Perfect your security interest or it will not be enforceable. It is as simple as that!
The recent decision in Forge Group Power Pty Ltd (Forge) (In Liquidation) Receivers and Managers Appointed) v General Electric International Inc (GE)  NSWSC 52 (Forge Case) provided a timely reminder:
- to "secured parties" (secured lenders, lessors, vendors selling goods on a retention of title basis, consignors, bailors) of the harsh commercial realities under the Personal Property Securities Act 2009 (Cth) (PPSA) of failing to perfect a security interest; and
- of the importance for management of a company operating in a foreign jurisdiction to be aware of the local laws in the jurisdiction in which it operates.
Key Facts of the Forge Case
- GE (an American company) owned 2 mobile turbines (Turbines).
- Forge (an Australian company) and GE entered into a lease agreement whereby Forge agreed to lease the Turbines from GE in Australia for a period of 2 years (with a provision for further extension of the lease term) (Lease Agreement).
- The Turbines were worth approximately AUD$60 million.
- GE failed to register a financing statement on the Personal Property Securities Register (PPSR) in respect of its interest in the Turbines created by the Lease Agreement (Security Interest).
- GE did not otherwise perfect the Security Interest.
- Forge went into voluntary administration (and subsequently into liquidation) and at the time was still in possession of the Turbines.
The PPSA regulates security interests over personal property (essentially all property – including motor vehicles, stock, equipment, etc – other than land and some statutory rights) in Australia.
An interest of a lessor in leased goods is deemed to be a security interest under the PPSA.
Perfection of a security interest under the PPSA is commonly achieved, particularly by lessors, by registration of a financing statement on the PPSR.
If after creation of a security interest over personal property, this security interest is not perfected, the security interest is "unperfected".
Under section 267 of the PPSA, an unperfected security interest vests in the grantor (the provider of the security interest) upon the appointment of a voluntary administrator or liquidator. This means that if a security interest is not perfected at the time a voluntary administrator or liquidator is appointed, then the security interest will not be enforceable by the holder of the security interest (the secured party) – which essentially means the secured party has no recourse to the assets the subject of its security interest upon default by the grantor.
The Issues in the Forge Case
The liquidators of Forge sought a declaration from the Supreme Court of New South Wales (Court) that:
- As a result of GE failing to perfect the Security Interest, the Security Interest vested in Forge immediately before the appointment of the administrators pursuant to section 267(2) of the PPSA; and
- on that basis, the right, title or interest of Forge in the Turbines was superior to that of GE.
In response, GE argued that the PPSA did not apply to the Turbines and therefore GE was not required to perfect the Security Interest because:
- GE was not regularly engaged in the business of leasing goods in Australia (because it was based in the United States); and
- the Turbines had become fixtures to the land upon which they were situated and therefore were not personal property under the PPSA.
The Court Decision
The Court found:
- GE was regularly engaged in the business of leasing in Australia (notwithstanding the leasing business in Australia was only a relatively minor part of its business operations);
- the Turbines were not fixtures – the Court noted, amongst other things, that the Turbines were designed to be demobilised and moved to another site easily in a short time and Forge was required under the Lease Agreement to return the Turbines at the end of the lease term;
- the Security Interest was regulated by the PPSA;
- GE failed to perfect the Security Interest by registration of a financing statement on the PPSR;
- the Security Interest vested in Forge immediately before the appointment of the voluntary administrators; and
- Forge's right or title to, or interest in the Turbines, was superior to that of GE.
The above findings meant that GE could not enforce the Security Interest and re-possess the Turbines, notwithstanding it was the owner of the Turbines and Forge was in breach of the Lease Agreement.
- If you are secured party, you must perfect your security interest.
- Reliance on title to personal property is no longer enough.
- A registration of a financing statement on the PPSR is normally the easiest way to perfect your security interest (and is inexpensive).
- Operating in a foreign jurisdiction requires sensitivity and awareness to the laws in that foreign jurisdiction. Ignorance to the legal environment may lead to a loss of rights and ultimately financial loss.