hire agreements that contain similar options and right of first refusal clauses and take steps to register any security interest that may exist.

Similarly, it is a timely reminder for insolvency practitioners of the importance of the vesting provisions for unperfected security interests.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.