Knowledge

When you are in the business of hiring out goods it is important to know your obligations of registering a lease in accordance with the Personal Properties Securities Act 2009 (Cth) (“PPS Act”).

What is a lease under the PPS Act

A lease under the PPS Act is created where goods being:

1. Machinery; and/or
2. Equipment,

which are not fixtures, are leased for a period of two years or more, or for an indefinite period.

Section 13 of the PPS Act defines a lease as:

13 Meaning of PPS lease

                        (1)        A PPS lease means a lease or bailment of goods:

                                    (a)        for a term of more than 2 years; or

(c)        for a term of up to 2 years that is automatically renewable, or that is renewable at the option of one of the parties, for one or more terms if the total of all the terms might exceed 2 years; or

(d)        for a term of up to 2 years, or a lease for an indefinite term, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of more than 2 years after the day the lessee or bailee first acquired possession of the property (but not until the lessee’s or bailee’s possession extends for more than 2 years).

                        (2)        However, a PPS lease does not include:

(a)        a lease by a lessor who is not regularly engaged in the business of leasing goods; or

(b)        a bailment by a bailor who is not regularly engaged in the business of bailing goods; or

(c)        a lease of consumer property as part of a lease of land where the use of the property is incidental to the use and enjoyment of the land; or

(d)        a lease or bailment of personal property prescribed by the regulations for the purposes of this definition, regardless of the length of the term of the lease or bailment.

Bailments for value only

(3)        This section only applies to a bailment for which the bailee provides value.

Is every person and organisation bound to the meaning of a lease under the PPS Act?

Section 13 of the PPS Act is drafted in a manner to provide an exemption for persons or organisations if their normal course of business is not in the provision of hiring out goods and/or services.

The Courts examined this exemption in the case of Forge Group Power Pty Limited (in liq) (receivers and managers appointed) v General Electric International Inc (2016) 305 FLR 101 (“Forge Group Decision”).

The Forge Group Decision is important to remember as it highlights a $44 million mistake made by General Electric International Inc (“GE”).

In the Forge Group Decision, the Court examined whether a $44 million lease over gas turbines was a lease under the PPS act. The facts of the Forge Group decision are:

1. GE agreed to lease four mobile gas turbine generators to Forge Group Power Pty Limited (in liq) (receivers and managers appointed) (“Forge”), a lease agreement was entered in March 2013.
2. GE did not register it’s security interest of the turbines on the PPSR register.
3. Shortly after installation of the turbines, Forge appointed voluntary administrators on 18 March 2014 and subsequently went into liquidation.
4. The Liquidators of Forge sought a declaration that the lease with GE was a PPS lease which was not perfected by registration. This would mean that GE was not a secured creditor of Forge and unable to assert a security interest in the turbines.
5. GE argued that the lease was not a PPS lease on the basis that:
   • GE was not regularly engaged in the business of leasing goods in Australia; and
   • The turbines were fixtures.
6. The Court rejected GE’s argument and held that:
   • In ascertaining whether a person is engaged in leasing goods, regards to the activity is not solely limited to this activity occurring in Australia;
   • The turbines were not a fixture.
7. GE appealed this decision and the Court of Appeal rejected GE’s appeal.

The Forge Group decision is important as it paints a picture of the consequences of failure to either register or perfect a security interest.

Benefits of registering a lease und the PPS Act

A benefit of registering a lease under the PPS Act is the fact that the registration may have the highest ranking in priority of the asset registered and provide you with rights over the property or other interests in the property. A detriment of not registering your lease under the PPS Act is that this may result in your secured interest not being recognised as held in the Forge Group Decision.

How Frank Law can assist you or your business

Frank Law is regularly engaged in providing advice to Insolvency Practitioners and trade creditors in respect of PPSR registrations.

Recently Frank Law was approached by a prominent Liquidator for urgent advice in respect of a hire agreement and the requirements to register a lease. The background facts are:

• The Company hired heavy machinery from a European company.
• The Company had been using the heavy equipment for the last 2 years.
• The European company did not register it’s lease under the PPS and maintained that it was not required to and the Australian laws in respect of security registration did not apply.
• In short, the European company did not obtain advice from an Australia Lawyer, which has now resulted in the European company losing it’s entitlement to claim a security interest on the heavy equipment.

Frank Law is able to assist you if you have any questions or concerns in regards to the PPS Act regime.

If you have any questions in relation to the information provided in this article, or would like to discuss your situation with one of our experienced commercial lawyers, please contact us on (02) 9688 6023 or via frank@franklaw.com.au.

This is not legal advice.