In March 2013, four portable gas turbines worth about AU$50m had been leased to Forge Group Power Pty Ltd (Forge) by GE International Inc (GE) as lessor.  In February 2014 and March 2014 Forge was placed in administration and liquidation respectively.

Under the Australian PPSA and the New Zealand PPSA, the interest of a lessor in goods under a lease or bailment for a term of more than one year will be deemed to constitute a security interest, irrespective of whether that interest secures payment or performance of any obligation.  However, under both Acts, a lease by a lessor who is not 'regularly engaged in the business of leasing goods' is excluded from the scope of that deemed security interest. 

The NSW Supreme Court held that the turbine lease was a deemed security interest for the purposes of the Australian PPSA:

  • GE was 'regularly engaged in the business of leasing' goods.  In its analysis the NSW Supreme Court did not follow the view of the New Zealand Court of Appeal in Rabobank v McAnulty [2011] 3 NZLR 192 (CA) as regards the meaning of the phrase 'regularly engaged in the business of leasing', finding instead that the reference to 'regular' means normal in the context of the lessor's business, rather than being solely focused on the frequency of actual leasing transactions.
  • The leased turbines did not constitute a fixture (so as to be beyond the scope of the Australian PPSA).

GE had not registered a financing statement in respect of its deemed security interest in the leased turbines on the Australian PPSR.  Accordingly, GE's security interest was unperfected due to the failure to register.  Under the New Zealand PPSA this would mean that the unperfected security interest faced losing priority to all other perfected security interests in the relevant collateral assets. 

However, in addition to a potential loss of priority, under the Australian PPSA the consequences of a failure to perfect by registration are even more severe for a lessor. Section 267 of the Australian PPSA provides that unperfected security interests vest in the grantor (debtor) upon its winding up or bankruptcy.  This vesting rule has no equivalent under the New Zealand PPSA.  The effect of such rule for GE in this case was that GE lost any claim to the turbines and was treated as simply an unsecured creditor in the liquidation of the Forge.  This windfall to the company and potentially its unsecured creditors as a group raises significant questions about the policy impact of the section 267 vesting rule in the context of leases which are deemed to constitute security interests by the Australian PPSA.

See Court decision here.