Compliance costs and risks to small businesses in

Australia’s hire and rental industry

Submission

to

Bruce Whittaker

Review of the

The Personal Property Securities Act2009 Cth.(PPSA)

Contacts:

Phil Newby
Chief Executive Officer
Hire & Rental Industry Association
Elevating Work Platform Association
Mobile: 0417 212 627
Email: / Oliver Shtein
Bartier Perry
Level 10, 77 Castlereagh Street
Sydney NSW 2000
Mobile: 0408 466 286
Email:

CONTENTS

1.Background - Australia’s hire and rental industry

2.The problem

3.Magnification of the concerns for small business

4.Specific concerns

5.Possible solutions

6.General / other comments

ATTACHMENT A

Example showing complexity of the PPSR and potential consequences of getting it wrong

ATTACHMENT B

Cross hire - example showing how hire businesses are at risk when hiring to each other to meet customer needs

ATTACHMENT C

PPSA compliance costs for typical hire business

Summary of costs:

1.Background - Australia’s hire and rental industry

The hire industry is represented by two peak national bodies, the Hire and Rental Industry Association (HRIA) and the Elevating Work Platform Association (EWPA).

Together the associations represent over 1,100 businesses, or 66 per cent of all hire employer enterprises.

Australia’s $6.6 billion hire and rental industry provides a critical service to the construction and mining sectors by facilitating flexible access to earthmoving and heavy equipment, medium to small equipment for trade contractors, cranes and access equipment, mining related equipment, scaffolding, forklifts and portable accommodation.

The industry employs over 18,000 people across a range of businesses, from large players such as Coates Hire and Kennards Hire to a majority of small and medium enterprises, many of which are family owned.

The industry is driven by the preference of large numbers of construction and mining firms to hire equipment, rather than purchasing it, based on a desire to remain flexible, reduce capital and maintenance expenditure and gain access to the latest technologies.

Indefinite hire is a significant feature of the industry providing flexibility to customers.

Whilst many hires are indefinite to accommodate the needs of customers and minimize the need for documentation, hires are predominantly short term. The associations estimate that the average hire period of their members is about 8 days.

We note however that hire periods are variable depending on the type of equipment and the kinds of use to which equipment is applied. For example goods such as road barriers or portable buildings are typically hired for longer periods and may be hired for more than a year.

Goods such as scissor lifts (‘motor vehicles’ under the current definition) are not typically hired for more than a year but one of our members advises that about 20% of their fleet may be on hire for periods approaching or exceeding a year. These hires may be longer because in those cases the goods are part of the ‘core’ of hired access equipment used in a major construction project such as construction of a hospital. Scissor lifts that are not part of the customer’s ‘core’ requirement may come and go from the project site offering flexibility and economy to the project.

2.The problem

PPSA has had a number of unintended and detrimental effects for the hire and rental industry. The industry has two major concerns:

a)Property owned by hire companies can be lost when a customer defaults or becomes insolvent.This drastic sanction is out of proportion to any policy gain which the industry can perceive from the PPSA.

b)PPSA is extremely complex and the regulatory, financial and administrative burden imposed on hire businesses to ensure that they are correctly registered on the PPSR,in order for their assets to be afforded limited protection, is excessive and onerous.

3.Magnification of the concerns for small business

The associations submit that whilst the concerns above are common across the industry they are magnified for small business for the following reasons:

a)Small hire businesses cannot afford to generate or obtain expertise about PPSA. A small family business cannot be compared with a finance company or bank with access to the legal advice, precedents and systems necessary to navigate the PPSA - which is unquestionably highly complex.

b)Small hire businesses are generally exposed to significantly greater credit risk:

  • Their customer base may comprise smaller companies in the construction industry
  • They will have few credit assessment and credit protection skills
  • They may have greater customer concentration – i.e., exposure to the possible insolvency of one customer compared to an industry major with a large and diversified customer base.

The history of PPSA in New Zealand and Australia demonstrates that the winners in PPSA disputes tend to be the banks and finance companies. Cases such as NZ Bloodstock and Portacom come to mind where the large and well-advised institution prevailed over the hire business. These outcomes have been replicated in Australia cases such as Spiers Earthworks and in the as yet uncounted number of cases where hire businesses have been confronted by controllers appointed by banks and other financiers claiming title.

Typically in these contests there is no reason to think that the presence of hired equipment deceived the bank as to the financial condition of the business. The gains appear to have been windfalls delivered by PPSA.

