Thursday, 20 October 2016

Will APR be Forge-ing ahead with its threatened action against Australia, or is it all a bit of hot air?

There have been recent reports that APR Energy PLC has threatened the Australian Government with a demand for $200 million in damages based on a claim under the Australia-United States Free Trade Agreement after it lost its security interest in multi-million dollar wind turbines it leased to an Australian company due to the operation of a provision in the Personal Property Securities Act 2009 (Cth) (PPSA).   

In January 2013, Horizon Power (Horizon), a statutory body in Western Australia, retained Forge Group Power Pty Ltd (Forge) to design a power station and supply its equipment.  In March 2013, Forge entered into a lease with General Electric International Inc. (GE) under which Forge agreed to lease four mobile gas turbine generator sets (Turbines) from GE for a fixed term.

In October 2013, the relevant part of GE’s rental business was sold to APR Energy PLC (APR).  GE assigned the benefit of its lease to Power Rental Op Co Australia LLC (OpCo) and assigned title in the Turbines to Power Rental Asset Co Two LLC (AssetCo), both American corporations.  OpCo and AssetCo were formerly subsidiaries of GE and became subsidiaries of APR.  GE, OpCo and AssetCo are collectively the Defendants.

In February 2014, shortly after the installation of the Turbines at the project near Port Hedland, Western Australia, Forge entered voluntary administration.  In March 2014, the company went into liquidation.

Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc & Ors (2016) 305 FLR 101
In the Supreme Court of New South Wales, Forge sought a declaration that the Defendants’ interests in the Turbines vested in Forge immediately before the company entered administration.  Forge’s claim was based upon the failure of GE to register the lease under the PPSA.

Subject to some exceptions, under the PPSA, a lease of goods for longer than 12 months is a ‘PPS Lease’.  The PPSA treats a PPS Lease as if the lessee owned the leased property and had granted a security interest over the leased property in favour of the lessor.  Section 267 of the PPSA has the effect that unless the security interest created by a PPS Lease is registered on the Personal Property Securities Register (PPSR) before a company enters administration, the security interest vests in the grantor/lessee immediately before the administration, leaving ownership of the goods with the lessee.
GE or APR failed to register the lease of the turbines on the PPSR and, in consequence, if the PPSA applied to the lease between APR and Forge, property in the turbines would have vested in Forge.  The question for determination by the Supreme Court, then, was whether the PPSA applied.

After deciding GE was regularly engaged in the business of leasing goods and deciding the Turbines had not become fixtures to Horizon’s land, the Court found that the PPSA applied to the lease and that the Defendants’ interests in the Turbines vested in Forge immediately before it entered administration.

OpCo has appealed this decision in the New South Wales Court of Appeal.  The appeal was heard on 23 September 2016.  Judgment was reserved at the time of publication.

The cost of (not) registering an interest
OpCo purchased the Turbines for a reported USD$64 million.  At the present rate of currency exchange, this equates to more than AUD$84 million.

The lease was for an initial term of two years, with the possibility of extension for a maximum effective term of approximately four years.  At the time of making the lease, the fee applicable to register a security interest for a term of no longer than 7 years was $8.00 (the fee is now $6.80).  A party may, of course, incur legal fees in the preparation and registration of the financing statement.  In all, however, it appears the Defendants lost their interest in equipment worth $84 million as a consequence of a failure to perfect their security interest by registering it for a nominal cost.

Recourse against Australia
APR has indicated an intention to pursue an action against the Commonwealth of Australia for breach of protections in the free trade agreement between the United States and Australia (AUSFTA).  In particular, APR contends that its assets have been expropriated, especially given the Turbines are still being used to generate electricity for the state-owned utility Horizon.  Article 11.7 of the AUSFTA prohibits expropriation by a signatory state, except on payment of adequate compensation.  Similarly, APR relies upon article 11.6, which requires that international investors be treated no less favourably than domestic investors, and that the signatory state provide compensation for losses in consequence of the state’s requisitioning of an investment.

