The recent news concerning the dispute between the receivers for Forge Group Limited and APR Energy over approximately $50 million worth of gas turbines has emphasised the risks for companies involved in the equipment lease business since the introduction of the Personal Property Securities Act 2009 (Cth) (PPSA).

According to reports, APR Energy, an energy giant, leased 4 gas turbines worth approximately $50 million to Forge. Forge subsequently went into administration and its creditors appointed KordaMentha as receivers. KordaMentha are now claiming that the lease of the turbines to Forge constituted a security interest under the PPSA. Given that APR Energy failed to register this alleged security interest on the Personal Property Securities Register (PPSR), KordaMentha claims that the 4 gas turbines will have vested in Forge (that is, APR’s interest in the turbines has been extinguished and the turbines will be available to meet the claims of Forge’s creditors). At this stage, it remains unclear why APR Energy didn’t register.

Although there have already been a number of cases in Australia dealing with the consequences of failing to register a security interest, this dispute is by far the largest to come before the courts so far and is likely to have far-reaching implications, particularly for those involved in the equipment leasing industry. In this update, we discuss when security interests arise in this context and the steps that should be taken in order to protect against the potentially significant consequences of failing to register a security interest.

When do these security interests arise?

It appears the type of security interest the subject of the dispute referred to above is a ‘PPS Lease’. Unlike more ‘traditional’ security interests, PPS Leases may not ‘look’ like a security interest, but nonetheless need to be perfected to ensure that the ‘secured party’ is best protected in the event of the ‘grantor’s’ insolvency.

Because a PPS Lease constitutes a security interest for the purposes of the PPSA, a failure to register that security interest may result in the goods vesting in the grantor of the security interest, meaning that if the grantor becomes insolvent, the secured party will likely lose their goods to the grantor (or the grantor’s other creditors) despite the fact that they may have had title to those goods prior to the insolvency.

PPS Leases are leases or bailments of goods for an indefinite period or a period of more than one year (or 90 days in respect of serial numbered property).¹ They don’t include leases by lessors, or bailments by bailors who aren’t regularly engaged in the business of leasing or bailing goods. PPS Leases also only apply to bailments where the bailee provides value.

PPS Leases may arise in the context of both operating and finance leases and typical examples include leases of equipment, motor vehicles, aircraft and ships. Because PPS Leases also include bailments, the types of transaction that may give rise to a PPS Lease are potentially very broad.

What's a bailment?

Although leases are relatively easy to identify, bailments can be more difficult. In general, they arise where one person (the ‘bailor’) delivers goods to another person (the ‘bailee’) on a promise that they will be redelivered to the bailor. A simple example of a bailment is a cloakroom or valet parking arrangement.

Bailments can arise by agreement, or can be implied by surrounding circumstances. Whether a bailment will arise in particular circumstances will vary from case to case, but some of the key indicia of a bailment are:

• delivery of possession of goods by the bailor to the bailee and voluntary assumption of possession by the bailee;
• the bailee being able to control the ability of the bailor to recover possession of the goods (for example, by providing a restricted licence for entering onto land to recover goods); and          
• the bailee assuming responsibility to keep the goods safe.

Examples of bailments that may constitute PPS Leases include the construction of infrastructure where it is intended that that infrastructure will be used for a finite period and then dismantled and returned (for example, in accordance with environmental rehabilitation requirements). The party on whose land the infrastructure will be built may be required to protect that infrastructure and accordingly a bailment may arise. Another example common in the mining industry is where the joint venture manager may hold certain equipment of the joint venturers as bailee for the joint venturers.

Given the likely high value of such infrastructure or other goods, parties should take steps to protect themselves by ensuring that any relevant security interests are identified and perfected.

But I'm not regularly engaged in the business of leasing/bailing goods (or am I)?

As noted above, PPS Leases don’t include leases by lessors, or bailments by bailors who aren’t regularly engaged in the business of leasing or bailing goods. Unfortunately the precise meaning of this provision has not yet been set down by Australian courts and courts in jurisdictions overseas which have a PPSA have adopted differing approaches.

So how do I best protect my business?

I'm the lessor/bailor

It is important that you have in place policies and procedures for the identification and perfection of security interests. Given the consequences of failing to register (i.e. that you may lose your asset), a conservative approach is to be preferred in all circumstances and, where unsure, you should seek advice.

Given the fact that the PPSA remains relatively new in Australia, the lessee or bailee may be unaware of the basis for such registration and may resist the registration of a security interest. Therefore it is important that you enter into a dialogue early to avoid any last-minute disputes as the timing of registration is very tight, being, in general 15 business days following the grantor obtaining possession of the goods (or, in the case of inventory, before or at the same time as the grantor obtains possession of the goods).

I'm financing the lessor/bailor

Banks and other providers of finance to parties who may be involved in leasing or bailing goods should ensure that they review the policies and procedures outlined above as part of their due diligence prior to lending as a failure to register could result in a material diminution of the borrower’s assets if the lessee/bailee becomes insolvent. Financiers should also consider appropriate representations and undertakings in their finance documents to ensure that they are best protected.

I'm buying the lessor/bailor

Purchasers of companies which may be involved in leasing or bailing goods should also ensure they review the policies and procedures outlined above and ensure the relevant sale agreement contains appropriate representations and undertakings to ensure that they are also best protected.

Footnote

1. Serial numbered property covered by this definition includes motor vehicles, watercraft and aircraft. As at the date of this update, legislation is currently before Parliament to remove the different time period for serial numbered property and have a flat, one year time period apply, although that legislation, being the Personal Property Securities Amendment (Deregulatory Measures) Bill 2014 (Cth) has not yet been passed by parliament.
PPS Leases also apply where the lease or bailment is for less than one year, but automatically renewable at the option of one party, or where the term is up to one year and the lessor or bailor retains uninterrupted (or substantially uninterrupted) possession of the goods with the consent of the lessor/bailor. This means that parties can’t avoid the operation of the PPSA by artificially limiting the term of the arrangement.