The hire industry is vital to the framework of our economy, representing a $6.6 billion industry and employing over 18,000 people across a range of businesses. The industry is driven by large numbers of construction and mining firms preferring to hire equipment, based on a desire to remain flexible, reduce capital and maintenance expenditure and gain access to the latest technology. In short, rental allows the most efficient use of assets by moving them to where they are most needed.
In January of 2012, when the Personal Property Securities Act 2009 (PPSA) came into effect, the Australian hire industry was tied up in administrative traps and exposed to financial harm as a consequence of being caught under the act.
Imagine you are operating a generator hire business. All your capital is tied up in 20 large pieces of equipment. Your best customer takes 10 of them for a big mining project. Six weeks later you get a call from the liquidator of the customer. He tells you that because you made a small mistake on an online registration form (or forgot or didn’t know about the need to register) all 10 generators are no longer yours. They are assets of the liquidating company. And you will still have to pay your bank back any finance owing on the equipment you no longer own.
Impossible? Not in the hire industry.
Section 13 of the PPSA "requires hire companies to register assets that cross a time threshold. The PPSA registration is to protect the hire companies from having that asset seized by receivers or liquidators if the customer of the hire business collapses. It means some hire companies are being forced to register thousands of assets. If they don't register the assets, or fill in the complex registration form incorrectly and a customer collapses, the liquidator can sell the hire assets and pay the proceeds to the creditors - even though the assets belong to the hire company. In cases where the hire company has taken out a loan to purchase those assets, it has to repay the loan even if the liquidator has sold them" explained Adele Ferugson of the Sydney Morning Herald.
The failing of PPSA has cost the industry "tens or even hundreds of millions of dollars in lost assets and legal fess, saying nothing of the administrative burden." The HRIA lobbied to have the act reformed under the Whittaker review and explained some major deterrents to the sustainability and development of the rental industry.
- The regulatory, administrative and financial burden imposed by the PPSA is excessive and onerous: Hire companies deal in a multitude of varied transactions on an hourly, often 24/7 basis. It is a fast moving industry with varied asset classes and varied customer types. Rental companies do not have the resources to manage the day to day registration of the multiple transactions that occur or the knowledge to understand and register effectively to protect their assets.
- The drastic sanction, allowing property owned by hire companies to be lost if a customer defaults or becomes insolvent, is out of proportion to any policy gain: Rental was not previously included in legislation. The industry has been dragged into an unfamiliar area of law and is now adversely impacted by the complexities and penalties the PPSA hold. There is never a joint liability or obligation with rental. Ownership is never shared or transfers under a rental agreement and there is no substance security created by an ordinary casual transaction, yet it is currently captured under the PPSA and treated as if there is a right transferred to the hirer that others should be aware of.
- The "evil of apparent wealth" has catastrophic outcomes for the rental company: The key philosophy underpinning the inclusion of rental in the PPSA is to protect the finance industry from a fraud where a potential borrower holds out rental assets as being their own. That theory holds that those dealing with with the insolvent company, would have been lured into providing credit by the fact that, as it headed towards insolvency, it appeared to own the machinery when in fact it was the property of the hire company. However, under the PPSA, if the hire company fails to register on time, according to the law's architects, it deserves to lose its machinery if the borrower goes broke.
In fact, when mining services company Forge Group collapsed last year and triggered the receivers to try and get control of four gas turbines worth an estimated $50 million that US Company APR Energy had leased to Forge, the US Chamber of Commerce did not take it lightly.
In a letter written to Bruce Whittaker, appointed by the Attorney-General to conduct a review of the PPSA, they urged a reconsideration of "the highly damaging effects of Section 13, which is being used improperly by some entities to make illegitimate claims against property. This practice undermines Australia's reputation of offering investors a safe and reliable commercial environment .... [which] may potentially lead American companies to reassess their investments in the country". With more than $130 billion invested in Australia by American companies, the letter strongly reminded him that American companies outpace investors from any other country, accounting for nearly one-quarter of all foreign direct investment.
These scenarios and variations on it are playing out all too regularly in the industry.
For example, in the Doka Formwork case, Doka hired formwork to Relux, a construction business. No fixed period was put in the hire agreement which is common in the industry. Yet under the PPSA, longer term and ‘indefinite’ term hires are deemed to be ‘security interests’. Make a small mistake and these hired assets become fair game in an insolvency.
PPSA requires that to protect its ownership of its equipment, Doka had to register its security interest on the Federal register within 20 business days of the hire agreement. The legislation is so complex that this requirement is not referenced in the PPSA’s hundreds of pages. It is found in section 588FL of the Corporations Act – related but separate legislation. The PPSA proper has its own set of deadlines that can also apply with equally devastating effect.
In April 2014 Relux went broke. [As Doka made the registration outside of the 20 day rule, Reulux's] liquidators used section 588FL to claim ownership of Doka’s formwork – about a million dollars’ worth. They succeeded in getting some of it.
While you you should ensure you register your security interests to ensure that you do not lose your property to third parties, Ferguson rightly concludes "this is a registration form that exists only to remedy a failure in legislation and a new one at that. A form for the sake of a form, the very definition of red tape."
Until measures are taken to safeguard a hire company's assets, the issues surrounding PPSA will remain a heated topic at the forefront of the equipment hire industry. PlantMiner will keep you informed every step of the way.