Protect your personal property rights by registering your security interest on the PPSR – Lessons on the ‘PPS Lease’ from the Forge case

We aim to deliver Just, Redemptive Outcomes®

Forge Group Power Pty Limited v General Electric International Inc [2016] NSWSC 52 sends a clear warning to companies regularly leasing goods to others: perfect the security interests in these goods on the Personal Properties Securities Register (“PPSR”) or risk losing them to liquidators or administrators.  This decision of the New South Wales Supreme Court provides helpful guidance as to the meaning of “PPS Lease” and the application of the Personal Property Securities Act 2009 (Cth) (“PPSA”) to leases of personal property in the course of business.

In this case, General Electric International Inc (“GE”), a subsidiary of the multinational General Electric Corporate in the United States, forfeited a priority interest in $60 million worth of turbines leased to Forge Group Power Pty Limited (“Forge”) after failing to register its security interest in the turbines on the PPSR.  Forge was successful in establishing that its lease of goods from GE was a “PPS Lease” on the basis that the defendant, GE, was regularly engaged in the business of leasing for the purposes of the PPSA. Further, the four model TM 2500+ mobile gas turbine generator sets (“the turbines”) in dispute were not fixtures based on the common law test that applies. As a result, the PPSA applied to the lease of the turbines from GE to Forge and, without a registered security interest, GE’s ownership of the turbines was insufficient to defeat the administrators’ claim to the goods when Forge went into voluntary administration.

The PPSA, which commenced in January 2012, introduced what some might call a ‘revolutionary national code’ for determining priorities between parties who hold a security interest in personal property. In most cases, a person can ‘perfect’ a security interest by registering a financing statement on the Personal Property Securities Register (“PPSR”).

The Court’s decision is an important reminder that ‘frequency’ or ‘repetitiveness’ is not the only factor relevant in determining whether a business is one regularly engaged in the business of leasing. If leasing can be established as a “proper component” of the business, then the lease will most likely be a ‘PPS Lease’ for the purposes of the PPSA.

The facts

The turbines were installed at a site near Port Hedland in Western Australia as part of a temporary power station. The station was established by the statutory body: Regional Power Corporation (“Horizon Power”) which employed Forge to design and supply the necessary equipment for the power station.

On 5 March 2013, Forge entered into a written contract with GE to rent the turbines from GE for a fixed term of 2 years. This lease gave rise to security interest in the turbines (granted by Forge), because the lease of goods fell within the definition of “PPS Lease” under the PPSA.  The security interest was not perfected by registration on the PPSR.  This meant that GE only had an ‘unperfected security interest’ and was not a secured creditor.

Section 267 of the PPSA provides that if an administrator of a company is appointed and, on the date winding up commences, the company is the grantor of any unperfected security interest, then the unperfected security interest vests in the company immediately prior to when the administrator is appointed. The effect of this provision was that GE was at real risk of losing their interest in the turbines (valued at $60 million) to Forge.

This risk was realised when Forge encountered significant financial difficulty and voluntarily appointed administrators on 11 February 2014.  Forge subsequently went into liquidation on 18 March 2014. Forge sought a declaration that GE’s interest in the turbines vested in Forge prior to its appointment of administrators and as such their interest was superior to that of GE.

A PPS Lease under the PPSA

Under section 13 of the PPSA, a PPS Lease includes a lease or bailment of goods for a term of more than one year. However the PPSA does not apply to leases where the lessor is “not regularly engaged in the business of leasing goods.”

Further, the PPSA does not apply to an interest in a fixture (s 8(1)(j) of the PPSA). The term “fixtures” is defined in s 10 of the PPSA as “goods, other than crops, that are affixed to land.”

Issues before the Court

  • Was the lease between Forge and GE a PPS Lease within section 13 of the PPSA? That is, was GE engaged in the business of leasing goods?
  • Were the turbines fixtures within s 10 of the PPSA? If so, they would be excluded from the operation of the PPSA (s 8(1)(j)).

