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THE PPSA & LEASES: A Warning

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  • May 24, 2016
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The Personal Property Securities Act 2009 (Cth) (“PPSA”) was enacted and came into force in 2012.  A government review in March 2015 found that many businesses were unaware of its impact and effects.

 

The commonly held – but dangerous – view is that businesses do not have to register their interest in leased goods on the Personal Properties Securities Register (“PPSR”).  That view stems from a section of the Act which provides that if a lessor is not “regularly engaged in the business of leasing goods” the PPSA will not apply to the lease and registration is not necessary.

 

There is nothing preventing a goods lease being registered on the PPSR – the Act specifically provides for it.  The issue is what happens if a lease is not registered but should have been, and the lessee, who has possession of the goods the subject of the lease, goes into liquidation, bankruptcy or administration.

 

Section 237 of the PPSA specifically provides that in the event of insolvency of the lessee, the interest held by the lessor will vest in the lessee, essentially resulting in the loss of goods by the lessor.

 

That is exactly what happened to General Electric (“GE”) (a large international leasing company) when its client Forge Group Power Ltd (“Forge”) went into liquidation.

 

The recent decision in Forge Group Power Ltd (In Liq) v General Electric [2016] NSWSC 52 is a real wake up call.

 

GE leased four mobile gas turbine generators (purportedly valued in excess of $50 million) to Forge each for a term of more than a year.  GE failed to register the leases on the PPSR.  When Forge went into liquidation, Forge claimed the turbines under s.237 of the PPSA.

 

GE conceded that it regularly engaged in the business of leasing goods internationally, but it argued it did not do so in Australia because it sold its power generation rental business after entering into the leases with Forge.

 

The Court found that despite the sale of the rental business, GE was regularly engaged in the business of leasing goods for the purposes of the PPSA.  Not only did international leasing activity count, but GE was regularly engaged in the business of leasing in Australia at the time it entered into the leases with Forge.  It was irrelevant that GE subsequently sold the rental business.

 

The impact of the Court’s decision is that a lessor will be held to be regularly engaged in the business of leasing provided leasing is part of its business, even if only a very small part.  It is not the frequency of entering leases that matters, but whether leasing is a part of the lessor’s business.  Arguably if even one lease contributes to business profit (and the business is prepared to enter into other leases), the business could be engaged in the business of leasing.

 

In fact, the Court proposed that a person can be regularly engaged in the business of leasing without entering into a single lease if, for example, a person acquired significant capital equipment and advertised its ability and willingness to lease it.

 

The business lesson to be learnt from the Forge Decision is that businesses which enter into an occasional lease of goods cannot safely rely on the “regularly engaged in business” exclusion.  Any lease of goods as part of one’s business is likely to constitute “regularly engaged in the business of leasing goods” and, therefore, should be registered on the PPSR.

 

For more information or if you have any concerns in relation to your leasing arrangements, contact Mark de Kerloy at mdekerloy@mdk.com.au

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