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Many people have heard of the Personal Property Securities Act 1999 (PPSA), but few people realise the full extent of its reach. Charity gaming societies are amongst those who may believe themselves to be unaffected, and yet face serious, but avoidable, risk of losing their gaming machines when a venue operator becomes insolvent.
What does the PPSA do?
The PPSA establishes a framework for people to grant security over their property to facilitate borrowing, and sets out the rules where there are competing interests in the property. For example, a venue operator may grant a “security interest” in all of its assets to a bank as a condition of the bank providing it with financing. This security interest would give the bank various rights if the venue operator defaulted under its bank loan, such as the right to take possession of the venue operator's assets and sell them to recover the bank debt.
Gaming machines are not owned by venue operators, so how are they affected?
In contrast to the previous regime, the PPSA allows a person to grant a security interest in an asset that they do not own. All they need is “rights” in the asset. Although “rights” is not defined in the PPSA, it is clear from the context in which the term is used that it does not just mean “ownership” rights. This view has been confirmed by the New Zealand courts. In the Court of Appeal case of New Zealand Bloodstock Ltd & Anor v Waller & Agnew & Anor, for example, a person leasing goods from the owner of the goods was held to be able to grant a security interest in the leased goods.
Under the usual arrangements between gaming societies and venue operators, gaming societies retain ownership of gaming machines, but the venue operator takes voluntary possession of the machines on the understanding that the machines will be returned to the society at the end of the term of the venue agreement. At law, this arrangement is called a bailment and the society is a bailor and venue operator a bailee of the machines. Although the point has not yet been litigated, it is highly likely that a bailee has sufficient rights to be able to grant a security interest. In other words, venue operators are probably able to grant security interests in gaming machines in their possession, even though ownership is retained at all times by the gaming societies.
It may seem unlikely that a venue operator would grant a security interest in gaming machines which they do not own, but it is, in fact, highly likely to occur without either the venue operator or financier particularly turning their minds to it. This is because many financiers will take a security interest in “all present and after acquired property” of the venue operator. This wording creates a security interest in all property in which the venue operator is able to give a security interest. Consequently, it almost certainly creates a security interest in gaming machines in the possession of the venue operator.
Does it matter if a financier has a security interest in the gaming machines?
You might think that it is irrelevant to a gaming society if a financier has a security interest in its gaming machines because the society can simply assert its ownership and take the gaming machines back. However, it is not always this straightforward. This is because, in some circumstances, the PPSA deems an owner to be merely the holder of a security interest. In these situations, an owner cannot rely on its ownership to trump the rights of a financier, it must instead establish that the owner's security interest defeats the security interest of the financier. Take the situation illustrated by the diagram below:
If the owner is able to assert its ownership rights, it will simply take possession back from the bailee and the secured party’s security interest will terminate because the bailee no longer has sufficient rights in the goods to support the security interest. However, if the owner’s rights are within the definition of “security interest” in the PPSA, the same transaction will instead be analysed this way:
In this case, the “owner” is not able to simply assert its ownership rights. It will only be able to take back possession of the goods and defeat the other secured party if it can show that its own security interest has “priority”.
Will gaming societies be treated under PPSA as mere security holders?
The way in which the courts are likely to analyse the arrangement between gaming societies and venue operators under the PPSA means that many societies will be currently exposed to the risk of losing their gaming machines.
This is because the definition of “security interest” in the PPSA has two limbs.
The first limb is a “substance” test, which says that a transaction is a “security interest” if it in substance secures payment or performance of an obligation. The arrangements between gaming societies and venue operators do not fall within the substance test, because the society does not retain ownership merely to secure payment or performance of an obligation.
The second limb is a “form test”. Under this limb, certain types of transaction are deemed to be security interests even if they do not secure payment or performance of an obligation. The rationale behind this is that, in some cases, it is too hard to determine the “substance” of a transaction. Consequently, to avoid uncertainty and potential litigation, certain transactions are simply deemed to be security interests.
Among the types of transaction deemed to be security interests is a type of transaction described in the PPSA as a “lease for a term of more than 1 year”. Despite the name of this transaction type, it does not only include leases. This is because the definition starts with the words “means a lease or bailment of goods for a term of more than 1 year”. In other words, a bailment (which is what the arrangement between gaming societies and venue operators is) will be a security interest if it is for a term of more than one year. The definition goes on to include arrangements which are for an indefinite period even if they are terminated in less than one year.
Consequently, in most cases, the arrangement between gaming societies and venue operators is a security interest and that, as a consequence, a society will not be able to assert “ownership” rights against a secured party of a venue operator because it will be deemed by the PPSA to be a mere security holder.
Can gaming societies protect themselves?
The good news is that gaming societies can take easy steps to protect their position.
Where two different parties both have a security interest in the same goods, the PPSA provides a set of rules for determining which of those parties has “priority” or, to put it another way, which of those parties has the better security interest. The basic rule is that the first of the two secured parties to register their security interest on the Personal Property Securities Register has priority.
However, in recognition that a lease for a term of more than 1 year is somewhat different from other security interests, there is an exception in the PPSA which provides that a lessee (or a bailee like a gaming society) can achieve priority even if they do not register first. The catch is that, to receive this advantage, the registration needs to be carried out no more than ten working days after a venue operator takes possession of the gaming machines.
Consequently, gaming societies can protect their position by registering their security interest on the Register. If they do this within ten working days of the venue operator taking possession they will have priority over all other secured parties. If they do not do it within ten working days they will still gain a measure of protection, because they will have priority over secured parties that register after they do, but they will not have priority over secured parties that have registered before them.
How can we help?
Thankfully the registration process is relatively straightforward and inexpensive. With a bit of help getting things set up, registrations are something gaming societies can run themselves or can run with minimal assistance. However, there are a few pitfalls, and where we can help is in explaining the process and helping to establish procedures which avoid these pitfalls. There are also some useful amendments which can be made to venue agreements which we can assist with. Owners of portable buildings and horses have suffered the consequences of not protecting themselves under the PPSA – don't let gaming societies be next!
This newsletter is produced by Simpson Grierson. It is intended to provide general information in summary form. The contents do not constitute legal advice and should not be relied on as such. Specialist legal advice should be sought in particular matters.
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