A recent decision in the Supreme Court of New South Wales has again illustrated the potential severe consequences for lessors of equipment, and other goods, under the “vesting” provisions of the Personal Property Securities Act 2009 (CTH) (PPSA).
The matter was a striking example of the dangers of ignoring the registration requirements of the PPSA which resulted in the loss of $50M worth of assets by the lessor for the sake of a $6.80 registration fee.
Facts
Horizon Power engaged Forge Group Power Pty Limited (In Liquidation) (Receivers and Managers Appointed) (Forge), to design, supply, construct, test and commission a temporary power station at a site near Port Hedland, Western Australia.
During March 2013, Forge entered into a written lease with GE under which GE agreed to rent mobile gas turbines to Forge for a fixed term, and provide Forge certain services including the installation, commissioning and demobilisation of the turbines.
The initial term of the lease was for two years with the ability to extend for a further six months, and then for a further 18 months after that.
No financing statement was registered on the PPSR in respect of the lease agreement.
On 11 February 2014, shortly after the turbines had been installed, Forge appointed Voluntary Administrators and on 18 March 2014, Forge went into liquidation.
As at the date of appointment of the Administrators, GE had not registered a security interest on the Personal Property Securities Register (PPSR) in respect of the turbines.
Accordingly, the Liquidators of Forge sought a declaration from the Court that any security interests that GE had in the turbines be vested in Forge immediately before the appointment of the Administrators in accordance with the relevant provisions of the PPSA.
In defending the proceedings, GE argued that the arrangement it had with Forge was not a PPS lease, and therefore the PPSA did not apply, because:
- GE as the lessor was ‘not regularly engaged in the business of leasing goods’ and as such, a PPS lease had not been created; and
- The turbines had become fixtures. The PPSA does not apply to an interest in goods that are fixed to land.
The Court’s Decision
The Court determined that the agreement between Forge and GE was a PPS lease and on the basis that GE had failed to register its interest in the lease on the PPSR, the turbines were vested in Forge.
In particular, the Court decided:
- In determining whether or not a person is regularly engaged in the business of the leasing goods, leasing activities outside of Australia may be taken into account.
- The frequency or repetitiveness of leasing activities is relevant, but not determinative. The critical question is whether the leasing activities form a ‘proper’ component of the lessor’s business.
- Orthodox tests should be applied in determining whether something has become ‘fixed to land’. Such tests include considering the purpose of fixing the item to the land, whether the item is to be in place permanently or temporarily, where the removal would damage the land or buildings to which the item is attached and whether removal would destroy the item.
- In applying these tests, the turbines had not become fixed to the land because it was the intention that the turbines be removed from the land and returned to GE at the end of the lease.
Lessons
Registration is paramount to ensure one retains an entitlement to, or security in, the goods supplied.
If the normal component of your business is leasing goods, whether it be motor vehicle, items of plant and equipment or million dollar turbines, then you should register your security interest on the PPSR. Failure to do so will result in a loss of your security interest, entitlement to the goods, if the lessee appoints an external administrator or becomes bankrupt.
Given the consequences of failing to register a lease on the PPSR and the minimal costs of doing so, lessors are well advised to always register their interest in leased goods.
If you require further information on the above, please contact Jeff Shute on jshute@shawgidley.com.au or at 02 4908 4444.
Shaw Gidley are experts in restructuring, turnaround and insolvency and provide free initial advice on these matters. Please contact our offices on (02) 4908 4444 or (02) 6580 0400.
