Forge v GE provides more guidance on the meaning of "PPS leases"

Finance Update

The recent decision by the New South Wales Supreme Court in Forge Group Power Pty Ltd (in liquidation)(receivers and managers appointed) v General Electric International Inc [2016] NSWSA 52 provides useful guidance for determining when a lease of equipment (in this case, turbines) will constitute a "PPS Lease" (and, as such, a security interest) under the Personal Property Securities Act 2009 (Cth) (PPSA).

This decision is important because it provides more certainty as to the types of lease arrangements which are (a) likely to be security interests and (b) registrable on the 'Personal Property Securities Register' (PPS Register) established under the PPSA (failure of which could result in the lessor losing its interest in the leased property).

In reaching its decision, the Court also considered whether a lease of equipment would be excluded under the PPSA by virtue of the lessor not being "regularly engaged in the business of leasing goods" or whether the property the subject of the lease was not "personal property" by virtue of becoming a fixture on the land.

Facts and issues

General background

On 5 March 2013, Forge Group entered into a two-year fixed-term rental agreement and supply of associated services with GE (Lease) as part of a temporary power station established by Regional Power Corporation, WA, south of Port Headland. The Lease pertained to four mobile gas turbine generators (Turbines), and the provision of associated services including installing and commissioning the Turbines. GE did not register a financing statement (in respect of the Lease) on the PPS Register.

On 11 February 2014, voluntary administrators were appointed to Forge pursuant to section 436A of the Corporations Act 2001 (Cth), and Forge subsequently went into liquidation. The liquidators argued that GE's interest vested in Forge following the appointment of the administrators pursuant to section 267(2) of the Personal Property Securities Act 2012 (Cth) because the Lease was a "PPS Lease" and was required to be registered on the PPS Register.

Issues

The fundamental issue before the Court related to the definition of "PPS Lease". GE raised a two-pronged argument to establish that the PPSA did not apply to the Turbines, and thus that the PPSA did not apply:

  1. GE was not regularly engaged in the business of leasing goods in Australia (although it was overseas) pursuant to section 13(2)(a) of the PPSA, and so the Lease did not fall within the definition of "PPS Lease"; or alternatively
  2. the Turbines had become fixtures on the land within the meaning of section 10, and accordingly were not subject to the operation of the PPSA under section 8(1)(j), as the interest was no longer personal property, but rather an interest in the fixture.

The Court's findings

The business of leasing goods

The Court rejected GE's assertion that the test for whether or not a person is regularly engaged in the business of leasing goods should be restricted to Australia, instead preferring to look at GE's global activities. As GE was commonly accepted to be engaged in the business of leasing goods internationally, the fact that it was not doing so in Australia was irrelevant.

Due to a lack of Australian authority on the meaning to the words "regularly engaged", the Court considered New Zealand and Canadian authorities. The Court favoured the Canadian interpretation, which holds that a business of which leasing is a proper or ordinary part, regardless of the frequency, will satisfy the definition. By contrast, the New Zealand courts require a lessor to have engaged in a series of transactions with some degree of frequency to be "regularly engaged".

The Court found that GE was regularly engaged in the business of leasing goods for the purposes of the PPSA.

Fixtures

The Court found that the application of common law principles resulted in the Turbines clearly not being fixtures, including:

  • the fact the Turbines were designed to be demobilised and relocated, and the units retained their wheels for that purpose;
  • the Turbines were subject to a two-year (with some possible extensions) fixed-term lease, and therefore clearly not intended to affix;
  • Forge was required under the Lease to return the Turbines and the end of the agreed fixed term;
  • the Lease included a term that the Turbines would remain personal property at all times; and
  • the Head Contract included a term that the Turbines would not pass to the titleholder of the land.

In making this finding, the Court pointed out that the operation of the PPSA in this instance required GE to lead arguments that the Lease intended the Turbines to become a fixture, which was contrary to the express terms of the Lease, and also would have resulted in GE losing its property to the titleholder of the land, which was clearly not GE's intention under the commercial arrangement.

Conclusion - leasing and the PPSA

The Court's decision in this case makes it clear that companies that engage in leasing as a normal part of their business operations may find themselves without recourse to the leased property if they have not taken steps to perfect the leasing arrangement on the PPS Register.

That being said, while the PPSA would generally only apply if a company is regularly engaged in the business of leasing goods, given the potentially significant risk of falling foul of the vesting provisions under the PPSA (and potentially losing title to leased goods), and the relatively light guidance on this aspect of the PPSA, any company that engages in leasing should implement policies to ensure that their interests are protected on the PPS Register.

Lessors who are considering whether to register their lease on the PPS Register should know that:

  • whether or not they are engaged in the business of leasing will depend upon their business activities worldwide, not just in Australia, at the time that lease agreement is entered into;
  • the lessor need only be entering leases as a part of their business in order to be "in the business of leasing goods", and the lessor does not have to be entering into leasing arrangements on a regular, periodic basis; and
  • whether leased goods are fixtures will be assessed according to existing common law principles.