By its much anticipated yet hardly surprising judgment in Forge Group Power Pty Limited (in liquidation)(receivers and managers appointed) v General Electric International Inc  NSWSC 52, the Supreme Court of New South Wales has again shone a bright light on the importance of perfection of security interests under the PPSA, and the dramatic consequences that follow for failing to do so by reason of the PPSA vesting rules. Indeed, the failure to register in this case has had multi-million dollar consequences.
Apart from the money at stake, the case is somewhat unremarkable except that the court has provided some helpful guidance on:
- how to determine the question of whether a secured party is regularly engaged in the business of leasing for the purposes of s 13 of the PPSA; and
- the meaning of “fixture” for the purposes of the PPSA.
In March 2013, General Electric International Inc. agreed to lease to Forge Group Power Pty Limited four mobile gas turbine generator sets for a fixed term, and to provide to Forge installation, commissioning and demobilisation services.
The initial term of the lease was for two years with the ability to extend for a further 6 months, and then for a further 18 months after that.
Shortly after the turbines had been installed Forge appointed voluntary administrators.
A little over a month after the voluntary administrators were appointed, Forge went into liquidation.
As at the appointment of the administrators, GE had not registered a security interest on the PPSR in respect to the turbines.
Accordingly, Forge (by its liquidators) sought a declaration from the court that any security interest that GE had in the turbines vested in Forge immediately before the appointment of the administrators in accordance with the relevant provisions of the PPSR.
Unsurprisingly for anyone with any knowledge of the case, and consistent with earlier PPSA decisions with similar factual circumstances, the court determined the turbines had vested in Forge, which meant GE lost any interest it had in them, allowing the liquidators to realise those assets for the benefit of all of Forge’s creditors.
That outcome aside, as noted, helpfully the court has given some useful guidance on some key PPSA concepts.
Regularly engaged in business
GE argued that it was not regularly engaged in the business of leasing in Australia at the time the Lease was entered into. If this argument was correct, the arrangement between GE and Forge would not have been a PPS Lease (as defined by the PPSA), putting the PPSA vesting rules out of play.
The court concluded that the evidence demonstrated that GE was clearly regularly engaged in leasing and that the arrangement between GE and Forge was a PPS Lease.
The court’s view was:
- you look to the business activity as a whole, both overseas and in Australia, in assessing whether a party is regularly engaged in the business of leasing;
- the material time for determining this question is the time at which the interest of the lessor under the instrument arises; and
- the word ‘regular’ does not refer to a temporal concept, but whether it is normal, that is, not abnormal in the context of the lessor’s business, but a proper component.
The Court went on to say that engaging in the business of leasing is a concept of wider reach than merely entering into leases. For example, a business that does not actually enter into any leases could still be considered to have regularly engaged in leasing if it has the infrastructure, ability and willingness to enter into leasing transactions.
The Court noted that the correct approach is to recognise the frequency or repetitiveness of the transactions as a factor relevant to, and in an appropriate case a critical factor in, the assessment of whether the leasing business being engaged in is ‘regular’. But it is not to be equated with it.
GE also argued that the turbines had become a ‘fixture’ to the land which, if correct, meant the PPSA didn’t apply because ‘fixtures’ are excluded from the operation of the PPSA. This was perhaps a strange argument given that, in effect, GE were submitting that they had lost title to the turbines by reason of affixation.
The court’s view was that the words “affixed to the land” in the definition of fixtures in s 10 of the PPSA means affixed according to common law concepts, and that the PPSA did not introduce a bespoke meaning of affixed being a non-trivial attachment as argued by GE.
Factors generally taken in to account when trying to determine if something has been ‘affixed to the land’ are as follows:
- whether removal would cause damage to the land or buildings to which the item is attached;
- the mode and structure of annexation;
- whether removal would destroy or damage the attached item of property;
- whether the cost of renewal would exceed the value of the attached property.
The court looked at the terms of the Lease, and it was clear that the turbines were not designed to be affixed to land in a way that would give rise to them being considered a fixture. The following aspects, amongst others, went against the conclusion the turbines were a fixture:
- the turbines being designed to be demobilised;
- the power station was only a temporary power station;
- Forge was contractually obliged to return the turbines at the end of the rental term.
If Australian financiers and lessors were not already on notice of the importance of registration when it comes to the PPSR, then they ought to be following this decision.
It is also apparent that whilst each factual scenario will give rise to its own unique arguments, the pool of arguments available to defeat a vesting claim in the vent of insolvency is starting to run dry.