Case Study — Failure to undertake $16 registration costs General Electric $62 million.
Hiring out your property? Be wary of the PPSA
The decision of Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc in 2016 highlighted the importance of strict compliance with the requirements of the Personal Property Securities Act 2009 (Cth) (PPSA). Non-compliance with the PPSA can have serious consequences, as General Electric found out when it lost ownership of its turbines (valued at approximately $62 million) when Forge entered administration.
How does the PPSA affect leases of goods?
Businesses that are “regularly engaged in the leasing of goods” and enter into leases of goods for periods of two years or more (previously one year) are deemed to have a “PPS Lease” which is caught by the legislation. The effect of having a PPS Lease is that you need to register your interest in the goods that you are hiring out on the Personal Property Securities Register (PPSR).
If you fail to register, and Administrators or Liquidators are appointed to the entity which hired the goods from you, you will lose ownership of the goods. Ownership will vest in the lessee entity in Administration/Liquidation, and you will simply be an unsecured creditor.
Forge entered into a contract with Horizon Power to design, construct and test a power station.
Forge then entered into a lease agreement for the hire of four gas turbines from General Electric (Turbine Lease). Under the Turbine Lease, General Electric agreed to rent the turbines to Forge and provide to Forge certain services including the installation, commissioning and demobilisation of the turbines.
Not long after the Turbines had been installed, Forge entered into voluntary administration and subsequently liquidation.
General Electric had not “perfected” its security interest in the turbines by registering its interest in them on the PPSR.
The dispute was whether the Turbine Lease was a PPS Lease, and therefore whether the PPSA applied. If it applied, then because General Electric had not perfected its security interest it would lose the turbines. If it did not apply, then General Electric was not required to register its interest and therefore would retain its turbines.
The determination as to whether the Turbine Lease was a PPS Lease depended on the following criteria being satisfied:
- whether General Electric was in the business of leasing goods; and
- whether the turbines were affixed to the land or not, as the PPSA does not apply to fixtures (being items which are fixed to the land).
The Court held that General Electric was in the business of leasing goods, and the turbines were not fixtures. As such, a PPS Lease had formed and in accordance with the PPSA the ownership of the turbines vested in Forge immediately before the appointment of the Administrators.
What does “regularly engaged in the business of leasing goods” mean?
This case is useful because it provides guidance as to when a business will be considered to be in the business of leasing goods. In General Electrics case, whilst it engaged in leasing overseas, it did not engage in leasing in Australia.
The Court considered that it was irrelevant where the leasing took place, and if an entity had a foreign leasing arm then that entity could be considered to be in the business of leasing goods for the purposes of the PPSA.
The Court also confirmed that the leasing need not be the principal or even a substantial part of the business of the lessor. An entity can also be considered to be engaged in leasing goods if it sets itself up to do it and tries to do it, even if it is unsuccessful.
Meaning of Fixtures
The Court did not consider that the turbines became fixtures on the basis that:
- the turbines were designed to be demobilised and moved to another site easily and in a short time;
- the Turbine Lease was only for a temporary, two-year period;
- Forge was obliged to return the turbines at the end of the Turbine Lease;
- removal of the turbines would cause no damage to the land; and
- the Turbine Lease explicitly stated that the turbines will remain at all times personal property notwithstanding that they may in any manner be affixed or attached to any other personal or real property, and they remain the property of General Electric.
What does this mean for you?
If you are hiring goods, even as a one off in your business, you may still be caught by the PPSA and deemed to be regularly engaged in the business of leasing goods. If the hire otherwise meets the definition of a PPS Lease, you must ensure that you register your security interest in the goods on the PPSR. The PPSA is an unforgiving piece of legislation and the Courts are adopting a black and white approach to enforcement, regardless of the value of the relevant goods hired.