Simon Moses has analysed the following decision and comments that the case confirms that the courts will interpret broadly whether or not a company is regularly engaged in the business of leasing goods. Significantly, principals and contractors should consider whether off-site goods held by a subcontractor on behalf of the contractor for a term of one year or more might constitute a PPS Lease, requiring registration on the Personal Property Securities Register to protect the principal's and contractor's ownership rights.
Horizon Power engaged Forge Group Power Pty Ltd (Contractor) to design and construct a power station. The Contractor subsequently entered into a lease with General Electric International Inc. (GE) in March 2013, under which GE agreed to, among other things, rent Turbines (which GE itself had rented from a third party) to the Contractor for a fixed term of longer than one year. In February 2014 the Contractor appointed voluntary administrators.
The issue before the court was, did this transaction constitute a PPS Lease for the purposes of section 13(1) of thePersonal Property Securities Act 2009 (Cth) (PPSA)?
A PPS Lease is, among other things, a lease or bailment of goods for one or more year by a party that is regularly engaged in the business of leasing or bailing goods. To answer this question, the court needed to decide whether GE was regularly engaged in the business of leasing or bailing goods:
- If GE was not, the PPSA would not be engaged and GE would maintain their rights over the Turbines.
- If, however, it was held that GE was regularly engaged in the business of leasing or bailing goods, pursuant to section 588FL of the Corporations Act 2001 (Cth) and section 267 of the PPSA, GE would lose their interest in approximately $60 million worth of assets as it did not register its interest, and the Contractor's receivers and managers could sell the Turbines to satisfy the debts of the Contractor.
Whereas GE contended that its Australian business was not involved in the regular leasing or bailing of goods, the Contractor contended that GE's business activity outside of Australia suggested that GE had regularly engaged in such business.
Given the infancy of the PPSA, there has been limited consideration by Australian courts as to what is meant by 'regularly engaged in the business of leasing or bailing goods'. Relying on the Canadian decision of David Morris Fine Cars Ltd v North Sky Trading Inc, Hammerschlag J held that this limb would be satisfied if, as a matter of fact, it could be held that leasing was a proper component of GE's business.
Hammerschlag J held that the leasing of goods was a proper component of GE's business because GE, among other things, promoted its desire to lease the Turbines and maintained contractual obligations to the third party that supplied the Turbines to replace the Turbines' engines. Accordingly, GE's failure to register their interest in the Turbines on the Personal Property Securities Register meant that, immediately prior to the Contractor's appointment of administrators, GE's interest in the Turbines vested back in the Contractor. GE's interest was therefore extinguished.