Held

His Honour Hammerschlag J held that GE was regularly engaged in the business of leasing goods within Australia and dismissed the argument that the turbines were fixtures.  Therefore the lease fell within operation of the PPSA.

The Reasons

  1. GE was regularly engaged in the business of leasing goods

In Australia

GE argued that as GE regularly traded in the business of leasing goods overseas, and not regularly in Australia, the PPSA did not apply to its lease with Forge.  GE submitted that reference to a company’s domestic leasing should only be taken into account in deciding if a company is regularly engaging in the business of leasing goods. The Court, however, rejected this argument. His Honour’s main reasons were:

  • The “plain words” of s 13(2)(a) do not fix a geographical limitation on the activity being assessed, and there was no justification for reading it as such;
  • The restriction would not serve the policy decisions behind s 13(2)(a). The reasoning behind exempting ad hoc lessors is that it would be unfair to impose the implications of s 13 on people or businesses who could not be reasonably “expected to have investigated the content of the laws that affect their business, including the Act”. GE, however, could not fairly be described as ad hoc and had as much incentive to investigate Australia laws as any domestic business;
  • International business often involves “cross-border” activity. His Honour noted that the “limitation which the defendants suggest raises the uninviting spectre of lengthy and detailed examination of such activity in a quest to determine whether the activity outside of Australia is part of carrying on business within it.”
  • In the absence of any pertinent Australian authority, the Court referred to various Canadian and New Zealand authorities in deterring the precise meaning of ‘regularly engaged in’. The Court held that such was a matter of fact taking into account whether the leasing of goods was a “proper component of the lessor’s business” (at [46]).
  • The frequency or repetitiveness of such transactions is also relevant, but not the sole determining factor. Here GE had promoted its intention to lease the turbines in advertising for new customers, had engaged in similar leases in Australia previously, and had agreed to the supply of replacement turbines to certain customers where necessary. Therefore the Court found that GE had been regularly engaged in the business of leasing the goods.

Point in Time

GE also argued that because it sold its business in October 2013, the security interest vested in Forge at a time when GE was not regularly in the business of leasing goods, and therefore the PPSA did not apply.

His Honour also rejected this argument, and held that the test applies when the lease was entered into, and that the mutual rights and obligations of the parties came into existence at that timeThe Court held that in any event, GE had been engaging regularly in the business of leasing at the time of the lease and each time after.

The turbines were not fixtures

GE tried to argue that the turbines were affixed to the land and therefore were exempt from operation of the PPSA.  GE contended that the definition of fixture in s 10 introduced a “bespoke meaning of affixed to land, being a non-trivial attachment” (at [76]).

His Honour rejected this argument, instead favouring Forge’s submission that the common law meaning should be applied. Applying the common law test laid out in Agripower v Blomfield [2015] NSWCA 30, his Honour considered the “objective intention with which the item was put in place, having regard to the degree and object of annexation”.

The Court held that the turbines were not fixtures as there was no objective intention that they should become fixtures. There were a number of factors which lead to this conclusion:

  • The wheels to the turbines’ trailers were kept on at all time and the turbines were designed to be demobilised and moved easily to another site without causing any damage to the land.
  • The turbines were only intended to be in position on the site as a rental for a temporary power station. The lease term was only for 2 years with limited optional extensions.
  • Forge was contractually obliged to return the turbines at the end of the rental period
  • The attachment of the Turbines to the land was for the better enjoyment of the Turbines themselves and not the better enjoyment of the land;

Lessons

This case highlights the strict approach courts are taking in implementing the PPSA. Serious consequences await those who do not comply with the provisions of the PPSA. As such, it is essential that those in the business of leasing equipment familiarise themselves with the PPSA or seek legal advice where necessary. The loss of $60 million worth of equipment is a very real consequence for those in the business of leasing goods who fail to register security interests in such goods on the PPSR.

Should you require advice regarding a lease, and would like an appointment with one of our experienced PPSA Property lawyers, please contact us on (07) 3252 0011 and one of our Business Development Officers will be happy to assist you.

This article was written by Kathleen Watt (Associate).