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The Need to Perfect PPS Leases

The Need to Perfect PPS Leases

Published on March 11, 2016 by Selwyn Black

Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52 demonstrates the importance of identifying when a PPS Lease has been created under the Personal Property Securities Act 2009 (Cth) (PPSA), and the need to perfect that security interest.

The Key Facts

1) Forge Group Power Pty Limited (Forge) entered into a contract with Regional Power Corporation under which Forge was to install four turbines (Turbines) as part of a temporary power station near Port Hedland in Western Australia.

2) General Electric International Inc (GE) entered into a contract (Lease) with Forge under which GE would rent the Turbines to Forge for two years, with an option to extend, and provide various services to Forge including installation of the Turbines.

3) Shortly after the Turbines were installed, Forge appointed voluntary administrators and subsequently went into liquidation.

4) GE did not register a financing statement for the Lease on the personal property securities register (PPSR).

The PPSA

5) A PPS Lease includes a lease of goods for a term of one or more year: section 13(1), PPSA.

6) However, a PPS Lease does not include a lease in which the lessor is not regularly engaged in the business of leasing goods: section 13(2)(a), PPSA.

7) A security interest may include the interest of a lessor under a PPS Lease: section 12(3), PPSA.

8) The PPSA does not apply to interests in fixtures: section 8(1)(j), PPSA.

9) A security interest in personal property is most commonly “perfected” by registering the interest on the PPSR: section 21, PPSA.

10) An unperfected security interest held by a secured party vests in the grantor of the security interest if the grantor enters administration: section 267, PPSA.

The Issue

11) The key issue was whether the Lease was a PPS Lease. For this purpose, it was necessary to examine whether:

(a) GE was regularly engaged in the business of leasing goods; or

(b) the Turbines were a fixture.

If the Lease was a PPS Lease, GE had a security interest in the Turbines. A consequence of this is that GE’s security was not perfected and GE’s rights and interest in the Turbines would vest in Forge immediately prior to Forge’s voluntary administration.

The Findings

The court found that GE regularly engaged in the business of leasing goods

12) In testing whether GE was regularly engaged in the business of leasing goods, the court held that all of GE’s activities worldwide (and not just in Australia) were to be considered.

13) The court held that based on the plain meaning of sections 12(3) and 13(1) of the PPSA, the relevant time in which GE had to be engaged in the business of leasing goods was at the time the Lease was entered into.

14) The court held that even if the test was restricted to GE’s activities in Australia, it would be satisfied. The court noted that:

(a) the relevant question is whether leasing goods was a proper component of GE’s business;

(b) leasing goods does not have to be the primary or a substantial part of GE’s business for the test to be satisfied;

(c) the test may be satisfied even if GE had not leased any goods at all prior to the entering the Lease, but had set up all of the infrastructure and processes to put it in a position to be in the business of leasing goods;

(d) frequent or repetitive leasing can indicate GE was regularly engaged in the business of leasing goods, but this is not an essential requirement;

(e) in the period from 2003 onward, GE’s Australian activities included:

(i) advertising and promoting its leases of the Turbines;

(ii) entering into many leases of goods, including turbines;

(iii) supplying, or potentially being required to supply, turbines or turbine parts.

The court found that the Turbines were not fixtures

15) The court adopted common law concepts in determining whether the Turbines became fixtures.

16) Whether an object has become a fixture depends on the objective intention with which the item was put in place, having regard to the degree and object of annexation: Agripower v Blomfield [2015] NSWCA 30.

17) Ironically, if GE’s Turbines were found to be a fixture, they would become part of the property of land owner Regional Power Corporation.

18) The court examined the purpose of the Turbines and the object and degree of annexation and found they were not fixtures based on the following observations:

(a) the Turbines and ancillary equipment were designed to be mobile, and to be easily and quickly moved to other sites;

(b) the Turbines were intended to be installed temporarily during the term of the Lease;

(c) Forge was required to return the Turbines at the end of the Lease;

(d) the attachment of the Turbines to the land was for the enjoyment of the Turbines as turbines, and not for the enjoyment of the land;

(e) removal of the Turbines would cause no damage to the land or the Turbines;

(f) the cost of removing the Turbines was modest compared to the value of the Turbines;

(g) the contract between Forge and Regional Power Corporation states that ownership of the Turbines did not pass to Regional Power Corporation;

(h) the Lease states that the Turbines remain personal property despite any attachment to other property;

(i) Forge did not own the land and did not intend to gift the Turbines to Regional Power Corporation; and

(j) GE set the mechanism for attaching the Turbines and did not intend the Turbines to become the property of Regional Power Corporation.

Conclusion

The Lease was found to be a PPS Lease. As GE did not perfect this security interest by registration or otherwise, the rights and interest in the Turbines vested in Forge on its voluntary administration.

This case highlights the need to carefully assess if a security interest has been created in personal property transactions that are not traditionally seen as security interests, such as leases. The consequences of failing to perfect such an interest may be significant especially when compared to the relatively small cost and time of registering the interest on the PPSR.

For further information, contact Selwyn Black, email: sblack@codea.com.au, phone: (+612) 8226 7359.

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