A $60M mistake – the consequence of a lessor failing to make a PPS registration

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The Personal Property Securities Act 2009 (Cth) (PPSA) commenced on 30 January 2012. However, many financiers and lessors are still unaware of its importance or have simply decided to ignore its provisions due to the administrative burden it has on their day-to-day business operations.

The PPSA requires that in order to secure payment or the performance of an obligation, you must register your security interests on the Personal Property Securities Register (PPS Register).  In the recent case of Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) v General Electric International, Inc. [2016] NSWSC 52 (Forge v GE), a lessor suffered a significant financial blow ($60 million!) because they failed to perfect their security interest under the PPSA.

Can your business really afford not to perfect its security interests?

The Forge Decision

In 2013, Forge Group Power Limited (Forge) leased four TM 2500+ mobile gas turbine generators (Turbines), worth tens of millions of dollars, from General Electric International Inc. (GE).  GE did not register its security interest on the PPS Register because it did not believe that the lease of the Turbines to Forge was a PPS lease because:

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

If the lease was not a PPS lease, GE was not required to secure its security interest on the PPS Register.

Issue 1: ‘Regularly engaged’ in the business of leasing goods

There are a number of exceptions to what constitutes a PPS lease under section 13(2) of the PPSA.  One of those exceptions is where a lessor is not regularly engaged in the business of leasing goods.

The NSW Supreme Court found that when the lease of the Turbines was entered into, and at all material times afterwards, GE was ‘regularly engaged’ in the business of leasing goods within Australia.  This meant that the lease of the Turbines constituted a PPS lease.

The Court concluded that in testing whether a person is regularly engaged in the business of leasing goods:

  1. Business activity outside Australia was to be taken into account; and
  2. The test applies to the time the lease was entered into, not the specific time of performance.

A business will be ‘regularly engaged’ if leasing is a ‘proper component’ of its business. The frequency or repetitiveness of leasing transactions is a relevant, but not determinative factor.

Issue 2: What constitutes a ‘Fixture’?

The PPSA does not apply, and registration is not required, to an interest in a fixture.

In this case, the Court held that ‘affixed to the land’ in the definition of a fixture in the PPSA should be interpreted using well-established common law principles.

In reaching its decision that the Turbines were not fixtures, the Court took into account the following factors, among others, that indicated the Turbines were only intended to be on site for the term of the lease:

  • the Turbines were designed to be demobilised and moved to another site easily, and in a short period of time, without causing damage;
  • the Turbines were positioned on a temporary power station site;
  • Forge was contractually obliged to return the Turbines at the end of the rental term (2-year period);
  • the cost of removal of the Turbines from the site would not exceed the value of the Turbines.

Ironically, if GE was successful in their argument that Turbines were fixtures, this would mean that they would lose legal title over the Turbines to the landowner, Regional Power Corporation.

Significance

This case serves as a potent reminder that you need to register all security interests that fall under the PPSA.  Lessors should have processes in place to identify security interests and to perfect these interests by registration on the PPS Register.

In most instances, the cost of registration is nominal.  Failure to register a security interest proved to be a costly mistake for GE when Forge went into liquidation!  Don’t make the same mistake.

Bryks Lawyers has considerable expertise in all things PPSA.  If you have any questions about registering a security interest under the PPSA, please contact our experienced team and we will assist you through the registration process.

This information is for information purposes only and is not legal advice. You should obtain advice that is specific to your circumstance and not rely on this publication as legal advice. Please contact us if you wish for us to advise you on any issue you may have arising from this publication.

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