Introduction
The New South Wales Supreme Court's decision in the case of Forge Group Power Pty Limited (In Liquidation)(Receivers and Managers Appointed) v General Electric International Inc [2016] NSWSC 52 was handed down earlier this year.
This case is a striking example of the dangers of ignoring the registration requirements of the Personal Property Securities Act 2009 (PPSA).
The the value of the assets foregone by the lessor was approximately $50 million due to its failure to register its interest on the Personal Property Security Register (PPSR).
Importantly, the Court's decision also provides important clarification on two provisions relating to the application of the PPSA. In particular, the Court considered:
- The requirement for a lessor to be "regularly engaged in the business of leasing goods" in order to fall within the definition of a PPS Lease.
- What constitutes a "fixture" for the purposes of the PPSA.
In this article, we consider the meaning of "regularly engaged in the business of leasing goods" and "fixture" under the PPSA.
Factual background
On 5 March 2013, Forge Group Power entered into a written lease with GE under which GE agreed to rent mobile gas turbine generator sets to Forge Group Power for a fixed term, and provide to Forge Group Power certain services including the installation, commissioning and demobilisation of the turbines.
On 11 February 2014, not long after the turbines had been installed, Forge Group Power appointed voluntary administrators. On 18 March 2014, Forge Group Power went into liquidation.
GE did not register its interest in the turbines as a security interest on the PPSR. It was common ground between the parties that if the PPSA applied to the lease of the turbines, GE's interest in the turbines would vest in Forge Group Power immediately before the appointment of the administrators.
GE argued that it was "not regularly engaged in the business of leasing goods" and, as such, the lease of the turbines was not a PPS lease within the meaning of section 13 of the PPSA. GE also argued that the turbines were fixtures and therefore not subject to the PPSA.
Was GE regularly engaged in the business of leasing goods?
Provided a transaction satisfies the criteria for a PPS lease under section 13 of the PPSA, a lease of personal property gives rise to a deemed security interest requiring registration on the PPSR. If GE was not regularly engaged in the business of leasing goods, the lease of the turbines would have fallen outside of the definition of PPS lease in section 13 of the PPSA.
GE argued that its business activities in Australia were limited and that its business activities outside of Australia should be excluded from consideration.
The Court dismissed this argument and held that regard is to be had to activity where it occurs and not only to activity in Australia. The Court took the view that "regular" did not connote periodic or a recurrence at fixed times. Rather, "regular" was equated with "normal". That is, not abnormal in the context of the lessor's business, but a proper component of it.
The Court also held that the relevant time for the application of the test was at the time the lease was entered into.
GE's argument regarding the turbines as fixtures
GE also argued that the turbines were fixtures and therefore, its interest in the turbines was not subject to the provisions of the PPSA.
GE's argument was curious because under common law, a fixture belongs to the owner of the land to which the fixture is attached. It seems that GE was asserting that the turbines were a fixture for the purposes of the PPSA (so as to escape the application of the PPSA) but not fixtures under the common law (so as to avoid ownership of the turbines passing to the owner of the land).
What is a fixture?
The common law provides that goods may, by virtue of the circumstances surrounding their annexation to land, change character from personal property to real property. Whether the annexation is sufficient to cause an object to become a fixture depends on the intention of the parties, the relationship of the party making the annexation to the owner of the land, the mode of annexation, the nature of the object and the purpose for which the object was affixed.
In contrast, section 10 of the PPSA defines fixtures to mean "goods, other than crops, that are affixed to the land".
Were the turbines fixtures?
The liquidators of Forge Group Power contended that the common law test applied. GE contended that the PPSA definition of fixtures introduces a bespoke meaning of "affixed to land" being a "non-trivial attachment".
The Court held that:
- the words "affixed to land" in the definition of fixtures in section 10 of the PPSA means affixed according to common law concepts; and
- the turbines did not become fixtures.
The Court's reasons for determining that the turbines were not fixtures included:
- the turbines were designed to be demobilised and moved to another site easily and in a short time;
- 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 Group Power was contractually obliged to return the Turbines at the end of the rental term;
- the attachment of the turbines to the land (including connection to utilities) was for the better enjoyment of the turbines as turbines, and not for the better enjoyment of the land;
- removal of the turbines would cause no damage to the land;
- the cost of the removal of the turbines from the site would not exceed the value of the turbines – it would be modest in comparison;
- the lease includes a term that the turbines will remain at all times personal property notwithstanding that they may in any manner be affixed or attached to any other personal or real property; and
- GE prescribed the mechanism for attachment and plainly did not intend the units to become the property of the owner of the land.
Lessons for Lessors
The Court preferred a narrow interpretation of the exemption from registration in section 13 of the PPSA. The exemption is only available for genuine ad hoc lessors. Given the consequences of failing to register a lease on the PPSR and the minimal costs of doing so, lessors are well advised to always register their interest in leased goods.
This includes circumstances where the lessor and lessee are related parties. For example, it is common to have plant and equipment owned by an asset holding entity and for these goods to be leased to a related trading entity. The asset protection advantages of this structure are lost if the lessor's interests are not registered. Even though the assets are owned by the lessor, unregistered interests may vest in the liquidator of the lessee.
The case deals with the leasing of goods but there are also similar provisions in section 13 of the PPSA regarding bailment of goods. The concept of a bailor "regularly engaged in the business of bailing goods" is likely to be interpreted similarly. As such, these arrangements should also be examined to ensure that any registration requirement is satisfied.
The Court's decision also maintains the established dichotomy between fixtures and chattels. The PPSA has not changed what will be regarded as a fixture. As such, parties with an interest in goods, whether they be lessors or secured creditors, should be mindful of the registration requirements created by the PPSA.
Likewise, mortgagor's who intend to obtain security over goods located on land should ensure that the items are fixtures in order to be secured by a real property mortgage. If the items are not fixtures it will be necessary to take a security interest over the items and register that interest on the PPSR.
Examples of items that have previously been the source of disputes between parties have included cold rooms, air conditioning plant, transportable accommodation units and large items of plant.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
