01 Mar 2018

Bredenkamp: Further analysis of when a bailment will be a PPS lease

By Orla McCoy, Greta Burkett

Whether a party is regularly engaged in the business of bailing goods requires a careful factual analysis.

One relatively contentious aspect of the Personal Property Securities Act 2009 (Cth) (PPSA) is the deeming of certain leases and bailments as "PPS leases". PPS leases are "security interests" that are registrable on the PPS Register.  As the market has become aware, failure to register a security interest can have ramifications for priority over other registered security interests and even more serious ramifications if the grantor is wound up or placed into administration.

The Federal Court has recently given further guidance on bailments and the definition of "PPS lease" under the PPSA (Bredenkamp v Gas Sensing Technology Corporation, in the matter of Welldog Pty Ltd (In Liq) (Receivers and Managers Appointed) [2017] FCA 1065).

What is a bailment?

A "bailment" exists where one person (the "bailor") delivers goods to another person (the "bailee") on a promise that the goods will be given back to the bailor or dealt with in a certain way.

What is a PPS lease?

A "PPS lease" is a "deemed" security interest under the PPSA.

A bailment of goods will be a PPS lease if:

  • the bailment is for a duration that meets the requirements set out in section 13(1) of the PPSA those requirements differ according to whether the bailment was entered into before or after 20 May 2017;
  • the bailee has given "value" for the bailment; and
  • the bailor is regularly engaged in the business of bailing goods.

Given the ramifications if a bailment is found to be a PPS lease and is not registered, whether each of these elements is satisfied is often the subject of furious controversy, particularly in an insolvency context.  In Bredenkamp, the Court considered each of these issues.

Facts of Bredenkamp

Gas Sensing Technology Corporation (GSTC), a company based in the United States, designs and manufactures chemical sensing systems that analyse underground conditions (the Core Technology). Its main customers are in the coal, gas and oil industries.

Welldog Pty Ltd, an Australian subsidiary of GSTC, marketed, sold and supplied the Core Technology to customers in Australia.

In 2016, GSTC identified opportunities to tender for projects in China and Australia. In anticipation of a project in China, GSTC sent tools to Welldog in Australia. The project did not, however, go ahead. Rather than send the tools back to the US, GSTC decided (for convenience) to store them with Welldog in case other jobs came up in the region. In addition, certain fibre optic tools were brought to Australia by GSTC employees. They were used by those employees (and employees of Welldog) to install a fibre optic system for a customer in Australia. GSTC's employees did not take the tools with them when they returned to the United States. Instead, they stored them with Welldog. No documents were signed in connection with the storage, no fees paid and no registration was made by GSTC against Welldog on the PPS register in connection with the tools.

On 1 August 2016, Welldog granted a security interest over all of its property in favour of ProX Pty Ltd.  On the following day, ProX registered that interest against Welldog on the PPS register. 

On 20 March 2017, the directors of Welldog appointed administrators to Welldog and ProX appointed receivers.

Was this a PPS lease?

The key issue was whether GSTC's interest in the tools that it had provided to Welldog (the Equipment) was a deemed security interest in the form of a PPS lease. If it was, then GSTC ought to have registered that interest on the PPS Register. Because it did not do that, it was facing the possibility that its interest had "vested" in Welldog upon the appointment of the administrators. If its interest had vested, the Equipment would form part of the assets of Welldog which were available to the creditors of Welldog (including ProX).

Justice Barker held that even though:

  • the Equipment had been "bailed" by GSTC to Welldog; and 
  • the bailment was for an indefinite term (as there was no certainty as to when GSTC would require the Equipment to be on-shipped to a project),

    the arrangement did not create a PPS lease. GSTC was not "regularly engaged in the business" of bailing goods and Welldog had not given "value" for the bailment. 

Regularly engaged in business of bailing goods

In reaching his decision, Justice Barker observed that the evidence did not:

  • satisfy him that GSTC had a business model to generate revenue by bailing the Equipment to Welldog; or 
  • support the conclusion that GSTC regularly engaged in the business of bailing goods in Australia or other parts of the world. 

GSTC ran its own business in Australia alongside Welldog's business. GSTC's overall business model could not be characterised as a bailment business. It supplied services to its clients and did not profit from bailing property to its clients.  The bailment enabled Welldog to conduct certain aspects of its business and that had the potential to produce positive financial outcomes for both Welldog and GSTC (as Welldog's parent). Those outcomes arose, however, from arrangements that could be better described as "service provision arrangements" rather from GSTC engaging in a bailment business. "Service provision arrangements" are arrangements where an entity provides a service to help another entity (such as its subsidiary) conduct its business.

Justice Barker's reasoning is consistent with that of the court in the New Zealand case of Rabobank New Zealand v McAnulty [2011] NZCA 212. It is also consistent with other case law in Australia relating to the concept of "carrying on business". That line of authority provides that "carrying on business" "generally involves conducting some form of commercial enterprise, systematically and regularly with a view to profit": see Gebo Investments (Labuan) Ltd v Signatory Investments Pty Ltd; Application of Campbell & Ors (2005) 23 ACLC 1,181.  

"Value" for the bailment

In Bredenkamp, although the issue of "value" was moot (as the Court had already found that the arrangement did not create a PPS lease because GSTC was not "regularly engaged in the business" of bailing goods), Justice Barker also considered the question of whether the bailments were ones for which Welldog had provided value. 

In doing so, he noted that he preferred the view expressed in Duggan - that the value must be "provided by the bailee specifically for the bailment, and not value provided by the bailee at large": see Duggan, A and Brown, D, Australian Personal Property Securities Law (2nd ed, Lexis Nexis, 2016) at [3.39]. He held that Welldog had not given "value" for the bailment as it had not paid GSTC a fee or given GSTC any financial benefit that was "sufficiently connected" to the bailment of the Equipment.  

While each case will ultimately turn on its own facts, the Court's careful analysis in Bredenkamp will be of assistance to practitioners and parties in considering one of the more contentious aspects of the PPSA.  It will be interesting to see how Australian case law will continue to develop on this aspect of the PPSA. 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.