The recent New South Wales Supreme Court decision in Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc NSWSC 52 is yet another painful lesson for lessors who ignore the operation of the Personal Property Securities Act 2009(Cth)(PPSA).
The key points to note are:
- GE, the lessor of mobile turbine generators to Forge, failed to register on the Personal Property Securities Register (PPSR) and lost its rights to $60 million worth of equipment under the “vesting” provisions1 when Forge appointed voluntary administrators;
- the decision includes some useful commentary on when a lessor is “regularly engaged in the business of leasing goods”.2This is relevant to whether an operating lease is a PPS lease, and therefore a security interest, for the purposes of a PPSA;3
- the court confirmed the common law test of what is, or is not, a fixture applies under the PPSA. Because the PPSA does not apply to fixtures this is often a critical issue in insolvency disputes.
The dispute arose in connection with the installation, at a site near Port Headland, Western Australia, of mobile gas turbine generator sets as part of a temporary power station established by Horizon Power.
Horizon Power and Forge were parties to a design, build, operate and maintain contract entered into in January 2013 (Head Contract).
On 5 March 2013 Forge entered into a contract for the rental of power generation equipment and the supply of associated services with GE, under which GE agreed to rent the turbines to Forge for a fixed term and provide Forge with certain services including the installation, commissioning and demobilisation of the turbines (Lease). No financing statement was registered on the PPSR in respect of the Lease.
On 11 February 2014, soon after the turbines had been installed at the site, Forge appointed voluntary administrators and on 18 March 2014 Forge went into liquidation.
Forge sought declarations from the court that the interest of GE, and two other parties to whom GE had assigned its rights and title in the turbines, vested in Forge immediately before the appointment of the administrators.
GE argued that the PPSA did not apply to the Lease on the basis that:
- GE was not regularly engaged in the business of leasing goods, and therefore the Lease was not a PPS lease (or a security interest) for the purposes of the PPSA; and
- in the alternative, the turbines were fixtures and therefore the PPSA did not apply to the Lease.4
Was GE regularly engaged in the business of leasing goods?
The court concluded that:
- the test of whether a person is, or is not, regularly engaged in the business of leasing goods is to be determined having regard to that person’s activity wherever it occurs, and not only to activity in Australia – GE had argued that its activities outside Australia should not be considered;
- this test applied at the time the Lease was entered into;
- when the Lease was entered into, and at all material times afterward, GE was regularly engaged in the business of leasing goods in Australia.
The court noted some differing views on the meaning of “regularly engaged in the business of leasing goods” under the equivalent legislation in both Canada and New Zealand. Significantly, the court observed that “regular” can mean “normal, that is, not abnormal in the context of the lessor’s business, but a proper component of it”5 and:
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 ... 6
In any event, the court found that, on the facts, GE was regularly engaged in the business of leasing even if the frequency or repetitiveness of transactions is a necessary component of the test.
Did the turbines become fixtures?
In section 10 of the PPSA “fixtures” is defined as “goods, other than crops, that are affixed to land.”
GE and the other defendants contended that the definition in section 10 introduced a specific meaning of “affixed to land”, being “a non-trivial attachment”. Forge argued that the common law test of what is, or is not, a fixture applies under the PPSA.
The court held that:
- the words “affixed to land” in the definition of fixtures in section 10 meant affixed according to common law concepts; and
- the turbines did not become fixtures.
The court observed that one of the critical features of the PPSA is its non‑application to interests in land. Land is expressly excluded from the definition of personal property7 and various other provisions in the PPSA make it clear that interests in land are not subject to the operation of the Act.8 The court believed that applying the common law meaning of fixtures was more consistent with the exclusion of interests in land from the scope of the PPSA than the alternate approach suggested by GE.
Having determined that the common law meaning of fixtures applies in the context of the PPSA, the court went on to find that the turbines had not become fixtures. In reaching this conclusion the court considered the following factors:
- the turbines were designed to be demobilised and moved to another site easily and in a short time. Relevantly, the turbines remained mounted on wheeled trailers while leased;
- the turbines were only intended to be in position on the temporary power station site for a rental term of two years, subject to some limited rights of extension;
- Forge was contractually obliged to return the turbines at the end of the rental term;
- anchoring equipment intended to prevent damage to the turbines during cyclonic weather conditions was designed to be easily removed for demobilisation and re‑use at a new site;
- the attachment of the turbines to the land, through the use of anchoring equipment, was for the better enjoinment of the turbines and not for the better enjoinment of the land;
- removal of the turbines would cause no damage to the land;
- removal of the turbines from the site would not destroy or damage the turbines;
- the cost of removal of the turbines from the site was modest in comparison to the value of the turbines;
- 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 be affixed or attached to any other personal or real property;
- Forge was not the owner of the site and it plainly did not intend to make a gift of the turbines to Horizon Power;
- GE prescribed the mechanism for attachment of the turbines at the site and plainly did not intend the turbines to become the property of the owner of the land.