Are there any recent cases about PPS leases and the PPSA?

  • Author : Bill Stark - 04-03-2016

Hammerschlag J in the Supreme Court of New South Wales recently considered the impact of the Personal Property Securities Act 2009(Cth) ("the PPSA") in Forge Group Power Pty Ltd (In Liquidation) (Receivers and Managers Appointed) v General Electric International Inc [2016] NSWSC 52.

Background
The dispute arose out of the installation near Port Hedland, Western Australia, of four model TM 2500+ mobile gas turbine generator sets (“the Turbines”) as part of a temporary power station established by Regional Power Corporation (“Horizon Power”).Under a written Design Build Operate and Maintain Contract dated 23 January 2013, Horizon Power retained the plaintiff, Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) (“Forge”), to design the power station and supply, construct, test and commission all equipment installed.On 5 March 2013, Forge, in turn, entered into a written contract for Rental of Power Generation Equipment and Supply of Associated Services (“the Lease”) with the first defendant, General Electric International Inc. (“General Electric”), under which General Electric agreed to rent the Turbines to Forge for a fixed term, and provide to Forge certain services including the installation, commissioning and demobilisation of the Turbines.On 11 February 2014, not long after the Turbines had been installed, pursuant to s 436Aof the Corporations Act 2001 (Cth), Forge appointed voluntary administrators. On 18 March 2014, Forge went into liquidation. The PPSAAs readers will know from previous posts, the PPSA establishes the Personal Property Securities Register (PPSR).

Security interests may be “perfected” on the PPSR by registration, giving those interests priority. 
General Electric failed to register its interest in the Turbines on the PPSR. 
If General Electric’s interest in the Turbines was a ‘security interest’, there was no dispute that the security interest became vested in Forge immediately before administrators were appointed (s 267(2)), meaning that General Electric ‘lost’ its interest in the Turbines (which had a value of approximately $60m). The ultimate question for the Court’s determination was whether the PPSA was engaged. This in turn required the court to determine whether the Lease was a 'PPS lease'.
General Electric claimed the Lease did not have to be registered on the PPSR on two separate bases:

  • First, it was not regularly engaged in the business of leasing goods (s.13(2)(a) makes this an exception to the requirement for registration); and
  • Secondly, the Turbines had become fixtures (s.8(1)(j) provides that an interest in fixtures is not subject to the PPSA).

Regularly engaged in the business of leasing

As there were no relevant Australian cases on point, the Court referred to various Canadian and New Zealand authorities. Based on those authorities, the Court decided that the question was whether or not, at the material time, leasing goods was a proper component of General Electric’s business.  Regarding the word “regular”, the Court concluded that ‘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.’
The Court decided that:

  • Whether a person is regularly engaged in the business of leasing goods, consideration should be given to activity wherever it occurs, not only in Australia.
  • The test applies when the lease was entered into.
  • When the lease was entered into and at all material times after that, General Electric was regularly engaged in the business of leasing goods in Australia.

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.

Fixtures

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'. 
The PPSA did not introduce a ‘bespoke’ meaning of ‘affixed’, being a non-trivial attachment (General Electric’s argument).
Common law factors generally taken into 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; and 
  • whether the cost of removal would exceed the value of the attached property.  

The terms of the Lease made it 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 factors assisted the court to conclude that the turbines were not fixtures:

  • the turbines were designed to be demobilised;  
  • the power station was only a temporary power station; and 
  • Forge was contractually obliged to return the turbines at the end of the rental term.   

Conclusion

The court decided that the lease of the Turbines by General Electric to Forge constituted a PPS lease. As General Electric did not register its interest on the PPSR, due to s.267(2) of the PPSA, General Electric’s interest in the Turbines vested immediately before the appointment of the administrators in Forge.The insignificant cost of registration, compared to the loss of a $60m security in this case, confirms the overall importance of registering PPS leases and the significant consequences of failing to do so. The decision also provides some insight into how the courts will analyse several sections of the PPSA.

About the Author

Bill Stark

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