By Ziv Ben-Arie, Partner

Summary

If you are in the business of leasing goods or equipment regularly, particularly in a construction environment, you ought to be mindful of the provisions of the Personal Property Securities Act 2009 (Cth) (the Act), also known as the PPSA. There is a possibility that any such lease will be considered a “PPS Lease” under the Act, and that the leased property will vest in the lessee if it enters into administration or liquidation. This means companies who lease goods are susceptible to losing title over those goods if the Act is not understood and complied with.

Facts

• Forge Group Power Pty Limited (in liquidation)(receivers and managers appointed) (Forge) had contracted with a Western Australian statutory body, Horizon Power, to design a power station at Port Headland, and supply and construct the necessary equipment for its operation.

• To fulfil its obligations under that contract, Forge Power proceeded to enter into a lease with General Electric Inc (GE), whereby GE would rent four turbine generators to Forge Power for use in the power station (Turbine Lease).

• Shortly after the turbines were installed, Forge Power entered into voluntary administration, and subsequently liquidation.

• Forge Power argued that the turbines vested in the company immediately before the administrators were appointed, pursuant to section 267(2) of the Act because the Turbine Lease was an unperfected security interest, as explained below. GE’s position was that it retained superior title over the turbines because the Act did not apply to the Turbine Lease, and therefore it was entitled to the return of turbines.

Issues before the Court

The key issue before the Court was whether or not the Act applied to the Turbine Lease.

The Act largely replaces the traditional concept of charges over lease property with what it terms “security interests”. This is defined in section 12 as “an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation…”.  Section 13 further provides that a PPS lease is a lease or bailment of goods (with some time constraints) by a lessor who is regularly engaged in the business of leasing goods.

The Act provides for what is called “perfecting” a security interest. Perfection of a security interest may be achieved by registering the security interest on the PPS register. This is a public database of security interests, designed to enable due diligence prior to entering into commercial arrangements.

Section 267 of the Act confirms that a security interest that is unperfected at the time that the grantor of that interest (is the case of a lease, this will be the lessee) enters into administration or liquidation, the security interest will vest in the grantor of the interest.

It was common ground that GE had not perfected its security interest over the Turbines. It was also common ground that the question that the Court had to determine was whether GE was in the business of regularly leasing goods, under section 13 of the Act. If it was, then the lease would be a PPS lease, and its interest in the Turbines would have vested with Forge.

Finding

In his judgment, his Honour Hammerschlag J held that GE was in the business of regularly leasing goods (as it was a “proper part of their business”), the Turbines were not fixtures, and as such the Turbine Lease was a PPS lease for the purposes of the Act, and accordingly Forge Power had a superior interest in the Turbines to GE

His Honour concluded [at 137]:

“The Lease is a PPS Lease. It follows that by operation of s 267(2), the interests of any of the defendants in the Turbines vested in Forge Power immediately before the appointment of voluntary administrators on 11 February 2011, and Forge Power’s right or title to, or interest in the Turbines, is superior to that of the defendants.”

The result was that the Turbines became part of the asset pool that was available to Forge Power’s liquidators, and that GE lost the entirety of their title and interest in the Turbines.

Impact

This case is a reminder of the importance of recognising when a lease is a PPS lease under the Act, and the need to ensure that any such interest is registered on the PPS register. It also provides the first commentary from a New South Wales superior Court on a number of key provisions within the Act.

If registration is not done, as in the current example, the subject of the lease may be lost entirely in the event of liquidation, through no fault of the lessor other than a failure to register the lease within time, or at all. If parties are properly advised, significant losses such as this may be avoided.