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Focus: You've got to be perfected — Equipment leasing and the PPSA

7 March 2016

In brief: A recent decision of the Supreme Court of New South Wales has again illustrated the potentially severe consequences for lessors of equipment and other goods under the 'vesting' provisions of the Personal Property Securities Act 2009 (Cth). The lease can be a security interest. If the lessors don't perfect the lease by registration, they can lose the equipment. Partner Kim Reid (view CV), Senior Associate Przemek Kucharski and Lawyer Kane Kersaitis report.

 
 

How does it affect you?

  • Perfection is imperative. This decision illustrates that many equipment leases are security interests. Lessors who fail to perfect their interest by registering it on the Personal Property Securities Register (PPSR) can lose the equipment on insolvency of the lessee because the equipment vests in the lessee.
  • Regularly engaged? The court clarified as to when a lessor is 'regularly engaged in the business of leasing goods' for the purpose of determining whether a Personal Properties Securities Lease (and therefore a security interest) has arisen:
    • regard should be had to the lessor's business as a whole, not just within Australia;
    • 'regularly' can mean 'not abnormal' in the sense of leasing being a proper component of the relevant lessor's business (it can include a company that advertises its willingness to lease goods even if it has not yet entered into any leases); and
    • the assessment should be made at the time when a relevant lease is entered into, rather than at a later date.
  • Fixtures. The Personal Property Securities Act 2009 (Cth.) (the PPSA) does not apply to land and fixtures. There is a statutory definition of 'fixture', but common law tests apply to determine whether equipment is a 'fixture'.
  • Financiers. The vesting of unperfected security interests and consequent loss of equipment may not only affect the lessor but also any secured financiers of the lessor who thought their security extended to the equipment. The decision therefore serves as a further reminder that financiers should seek to ensure that any borrowers regularly engaged in the business of leasing goods register all relevant security interests on the PPSR.

The facts

A power company retained Forge Group Power Pty Limited (Forge) to design, supply, construct, test, and commission a temporary power station in Western Australia. Forge entered into a lease with General Electric (GE) under which GE agreed to rent four gas turbine generator sets to Forge for use in the power station.

Before the turbines were installed, GE sold its large-scale long-term temporary power generation rental business. Neither the purchasers nor GE registered a security interest on the PPSR in respect of the turbines against Forge.

Shortly after the turbines were installed, administrators were appointed to Forge and receivers and managers were appointed over its assets.

Forge, by its receivers and managers, sought a declaration that, by operation of section 267(2) of the PPSA, the interest which GE had in the turbines vested in Forge on the appointment of the administrators.

The decision

The purchasers and GE said that the lease was not a security interest because GE was not 'regularly engaged in the business of leasing goods' as required by s13(2)(a) of the PPSA. They argued that:

  • this was the only transaction of its type that it had entered in Australia;
  • GE's international leasing business should not be taken into account; and
  • the 'regularly engaged' test should be applied either when Forge obtained possession of the turbines, or when the vesting is said to have occurred. By either of those times, GE had sold the relevant part of its business and was not 'regularly engaged in the business of leasing goods'.

The court rejected these arguments, noting that:

  • 'regular' can 'connote periodic or recurrence at fixed times', but can also mean 'not abnormal in the context of the lessor's business'. The lease in question was 'not abnormal' for GE, particularly given that it had actively advertised its rental business;
  • the lessor's operations outside of Australia should be taken into account. There was no compelling reason to restrict the relevant section of the PPSA to business operations in Australia; and
  • the relevant time for testing whether a lessor is 'regularly engaged' is the time at which the lease was entered, which was before GE had sold its rental business.

As a further point, GE and the purchasers argued that the turbines had become 'fixtures', and were therefore excluded from the operation of the PPSA. They submitted that either:

  • the meaning of 'fixture' under the PPSA was a 'bespoke meaning of affixed to land, being a non-trivial attachment' rather than the common law tests that have been developed in relation to land; or
  • the turbines became fixtures under the common law tests (and therefore became part of the land).

The court rejected both of these arguments, finding that:

  • one of the critical demarcation lines underpinning the operation of the PPSA is that between personal property and land, and applying the common law tests accords with this demarcation; and
  • various factual matters indicated that the turbines did not become 'affixed' to the land under the common law tests (and therefore did not become part of the land). These included evidence of the intention of the parties at the time and the fact that the trailers holding the turbines were on wheels.

The court noted that 'one feature of these proceedings worthy of mention and brought about by the way the PPSA operates is that GE was impelled (counterintuitively one might think) to argue that objectively viewed, it intended to lose its own very valuable property'.

The implications

The decision is another example of what the court described as the 'innovative' operation of the PPSA. Perhaps more importantly, however, it also has important ramifications for lenders, borrowers, and administrators alike.

It clarifies the position in relation to the operation of the PPSA for multinational lessors, and emphasises that the obligation is on those lessors to investigate the operation of Australian law prior to entering the marketplace.

The decision also clarifies the property to which the PPSA will and will not apply; the pre-existing rules developed through the common law continue to apply in distinguishing land from personal property.

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