In the circumstance where a hire business loses its capital to its customer’s creditors because of PPSA imperfection of the hire, the .institution that lends to the hire business will normally have other security in the form of personal guarantees or real property security over directors’ assets to fall back on. This pushes the loss to the individuals owning the hire business.

The associations submit that the overall pattern of outcomes occurring and expected to occur under PPSA will be to deliver windfall gains to large financiers and banks at the expense of hire businesses which as noted above are, in the associations’ experience, typically small businesses.

4.Specific concerns

These are outlined below:

a)Complexity

Small hire businessesdo not fully understand the system and the legislation allows no leeway to individuals and businesses who cannot grasp its legal complexity.

Attachment Ashowsa number of understandable errors or (even slight) delays that could lead to loss of ownership of a hire business’s assets if a customer becomes insolvent.

The .financing statement has been framed with no sympathy at all for the unsophisticated user or anyone who is less than thoroughly conversant with PPSA principles. Many questions appear to be unnecessary but the wrong answer may be fatal to the registration.

Hire industry personnel must have an understanding of at least the following:

  • The wording of the ‘PPS lease’ definition and subtle differences between security interests which arise at inception of the hire and those that become subject to PPSA subsequently
  • PMSIs and priority concepts in finance law and the exceptions to what is a PMSI. A lay person would instinctively think that a hire was nothing to do with ‘purchase money’
  • The way to identify trusts and the workings of the ABN and ACN/ ARBN identifiers – ABNs have previously only been the province of Federal tax law and the workings of trusts and ABNs are not widely understood outside the tax and accounting professions
  • The difference between transitional and non-transitional security interests
  • The collateral classes and the definition of ‘motor vehicle’ in particular
  • Sound drafting principles in the framing of collateral descriptions so that they are wide enough to cover the hired goods but not unduly wide (which will lead to additional administration costs in answering questions from third parties dealing with the customer)
  • What are ‘proceeds’ and why they are described in the financing statement as ‘All present and after-acquired property’ – which is also a collateral class
  • What the term ‘inventory’ means under section 10 of the PPSA (for PMSI purposes) but also under Part 9.5 (which is actually the relevant issue for the inventory box in the financing statement)
  • The additional timing requirements under section 588FL of the Corporations Act if (as usual) the customer is a company
  • The documentation requirements in section 20 of the PPSA.

b)PPSA is imposing large compliance costs on the industry and impeding businesses.

For those hire businesses who seek to defuse the effect of PPSA if their customer becomes insolvent, PPSA demands that those businesses act like financial institutions, fully document hires and confront a piece of highly complex financier-driven legislation to assure their ownership. Businesses willing to hire urgently and be flexible are forced to take risks with their capital. A list of typical compliance steps and costs is provided in Attachment C.

c)Indefinite hires, which form a key aspect of flexibility within the industry, carry the most risk for hire businesses under the PPSA system.

Construction businesses typically need equipment for indefinite periods and often very urgently. Construction businesses are also more prone to insolvency than many other businesses so the risk of loss to the hire business isheightened. The drafting of the PPSA makes it clear that any ‘indefinite’ hire, whether lasting for 10 minutes or 10 years, is a PPSA ‘security interest’ from its inception.

The drafting of the PPSA leaves uncertainty as to whether a hire that is of uncertain duration but within an overall time cap is ‘indefinite’ or not.

But even if this uncertainty were resolved, the concept of an ‘indefinite’ hire as automatically requiring a security interest entraps hire businesses who, unaware of the dangers, try to help their customers by offering flexibility and inadvertently enter into indefinite hires or fail to document hires that are finite. See paragraph (e) below.

d)Sub-hire, also called cross-hire, is another substantial part of the industry where PPSA has created a complex problem making hire businesses take on risk in dealing with each other.

Hire businesses hire to each other to ensure that customers’ needs are met. Under the PPSA system a hire business can lose its equipment even if it registers under PPSA if its industry colleague doesn’t protect the equipment. Atypical sub-hire example is provided in Attachment B.

The system has effectively forced a hire business to run a credit and insolvency risk when providing equipment to an industry colleague. If the colleague has made errors in PPSA compliance and suffers insolvency as a result, the hire businesses will lose capital assets, and it will not matter that it made the appropriate PPSA registrations against the industry colleague.

The problem appears to the industry to be an intractable structural problem arising out of the policy decision to extend security interest concepts to things that are not really security interests – notably the PPS lease.

