Aircraft lessors, lessees and financiers will be very familiar with the Australian Personal Property Securities Act 2009 (Cth) (PPSA) and its digital register, the PPSR.
The Commonwealth Government is currently seeking public feedback on a suite of long-awaited changes to the PPSA which initially arose out of the Whittaker Review of 2015.
Why does the PPSA matter for aircraft finance and leasing?
Australia is a signatory to the Cape Town Convention,1 which is an international treaty designed to protect ownership rights and security interests in aircraft and engines. Section 256 of the PPSA provides that the Convention prevails over the PPSA to the extent of any inconsistency.
However, the PPSA remains highly relevant in Australian aircraft leasing and finance as only certain “aircraft objects” can be registered on IR, being:
- aircraft engines with at least 1,750 lb of thrust;
- airframes capable of transporting at least 8 persons or goods in excess of 2,750 kg; and
- helicopters that can transport at least 5 persons or goods in excess of 450 kg.
If an aircraft object does not fall within any of these definitions, then security interests in it are solely governed by the PPSA in Australia.
The PPSA also applies to a much broader class of personal property than simply “aircraft objects”. In the context of aircraft leasing and financing, it allows secured parties to register their interest in other property and intangibles, such as rights to insurance proceeds.
The practice has therefore developed that, where possible, all security interests in aircraft and engines in Australia are registered on both the PPSR and IR.
What are the changes?
The Government has stated that its objective is to:
- enhance uniformity and certainty;
- streamline key concepts; and
- improve the functionality of the PPSR.
The reforms seek to implement 345 of the Whittaker recommendations as well as additional changes. We have highlighted some of the changes that are of most relevance to the aviation finance and leasing industry:
- Streamlining of collateral classes. Collateral categories will be streamlined from 9 to 6, with aircraft to fall within a broader class of “serial numbered property”. The proposed new categories are serial-numbered property (with sub-classes for the different types of serial-numbered property), goods, accounts, intangible property and financial property, all present and after-acquired property and all present and after-acquired property except.
- Removing a common ‘trap’. Under the current system, a party is required to ‘tick’ the PMSI checkbox when making a registration and failure to do so can render a registration ineffective. It is proposed to remove this requirement which should reduce confusion and inadvertent error.
- Clarifying PMSI leases. The definition of PMSI is to be amended to make it clear it applies to all leases, not just PPS Leases.
- Bailments. The definition of PPS lease has been amended to remove references to ‘bailments’. The term creates uncertainty as to scope and leads to unnecessary registrations on the PPSR.
- Enforcement. Chapter 4 of the PPSA which deals with enforcement is to be replaced entirely. The new chapter is intended to clarify how security interests can be enforced in the event of default and which provisions are mandatory and cannot be excluded by contract.
- Vesting. Exempting a PPS Lease from the vesting provision in s 267 unless the PPS Lease is also an “in substance” security interest.
- Sale and leaseback The PPSA currently provides that a PMSI does not include an interest acquired under a sale and lease back transaction (they are excluded because no new asset is being added to the grantor’s asset pool under a sale and lease back – rather, an existing asset is being taken out of the pool and then returned to it). The reforms propose to allow for a PMSI to arise in a sale and lease back arrangement provided that the PMSI secured party pays the purchase price for the collateral directly to the supplier.
Next steps
Public consultation is open until 17 November 2023. We will keep you updated as to the next steps in the reform process and any impact on the aviation leasing and finance industry.
This article was written by Jayne Heatley, Partner.
1Convention on International Interests in Mobile Equipment 2001 and its Protocol on Matters Specific to Aircraft Equipment.