However, unlike many other free trade agreements and investment treaties, the AUSFTA does not provide an investor-state dispute settlement (ISDS) process by which a foreign investor such as APR can bring an action against a signatory state alleged to have breached its obligations under the agreement.  An ISDS generally provides an aggrieved investor with a dispute resolution method that can be outside the host state’s legal system and potentially conducted in a mutually convenient location.  At the moment, the AUSFTA provides that Australia and the United States may consider establishing such a procedure to hear a claim by an investor, if there is a change in the Parties’ robust, developed legal systems or stable political environments.  Until then, APR’s only recourse may be to travel to Australia and pursue its claim through the Australian courts which can be a lengthy and expensive process.

The AUSFTA does allow for dispute resolution by one state against the other.  Under article 21, a claim for breach of the AUSFTA can be referred to a joint committee established by the states, and then to a dispute settlement panel appointed by the states.  Ultimately, the complainant state can suspend benefits ordinarily conferred upon the other state.  This protection may only be of value to an aggrieved investor, if they are successful in lobbying their government to bring a dispute against a trading partner.

It is worth noting that if the Trans-Pacific Partnership (TPP), a fully negotiated multilateral free trade agreement which includes the United States and Australia as parties, was in force at the time the lease was entered into, APR could have had access to an ISDS process which would have allowed it to initiate arbitration proceedings against Australia for breach of the TPP.

In any event, the present case differs from the only ISDS challenge that has been brought against Australia. That case was Philip Morris Asia Ltd v Commonwealth of Australia (PCA Case No. 2012-12), in which Philip Morris underwent a restructure in an attempt to gain the protection of the Hong Kong-Australia bilateral investment treaty because it knew that tobacco plain packaging laws were being contemplated by the Australian Government.  In consequence, the arbitral tribunal found the claim to be an abuse of process as the dispute was foreseeable (legislation was contemplated) and the main purpose of the restructure was to gain treaty protection.

In the present case, APR does not appear to have an argument that this dispute was not foreseeable as the PPSA has been in force since January 2012, approximately 12 months before the execution of the lease between Forge and GE.

In addition, it is arguable that APR’s loss of its interest in the turbines was not a product of supervening government action, but rather a consequence of GE’s failure to comply with existing laws.  It is not the case that the government deprived APR of its interest by force of law, but rather that APR forfeited that interest by neglecting to comply with the inexpensive requirement to register its interest on the PPSR.  APR was not deprived of a reasonably expected economic benefit of the investment, because it could not reasonably expect to retain its interest without registration, especially given there was no change in the state of affairs during the period of the investment, as the PPSA had been in effect before entry into the lease.  The conduct of the Australian government likely did not rise to the standard of ‘malfeasance, misfeasance or nonfeasance’ that would give rise to a claim of expropriation.  Finally, as a general principle of customary international law, expropriation will not be established by a non-discriminatory regulation for the purpose of general welfare of the state or of regulating economic activity.  It appears unlikely that APR would be able to discharge its burden of demonstrating the impropriety of the PPSA.

GE would also struggle to establish that it was treated less favourably than domestic investors within Australia.  This is because the PPSA applies to Australian companies as much as to foreign investors.  In addition, registration on the PPSR, which is conducted online, is equally accessible to domestic and overseas investors.

The situation in which APR finds itself demonstrates, above all else, the importance of registering an interest on the PPSR.  It also highlights the fact that there is presently no ISDS mechanism for Australian or American parties who make investments in the other state.  

Investors should ensure that they take steps to identify and comply with the laws of the investment destination.  The PPSA, while novel, is not likely to be regarded as a means of expropriation against investors, but more likely to be recognised as an inexpensive means by which to protect an investment.

Foreign investors may benefit from reading another article by the author’s firm which considers proactively structuring foreign investments to gain access to free trade agreements and investment treaties which contain investor-state dispute settlement mechanisms – Protect your investment - important advice for inbound and outbound investors.

Scott Butler
Kristen Podagiel
Erika Williams

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