The associations expect that your review will have submissions from financiers to the hire industry expressing similar concerns. The associations note that it is impracticable for hire businesses to monitor or audit the PPSA compliance practices and financial condition of their industry colleagues who are also typically their competitors.

e)Indefinite hire should not be a PPS lease

The associations state emphatically that they do not understand the argument that inclusion of indefinite hire is a necessary integrity or anti-avoidance measure in the PPSA. See the example at paragraph g)below as to the absurdity that flows from treating indefinite hire as a security interest.

The Government has proposed in the Explanatory Memorandum to the Personal Property Securities Amendment (Deregulatory Measures) Bill 2014that hire businesses put in a ‘longstop’ date in hire agreements so that there is a maximum term of one year. However this would not be the actual hire term. It is questionable whether such a longstop prevents the application of section 13(1)(b) of the PPSA which includes as a PPS lease any hire:

b)for an indefinite term (even if the lease or bailment is determinable by any party within a year of entering into the lease or bailment);

The ‘longstop’ suggestion seems to contemplate the parties settle on an artificial hire period not knowing what the actual hire period will be, even if they may know it will almost certainly be less than a year. Such a course of action will necessarily result in hires that have ‘nominal’ terms or end dates that are not connected to the actual intentions of the parties – opening the door to the argument that the stated or ‘long stop’ term should be disregarded and the real term construed as truly ‘indefinite’ because it is not known.

The argument that hire businesses should document the longstop in effect also amounts to the promotion of red tape. A short term documented hire is safe. A short term undocumented hire is not.

Hire businesses will be unable to do flexible and accommodating business with customers and may trip over the requirements.

Example:

HireCo hires a scissor lift to FredCofor 9 months. There is a longstop of 12 months in the hire terms.

Near the end of the 9 monthsFredCo rings HireCo and asks if FredCo can keep the lift for a bit longer because FredCo is using it in a construction job that has been held up by site conditions.

A helpful employee of HireCo emails FredCo’s principal as follows: ‘Fred – just confirming you can keep the lift as long as you need it’.

A liquidator would no doubt argue that the hire became indefinite at that point.

There are many other ways in which a hire business can trip up over the documents and requirements. For example using a hire or delivery docket that has outdated or incomplete contractual terms on it will be argued to give rise to new separate contract without the longstop. New business may have to be signed up urgently – this is a typical occurrence when hired goods are delivered early in the morning or late at night when sites are available.

One justification offered for the ‘indefinite hire PPS lease’ was that it provided certainty to hire businesses that they could not be accused of making unjustified registrations against customers. Some large industry players took the view that they should amend their customer terms so that every hire became indefinite. Reviewing each customer account to assess if there really was a security interest was simply too time-consuming for them.

The practical effect was that these hire businesses made registrations against literally all their customer base – thousands or tens of thousands of customers in some cases. Consequently they have to incur the costs of answering queries every time a customer sells other equipment, refinances, sells its business etc. In the general hire industry this problem cannot be solved by improved collateral descriptions since the range of general hire equipment is very wide. In any event the legislation only requires a collateral description of ‘Other Goods’ or ‘Motor Vehicle’.

The associations submit this was an extraordinary imposition of red tape not only on the hire businesses who felt compelled to make the registrations and now have to attend to enquiries about them but to all the small and large businesses and government bodies who now add hire companies to the list of businesses registering against them.

The irony here is that most of the hires in question would not breach the one year time threshold (or even the 90 day threshold currently under amendment).

Accordingly a large administrative burden was created for no sound policy reason.

f)The PPSA assumption that leases of more than a year are equivalent to security interests should not be accepted

The Explanatory Memorandum to the Personal Property Securities Amendment (Deregulatory Measures) Bill 2014 states:

Whether other lease arrangements meet the definition of a security interest can be moredifficult to determine. Generally, short term leases of personal property will be unlikely tomeet the definition, but as lease terms becomes longer, especially as they begin toapproximate the useful life of the leased property, they become increasingly likely to be asecurity interest.

The associations estimate that the typical useful life of most hired equipment, in terms of its retention by the hire business, is 8 years. However this is variable and will depend on the kind of equipment and the locations it is used at, and the intensity of use. But it will be a multiple of the PPS lease thresholds provided for in the legislation.

The typical period of a finance lease (in substance security interest) for equipment that would be considered eligible for finance leasing is in our experience four to six years.