Introduction

The New South Wales Supreme Court has confirmed that a lease of gas turbine generators was a PPS lease under the Personal Property Securities Act 2009 (Cth) (PPSA) despite claims by the lessor that the gas turbines were fixtures and that the lessor was not regularly engaged in the business of leasing goods.

The decision in Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc & Ors [2016] NSWSC 52 confirms that:

  • to determine whether a lessor is “regularly engaged in the business of leasing goods”, one must consider whether the leasing of goods was a proper component of the lessor’s business as at the time the lease was entered into. The frequency or repetitiveness of transactions is a relevant factor but it is not determinative;
  • references to “fixtures” should be interpreted according to common law concepts.

A link to the decision is available here.

Significance

The decision provides another example of the potentially severe (and expensive) consequences to lessors of failing to register security interests arising from PPS leases.

The major findings of this decision are:

  • in determining whether a lessor is regularly engaged in the business of leasing goods:
    • the global activities of the lessor are relevant, not only the lessor’s Australian activities;
    • the test applies at the time the lease is entered into;
    • the frequency and repetitiveness of transactions is a relevant factor (and may in some cases be the critical factor) but it is not determinative. In addition, account may be taken of more than actual transactions entered into; and
  • in determining whether something is “affixed to land”, the common law concepts are to be applied.

Background

The proceedings arose out of the installation of four mobile gas turbine generators (Turbines) as part of a temporary power station established by the Regional Power Corporation and constructed by Forge outside of Port Hedland, Western Australia.

On 5 March 2013, Forge entered into a lease with General Electric International Inc (GE), under which GE agreed to lease the Turbines to Forge for a fixed term (Lease). GE did not make any registrations on the Personal Property Securities register (PPS register) in relation to the Lease.

On 11 February 2014, shortly after installation of the Turbines, voluntary administrators were appointed to Forge under s436A of the Corporations Act 2001 (Cth). Forge went into liquidation in the following month.

As GE had failed to register its security interest in respect of the Turbines on the PPS register, the liquidators of Forge brought proceedings seeking a declaration that, by operation of s267(2) of the PPSA, the interest of GE and the other defendants (GE’s assignees) vested in Forge immediately before the appointment of the administrators. The consequence of such a declaration would be that GE (and GE’s assigns) would lose their interest in the Turbines and would be left with an unsecured claim against Forge.

Issues before the court

Under the PPSA, a PPS lease is deemed to be a security interest. A PPS lease is defined in s13 of the PPSA as:
“a lease or bailment of goods: 
(a) for a term more than one year; 

However, a PPS lease does not include: 
(a) a lease by a lessor who is not regularly engaged in the business of leasing goods … ”

The only matters in dispute between the parties were:

  • whether GE was regularly engaged in the business of leasing goods and, in particular:
    • whether this was to be assessed at the time of entering into the Lease, the time at which the goods were delivered or the time at which the lessee went into administration; and
    • whether regard could be had to activity of the lessor outside Australia.

This was important because, while the parties agreed that GE was engaged in the business of leasing goods outside Australia, GE had sold its Australian leasing business shortly after entering into the Lease. GE argued it was not in the business of leasing goods in Australia either when the goods were delivered or when Forge was placed into administration.

  • whether the Turbines were “fixtures”, in which case the PPSA would not apply (s8(1)(j) of the PPSA). GE argued that the reference to “affixed to land” in the definition of fixtures was “bespoke” and denoted a “non-trivial attachment” rather than a common law concept of affixation to land.

Was GE regularly engaged in the business of leasing goods?

Hammerschlag J found that GE was regularly engaged in the business of leasing goods, holding that:

  1. in testing whether a person is (or is not) regularly engaged in the business of leasing goods, regard is to be had to activity wherever it occurs, and not only to activity in Australia.
  2. the test applies at the time the Lease was entered into; and
  3. when the Lease was entered into, and at all material times thereafter, GE was regularly engaged in the business of leasing goods within Australia.

In making the last point, His Honour considered various foreign decisions (noting a lack of Australian authority on point) and stated that the relevant question (which is one of fact) was “whether or not, at the material time, leasing goods was a proper component of GE's business”.

Further, His Honour considered the meaning of the word “regular”:

The word "regular" can in one of its meanings connote periodic or a recurrence at fixed times. However it can also, and in this case in my view does, mean, as the Canadian authorities consider, normal, that is, not abnormal in the context of the lessor's business, but a proper component of it…

Drawing a distinction between an activity which constitutes engaging in “the business of leasing” as against engaging in “the activity of entering into leases” (the former being the test), he concluded:

In my opinion, the correct approach is to recognise that frequency or repetitiveness of transactions is a factor relevant to, and in an appropriate case may be the critical factor in, the assessment of whether the leasing business being engaged in is regular. But it is not to be equated with it, as the New Zealand approach appears to require.

His Honour concluded that the evidence before the Court showed a history of leasing and related marketing activity by GE between 2003 and 2013 in Australia and, notwithstanding that GE had sold its temporary power generation rental business in October 2013 (seven months after entry into the Lease) and assigned its rights in the Lease and the Turbines, as at the time of entry into the Lease, GE was regularly engaged in the business of leasing goods within Australia and it likely continued to be so. Accordingly, GE could not qualify for the exception under s13(2)(a) of the PPSA.

Were the Turbines fixtures?

In determining whether GE’s interest was an interest to which the PPSA does not apply under s8, the court had to determine whether the Turbines constituted “fixtures” under s8(1)(j) of the PPSA. In this respect, His Honour held that:

  1. the words "affixed to land" in the definition of fixtures in s10 means affixed according to common law concepts; and
  2. the Turbines did not become fixtures.

His Honour adopted the established common law test applied in Australian Provincial Assurance Co Ltd v Coroneo (1938) 38 SR (NSW) 700, which requires the court to determine the purpose or object and degree of annexation in the particular circumstances of the case.

In determining the Turbines were not objectively intended to become fixtures, the court considered a long list of factors, including:

  • the Turbines were designed to be demobilised and moved to another site easily and in a short time. Significantly, the trailers keep their wheels throughout;
  • the Turbines were only intended to be in position on the site, which was a temporary power station site, for a rental term of two years subject to limited optional extensions;
  • Forge was contractually obliged to return the Turbines at the end of the rental term;
  • the Head Contract included an express term that property in the Turbines would not pass to the owner of the land;
  • the Lease included a term that the Turbines would remain at all times personal property notwithstanding that they may in any manner be affixed or attached to any other personal or real property;
  • GE prescribed the mechanism for attachment and plainly did not intend the units to become the property of the owner of the land.

His Honour concluded by observing the irony of GE being impelled to argue that it (objectively) “intended to lose its own very valuable property” in order to protect its interest. This is a telling example of the sometimes counter-intuitive operation of PPSA.

Conclusion

This decision is not particularly surprising in light of the fact scenario and the Australian cases to date on PPS leases. It does, however, provide useful authority for the interpretation of the fixtures exclusion and the requirement for the lessor to be regularly engaged in the business of leasing goods.

The concept of PPS leases and the consequences of the failure to register them on the PPS register has already attracted significant attention in the leasing industry and the media. The Final Report for the Review of the Personal Property Securities Act 2009 does, however, recommend that the PPSA continue to apply to some types of longer-term leases, regardless of whether they operate in substance as security for payment or performance of an obligation. This underlines the importance of lessors registering their interest on the PPS register in a timely manner to avoid losing their assets.