PPSA meets the Constitution: the OneSteel case

Section 51(xxxi) of the Constitution allows the Commonwealth to make laws for the acquisition of property on just terms. Australian film lovers will remember the section as central to the plot in The Castle, where Daryl Kerrigan saves his house from acquisition for an airport extension, persuading the High Court that no money can justly compensate for loss of such a beloved dwelling.

Could the same section be used to strike down provisions of the Personal Property Securities Act 2009 (PPSA)? The PPSA provides that if a security interest has not been perfected when the grantor goes into liquidation, bankruptcy or administration, the secured party’s interest will vest in the grantor. That is, the secured party will lose its security. If the security interest is a lease of goods, the secured party will lose the goods. That can be a windfall for the grantor (or, in insolvency, the grantor’s unsecured creditors). Isn’t that the acquisition of property, by the grantor, on unjust terms?

The OneSteel case

The secured party tried that argument in Re OneSteel Manufacturing Pty Limited [2017] NSWSC 21, but failed.

Alleasing Pty Limited had leased equipment to OneSteel, but made PPSR registrations by reference to OneSteel’s ABN rather than its ACN. OneSteel went into administration. The court held that Alleasing’s interests vested in OneSteel, under s267 of the PPSA, on administration, and so the equipment was available to meet the claims of unsecured creditors. The registrations were defective and failed to protect Alleasing.

The constitutional issue

In coming to that conclusion, the court considered Alleasing’s argument that vesting effected an acquisition of property other than on just terms, contrary to s51(xxxi) of the Constitution. Section 252B of the PPSA acknowledges the primacy of s51(xxxi): s252B says that a provision of the PPSA will not apply to the extent it would result in an acquisition of property from a person other than on just terms.

The court rejected the argument for three separate reasons.

(1) A scheme for adjusting competing rights, claims and obligations

Consistently with White v Spiers Earthworks Pty Ltd [2014] WASC 139, the court held that an acquisition which is part of a general scheme for adjusting competing rights, claims and obligations will typically not contravene s51(xxxi). The vesting provisions in the PPSA, concerned as they are with division of assets to meet claims of competing secured and unsecured creditors, are such a scheme.

(2) Vesting is inherent in the nature of a PPS lease

The court found that vesting was not a supervening event imposed on a lease, but rather was an inherent part of the rights and obligations implicit in any PPS lease.

That is, whenever a lease of goods is granted that falls within the definition of ‘PPS lease’, it is an incident of the lease, as surely as if it were an express term written into the lease agreement, that property in the goods will pass to the lessee, on liquidation, bankruptcy or administration, if the lessor has not perfected its interest.

This is an important reminder that the PPSA is far more than self-contained set of rules about charges and mortgages (and cannot be considered as just a stand-alone area of law to be left to a single expert in the finance department). Rather, the PPSA makes some fundamental changes to basic property law.

So the court did not see vesting as resulting in OneSteel ‘acquiring’ Alleasing’s property. Rather, the property was simply dealt with in accordance with the incidents of the lease.

(3) Not an acquisition to which s51(xxxi) applies

Finally, the court said that even if there was an acquisition, it was not an acquisition to which s51(xxxi) applied.

Section 51(xxi) applies to “the acquisition of property on just terms from any State or person for any purpose in respect of which the Parliament has power to make laws”. That is, said the court, it does not apply to every acquisition. Rather, it only applies where the property is to be applied for purposes in respect of which the Commonwealth has legal power. And even if (despite the argument in (2) above) OneSteel was acquiring Alleasing’s property, the acquisition was not for the purpose of a Commonwealth power. Instead, it was for whatever private purposes OneSteel might choose to apply the property.

The end of the story?

There might be scope for future discussion of the third reason. The court found that vesting under s267 is not an acquisition to which s51(xxxi) of the Constitution applies. But s252B strikes down any ‘acquisition of property’, within the meaning of s51(xxxi), which is not on just terms. The phrase ‘acquisition of property’ is given the same meaning as ‘acquisition of property’ in s51(xxxi). It is not explicitly given the same meaning as ‘acquisition of property for any purpose in respect of which the Parliament has power to make laws’. So it could be argued that s252B is broader than s51(xxxi), striking down not only unjust acquisitions for purposes in respect of which the Commonwealth has legal power, but rather striking down any unjust acquisition.

But the court gave three separate reasons to reject the constitutional challenge. Even if one of them were knocked out, anyone seeking to use s51(xxxi) to strike down the vesting provisions of the PPSA would still need to dispose of the other two.

Digest of PPSA cases

I have added a summary of the OneSteel case to my digest of reported Australian cases – please go to PPS cases for a link to the digest.

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