Australia: Think you're not regularly engaged in the business of leasing? Think again, says new PPSA decision

Last Updated: 6 April 2016
Article by Dan Fitts

Most Popular Article in Australia, April 2016

Key Points:

Companies that have leasing as a small and irregular part of their overall business still must comply with the PPSA if their interests in leased goods are to be protected.

Ad hoc leasing arrangements might not be a core part of your business, but they could still mean you're regularly engaged in the business of leasing, and therefore need to register your interest under the Personal Property Securities Act 2009 (Cth) (PPSA), or risk losing title to the goods on insolvency of the lessee. That's the lesson from a recent decision of the NSW Supreme Court (Forge Group Power Pty Limited (in liquidation)(receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52).

The leasing arrangement and the liquidationf

Horizon Power engaged Forge Group Power Pty Ltd to design, construct and operate a temporary power station near Port Hedland. Forge in turn entered into a contract with General Electric International Inc to lease four mobile gas turbine generator sets for a period of two years.

In February 2014, not long after the turbines had been installed, Forge appointed voluntary administrators, and went into liquidation in March 2014.

How the Personal Property Securities Act affects leasing arrangements

The PPSA defines a registrable security interest to include a lease of goods for more than a year (PPS Lease). The lessee under a PPS Lease is treated as the grantor of a security interest in favour of the lessor, and the lessor must perfect its security interest through registration. GE did not, however, do this.

Under the PPSA, if a grantor enters into administration, and a security interest has not been perfected by the secured party, then the secured party's interest in the property vests in the grantor. That meant that in this case, even though GE was the legal owner of the turbines, its security interest in the turbines was transferred to Forge upon the appointment of the administrators to Forge, and became property of Forge to be realised by Forge's liquidators.

There are two important exceptions to the above provisions on which GE sought to rely to recover its interest in the turbines.

First, the PPSA does not apply to fixtures that have become part of the land. GE argued that the turbines had, upon installation, become fixtures on the land owned by Horizon Power.

Secondly, a lease will not be a PPS Lease if the lessor is not regularly engaged in the business of leasing goods. The intention is to not catch out lessors who are not in the business of leasing, and therefore might not be aware of the PPSA requirements. GE argued that it was not regularly engaged in the business of leasing at the relevant time.

Were the turbines a fixture?

Justice Hammerschlag noted that the way in which the PPSA operates led to the counter-intuitive situation of GE being forced to argue that the contract's intention was for the turbines to have become a fixture and part of the land thereby losing its own valuable property to Horizon Power as land owner. He rejected GE's contention, as the turbines were not sufficiently affixed to the land, and the terms of the contract made it clear that the turbines were at all times to remain the personal property of GE.

What is "regularly engaged" in the business of leasing?

Courts in New Zealand have interpreted "regularly" in the corresponding provision in their PPS legislation to mean being involved in a series of transactions. A single transaction, where it can be established that the transaction was a one-off, would not be regular (though a single transaction could be considered a "regular" one at that time, if it was then followed by others).

On the other hand, courts in Canada have interpreted "regularly" in their PPS legislation as meaning a proper part of the business, regardless of the frequency with which it was undertaken.

Justice Hammerschlag preferred the Canadian approach. What is important, he held, is to consider whether a party is regularly engaged in the business of leasing, not whether they are engaged in the activity of regularly entering into leases.

One could establish a business of leasing, including taking premises, purchasing goods to be leased, registering business names, employing staff and establishing pro forma contracts, and even if it took some time before a customer walked in the door and actually entered into a lease, one would still be regularly engaged in the business of leasing during that period.

He considered that the frequency or repetitiveness of transactions is a factor to consider when assessing whether the leasing business being engaged in is regular. But it is not itself the test.

Was GE regularly engaged in the business of leasing goods?

Whatever test was used, Justice Hammerschlag concluded that GE was regularly engaged in the business of leasing.

GE contended that:

  • the court should ignore any activity outside of Australia and focus on Australian activity only;
  • the test should be applied at the time when the security interest "attaches" (being when the turbines were delivered to Forge in February 2014) or at the time of administration (in March 2014), not at the time when the lease was entered into (in May 2013); and
  • by early 2014 GE had ceased being regularly engaged in the business of leasing goods in Australia, having sold its power generation rental business in October 2013.

Justice Hammerschlag rejected GE's arguments and held that:

  • all business activity, not just that undertaken in Australia, should be taken into account. Justice Hammerschlag pointed to the intention behind the exclusion as noted earlier, to avoid "ad hoc" lessors from being caught out. An entity engaged in an international leasing business could not be said to be an ad hoc lessor; and
  • the test is to be applied at the time at which the mutual rights and obligations of the parties to the PPS Lease are brought into existence, being the time of signing. In any event, he found that GE was continuing to be regularly engaged in the business of leasing at all relevant times identified by GE.

Evidence that GE was regularly engaged in the business of leasing goods included:

  • a contract in 2009 to supply parts and services to the Karratha Power Station for a period of 20 years, which entitled the station owner to elect to get replacement turbine generators from GE at any time during the contract term;
  • a contract in 2012 to provide services to the Birla Nifty copper mine, including leasing of replacement turbine generators if required;
  • a contract in 2014 to provide a replacement turbine generator to Origin while GE repaired a turbine under warranty;
  • making temporary turbines available to customers while it is providing maintenance services, either for a specific fee, or as part of the membership service where the customer has paid an annual membership fee.

As a result, Justice Hammerschlag rejected both of GE's arguments, and held that Forge (as holder of GE's security interest in the turbines) held a superior right to GE (as legal owner).

As the transaction in this case was a lease, Justice Hammerschlag did not have to consider the New Zealand and Australian cases which have held that a party won't be "in the business" of leasing or bailing goods for PPSA purposes if the lessor or bailor does not profit from the lease or bailment.  That issue - which is mainly relevant for bailments that are not leases- remains unresolved.

Ad hoc leasing could trigger need to comply with PPSA

Although the precise test for "regularly engaged" in the business of leasing did not matter in this case, the Forge decision is a useful discussion and guidance as to how the courts may interpret these provisions.

Importantly, companies that have leasing as a small and seemingly "irregular" part of their overall business might not have fully appreciated that they could be required to comply with the PPSA if their interests in leased goods are to be protected. Companies with leasing as a component of their business should be reviewing this decision carefully and considering whether they should build PPSA compliance into their business practices.

 

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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