Australia: PPSR Series: PPSR and leases – the $44 million mistake

Last Updated: 6 December 2018
Article by Catherine Ballantyne

Even if the leasing of goods forms just a small part of your business, you need to ensure that you register on the PPSR to ensure that your leased goods are protected.

When it comes to the Personal Property Securities Register (PPSR), we can't help but ask: "It's been six years – what have we learnt?"

To address this, Madgwicks is publishing an informative series of articles over the next few weeks for those of you currently using the PPSR and those who may need to register the occasional dealing. The aim of these 6 articles is to help you better understand how the Personal Property Securities Act (PPSA) applies to you and to avoid the common pitfalls in registration.

In brief

Are you regularly engaged in the business of leasing goods?

Even if the leasing of goods forms just a small part of your business, you need to ensure that you register on the PPSR to ensure that your leased goods are protected.

The case of Forge Group Power Pty Limited (Forge) is an excellent example of what can go wrong if you fail to register on the PPSR. Failing to do so resulted in a $44 million mistake for the business!

What you need to know

  • A Personal Properties Securities lease (PPS lease) is created when goods that are not fixtures are leased for a period of one year or more, by a lessor regularly engaged in the business of leasing goods.
  • Failure to register your interest may result in the leased goods vesting in the lessee company upon the appointment of a liquidator or an administrator to the lessee company. In other words, if you don't register you may lose the goods to the company you have leased them to if that company goes into liquidation or administration.
  • If the goods are determined to be fixures, then they are not regulated by the Personal Properties Securities Act 2009 (Act) and do not need to be registered.

Putting it into context

The New South Wales Supreme Court of Appeal dismissed an appeal against Forge Group Power Pty Limited (in Liquidation)(receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52, upholding the decision that a lease involving $44M gas turbines constituted a PPS lease under the Act

The decision highlights the consequences of failing to perfect a security interest by registration on the PPSR.

Background

GE agreed to lease four mobile gas turbine generator sets (Turbines) to Forge and they entered into a lease agreement in March 2013..

GE did not register its interest in the Turbines on the PPSR.

Following installation of the turbines, Forge appointed voluntary administrators and on 18 March 2014 went into liquidation.

The Liquidators of Forge sought a declaration that since the lease was a PPS lease that had not been perfected by registration, the interests of GE vested in Forge immediately before the appointment of the administrators. Such a declaration meant that GE would lose its interest in the Turbines to Forge.

The Decision

GE argued that the Lease was not a PPS lease, for the following reasons:

  1. GE was not regularly engaged in the business of leasing goods; and
  2. the Turbines were fixtures. .

His Honour Justice Hammerschlag rejected both arguments.

Was GE regularly engaged in leasing?

if, at the material time, leasing goods was a proper component of its business, His Honour determined that a lessor is regularly engaged in the business of leasing goods.. The frequency or repetitiveness of leasing activities was a relevant factor and taken into account.

GE was found to be engaged in leasing goods from as early as 2003, both in the sense of it being a proper component of GE's business, and in the frequency of that leasing. When the lease was entered into, GE promoted itself as a lessor and was involved in 29 mobile turbine lease agreements globally, including four leases in Western Australia.

Were the Turbines fixtures?

The Turbines did not fit the common law definition of a fixture (i.e., . an item which is fixed with the intention of remaining in position permanently or for an indefinite or substantial period).

His Honour noted that:

  • the Turbines were designed to be demobilised and moved to another site easily, in a short time and at a modest cost in comparison to their value;
  • the Turbines were intended to be in position for only two years, for use at a temporary power station;
  • the attachment of the Turbines to the land was for the better enjoyment of the Turbines themselves and not for the better enjoyment of the land; and
  • the lease expressly stated that the Turbines remained the property of GE at all times, notwithstanding that they may be affixed or attached to other personal or real property.

The Result

His Honour concluded that:

  • the Turbines were not fixtures; and
  • the lease was a PPS lease

This meant that the interests of GE in the Turbines vested in Forge immediately before Forge went into voluntary administration. Consequently, by failing to register its interest on the PPSR, GE lost its interest in the Turbines.

Conclusion

The case is an important reminder that failing to recognise a PPS lease and register a security interest on the PPSR may result in the lessor losing its interest in the leased goods.

The important lessons to come from this case are:

  • seek legal advice as to the nature of the transaction and whether the Act applies; and
  • when in doubt, register your interest on the PPSR.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. Madgwicks is a member of Meritas, one of the world's largest law firm alliances.

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