If you thought you did not need to register your interest if your assets are in the possession of a third party, then you might need to reconsider. Otherwise you risk losing your property.
The decision of Forge Group Power Pty Limited v General Electric International Inc  NSWSC 52 handed down in February in the Supreme Court of New South Wales raises significant issues regarding the construction and operation of important exclusionary provisions of the Personal Property Securities Act 2009 (Cth) (PPSA).
The PPSA governs security interests in personal property, such as generators, plant or scaffolding, where that property is in the hands of a third party.
A "security interest" means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation. This includes the interest of a lessor of goods under a "PPS lease", whether or not the transaction concerned secures payment or performance of an obligation.
Generally, a PPS lease exists when a lease or bailment over an asset is for an indefinite period or for a term of one year or more. However, there are some arrangements which are excluded from being PPS leases, and relevantly, these exclusions include situations where the lessor is not regularly engaged in the business of leasing goods.
If the third party holding the goods becomes insolvent, the PPSA regulates the prioritisation of asset distribution to creditors. If say an owner wants to recover its goods from the insolvent third party, its interest in the asset must be registered on the PPS Register. If not, the owner will only be an unsecured creditor in the insolvency, and may well be unable to recover the asset.
This was the situation in the Forge case, where Horizon Power engaged Forge Group Power Pty Limited (Forge) to design a temporary power station near Port Hedland in Western Australia.
To fulfil its obligations to Horizon Power, Forge leased four mobile gas turbine generator sets from General Electric International Inc (GE). GE agreed to rent the turbines to Forge for a fixed term of 2 years, and to install, commission and demobilise them.
Shortly after the turbines were installed, Forge appointed voluntary administrators, and then went into liquidation. GE had not registered a security interest on the PPS Register against the turbines
GE is incorporated in the United States, and has been registered as a foreign company doing business in Australia for over two decades.
The question was whether the PPSA applied to the lease, making it a PPS lease, which could allow Forge's liquidators to treat GE as an unsecured creditor, and claim the turbines.
GE argued that there was no PPS lease because the PPSA did not apply. GE claimed:
- any leasing that GE undertook outside Australia could not be regarded when determining whether GE's leasing activity was 'regular', and therefore the PPSA did not apply to it; and
- as GE had sold its rental business in 2013 (after it entered the lease with Forge), it was not regularly engaged in the business of leasing goods at the relevant time, which it argued was either the date Forge took possession of the turbines or the date of appointment of the administrators, both in early 2014.
Forge, on the other hand, argued that the PPSA did apply and that this was a PPS lease because it said the relevant date is the date that the security interest is created (being the date of entry into the lease), and at that time GE was in fact regularly engaged in the business of leasing goods.
As to whether a person is (or is not) regularly engaged in the business of leasing goods, the Court said that:
- regard is to be had to activity wherever it occurs, and is not limited to activity in Australia; and
- the test applies at the time the security interest is created, which Forge correctly identified as being the date of entry into the lease.
The Court disregarded GE's argument that business outside Australia is excluded. It said:
- the words of the PPSA are clear and unambiguous and place no geographic limitation on the activity to be assessed; and
- an entity wishing to conduct business within Australia should get the benefit of being able to register its lease as would an Australian entity.
The Court therefore held that the lease was in fact a PPS lease because GE was regularly engaged in business of leasing goods at the date of entry into the lease. Accordingly, Forge's security interest (as possessor of the turbines) vested immediately before the appointment of its administrators, under section 267 of the PPSA.
In other words, GE's failure to register its security interest meant that the rights, title and interest in $60 million worth of turbines vested in Forge (or its liquidators).
What does this mean in practice?
If your business assets are in the possession of another person, then you should familiarise yourself with the PPSA so you know what your rights are. GE's failure to ensure this was a costly mistake.
All businesses who may be engaged in leasing goods in Australia, whether the business is based here or not, should review their contracts, and where appropriate, register their security interests on the PPS register.
If you are in doubt, get some advice.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.