More clarity on PPS leases from the Forge v GE decision

Background

The dispute between the Liquidators of Forge Group Power Pty Ltd (Forge) and General Electric International Inc. (GE) arose out of the installation near Port Headland in Western Australia of four mobile gas turbine generator sets (Turbines) as part of a temporary power station established by Regional Power Corporation.

Facts

Regional Power Corporation had contracted with Forge under a written agreement dated 23 January 2013 for Forge to design the power station and supply, construct, test and commission all equipment installed.

On 5 March 2013 Forge entered into a written contract for Rental of Power Generation Equipment and Supply of Associated Services (Lease) with GE.

No financing statement in respect of any security interest arising under the Lease was registered on the Personal Property Securities Register (PPSR) by GE.

On 22 October 2013, GE’s large scale, long term, temporary power generation rental business in Australia was sold to ARP Energy Plc.

On 27 October 2013 GE:

• Assigned the benefit of the Lease to the second defendant, Power Rental Op Co Australia LLC; and
• Assigned title to the Turbines to the third defendant, Power Rental Asset Co Two, LLC.

On 11 February 2014, not long after the Turbines had been installed in the power station, Forge appointed voluntary administrators.

The Liquidators argued that the Lease was a ‘PPS lease’ and so gave rise to a ‘security interest’ for PPSA purposes. Because GE has failed to register its security interest on the PPSR, GE’s security interest vested in Forge immediately prior to their appointment (as administrators).

The proceedings raised issues concerning the construction and operation of a number of sections of the PPSA. If the arrangements between GE and Forge constituted a ‘PPS lease’ and if the Turbines and not become ‘fixtures’ at the time administrators were appointed to Forge, then Forge was entitled to the relief it sought, being declarations that the interest of GE and the other defendants vested in Forge immediately before the appointment of the administrators and Forge’s right or title to, and interest in, the Turbines is superior to theirs.

The Court’s decision

A PPS lease or not?

In order not to lose its security interest (and title to the Turbines) GE had to argue that no ‘PPS lease’ arose because an exception applied: that GE, as the lessor, was not ‘regularly engaged in the business of leasing goods’.

The Forge Liquidators contended the exception did not apply.

The Court ruled against GE and in favour of the Liquidators on this point.

A significant amount of evidence was considered by the Court in regard to GE’s leasing activities in Australia and elsewhere.

The Court considered the meaning of ‘regularly engaged in the business of leasing goods’. It noted there was no Australian case law on the matter and looked at Canadian and New Zealand case law, preferring the former to the latter.

The Canadian approach was to ask whether (or not), at the relevant time, leasing goods was a ‘proper’ component of GE’s business (‘proper’ connoting normal rather than abnormal).

The New Zealand approach was to consider the frequency with which the lessor entered into leasing transactions (which our Court said was only one of a number of relevant factors).

Due to the sale of its long term temporary power generation rental business in Australia between the time the first two Turbines were delivered to Forge and the time the last two were delivered, the two propositions put by GE were:

• The test (of whether or not a lessor is regularly engaged in the business of leasing) should have regard to business activity in Australia only; and
• The test should be applied at the time the security interest attaches to the collateral (the Turbines) – that is, when Forge obtained possession of the Turbines – or, alternatively, on the date the vesting occurred.

The Court rejected the first proposition by applying principles of statutory interpretation.

The Court rejected both of the second propositions and said the test was to be applied at the time the lease agreement was entered into (which was the Liquidators’ submission).

A fixture or not?

The Court also considered arguments that:

• The test of whether something is a fixture (as defined in section 10 of the PPSA) is the common law test (contended by Forge) or ‘non-trivial attachment to the land’ (contended by GE); and
• The Turbines had become affixed to the land (contended by GE) – which meant they were not ‘personal property’ and the PPSA did not apply to them but it also meant GE lost them to the owner of the land. The Court pointed out it was ironic and counter intuitive that GE should argue for that result.

The Court cited a number of authorities on the meaning of affixation which indicated the applicable principle is: ‘whether an item has become a fixture depends upon the objective intention with which the item was put in place, having regard to the degree and object of annexation, but in each case depends on its own facts’.

Those cases also indicate a number of factors that Courts take into account in determining the purpose or object and degree of annexation, for example:

• Whether the annexation was for the better enjoyment of the object (no affixation) or the land (affixation);
• Whether the parties intended the item to be in place permanently (affixation) or temporarily (no affixation);
• Whether removal of the object would damage the land and building to which it is attached (affixation indicated by greater damage from removal); and
• Whether the cost to remove would exceed the value of the item (if yes, annexation).

Applying the principles and considering evidence about the presence of absence of the relevant factors, the Court concluded that the Turbines were not fixtures.

The Court found GE’s security interest in the Turbines (and its title to them) vested in Forge immediately prior to the appointment of the Liquidators (as administrators) to it, by the operation of section 267(2) of the PPSA.

Accordingly, Forge’s right or title to, and interest in, the Turbines was superior to that of GE and its assignees.

What should you do?

If a normal component of your business is leasing goods, then you should register on the PPSR your security interest arising under each leasing arrangement that constitutes a ‘PPS lease’ or gives rise to an in substance ‘security interest’ for PPS purposes. Failure to do so will result in (among other things) loss of your security interest (and title to the goods) if the lessee has an administrator appointed, commences winding up or executes a deed of company arrangement or (if an individual) becomes bankrupt.

If you are an insolvency practitioner, you need to critically examine a claim by a lessor that their arrangement with the company in administration or liquidation does not constitute a ‘PPS lease’ in the light of the guidance the Court has given on the meaning of ‘regularly engaged in the business of leasing’ and, if relevant, the appropriate test to apply to determine whether or not particular equipment has become a ‘fixture’.

This article was written by Karen Fairbairn, Partner.