Failure to Comply with PPSA Leads to Significant Financial Loss

 Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed)
v
General Electric International Inc.

[2016] NSWSC 52

 Introduction

1. The potential for significant financial loss resulting from a failure to register a security interest in plant or equipment, under the provisions of the Personal Properties Securities Act 1999 (Cth) (“PPSA”), became a reality in  the recent decision of the Supreme Court of NSW in Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc. [2016 NSWSC 52 (“Forge v GE”)

2. In Forge v GE, his Honour Hammerschlag J held that the property interest in four mobile gas turbine generator sets, which were worth tens of millions of dollars, and which had been leased by General Electric International Inc. (“GE”) to Forge Group Power Pty Limited (“Forge”), vested in Forge immediately prior to the appointment of voluntary administrators. The interest vested in Forge pursuant to section 267 of the PPSA, commonly referred to as the “vesting rule”.

3. This meant that the liquidator was able to retain the generators and realise their value in any liquidation of Forge’s assets.

4. Since commencing operation in January 2012, the PPSA has caused some confusion, with the result that many parties simply ignore the provisions in the PPSA and hope that its content will not affect their particular transactions or activities. This case provides a timely reminder as to the application and operation of the PPSA and the serious implications of failing to register a security interest.

Facts

5. In January 2013, Forge entered into an agreement with Regional Power Corporation in Western Australia to design and construct a temporary power station and to supply and commission all equipment required to make the power station operational.

6. In March 2013, GE leased four mobile gas turbine generator sets to Forge to be used at the power station and as part of the agreement GE also undertook to install, commission and demobilise the turbines as required (“the Lease”).

7. Shortly after the turbines had been installed at the power station, Forge appointed voluntary administrators under s436A of the Corporations Act 2001 (Cth). At that time, GE had not registered a security interest under the PPSA in respect to the Lease. In March 2014, Forge went into liquidation.

8. Forge sought a declaration that, by operation of s 267(2) of the PPSA, GE’ interest in the turbines vested in Forge immediately prior to the appointment of the voluntary administrator.

Issues for Consideration

9. Broadly speaking, the PPSA creates a regime whereby one party’s interest in an item of personal property (“security interest”) can be registered to create superior title to that property in the event that title to that property is disputed by another party.

10. Given that GE did not register a security interest under the PPSA, by reason of s 267 of the PPSA, the property interest in the turbines would be held to have vested in Forge immediately prior to the appointment of voluntary administrators unless GE could show the Court a reason why the PPSA was not applicable.

11. Relevantly to the facts of the case, neither:

• a lease of goods given by a lessor who is not regularly engaged in the business of leasing goods (s 13(2)(a) of the PPSA); nor
• an interest in a fixture (s 8(1)(j) of the PPSA),

is an interest capable of being registered as a “security interest” under the PPSA.

12. The Court was therefore required to determine:

• whether GE was a lessor who was “regularly engaged in the business of leasing goods”; and
• whether the turbines, once installed at the power station, had in fact become “fixtures” as defined in section 10 of the PPSA.

13. As to the above issues, GE argued that:

• it was not regularly engaged in the business of leasing goods in Australia because it is a company based in the United States and does not lease goods in Australia with sufficient frequency to enliven the use of the word “regularly”; and
• the turbines became fixtures when they were installed at the power plant because they were attached to the land in a “non-trivial manner” and had been put there with the intention that they become affixed to the land.

Analysis and Decision

14. In the judgement, his Honour firstly considered the issue of whether or not GE was regularly engaged in the leasing of goods for the purposes of s13(2)(a) of the Act. In paragraphs 25 to 72 of the judgment.

15. In summary, his Honour found:

• there is no provision in the Act or otherwise which requires a consideration of whether a party is regularly engaged in leasing goods “in Australia”, nor is the Act concerned only with property located within Australia;
• the relevant consideration is therefore the conduct of the party generally, in any part of the world, not only to the conduct of that party within Australia and in this case there is no doubt that at the relevant time GE was in the business of leasing goods both worldwide and locally;
• section 13(2)(a) of the Act applies as at the time the relevant interest of the lessor arises, in this case, at the time the lease was executed in March 2013; and
• although the Act does not define the word “regularly”, for the purposes of
  s 13(2)(a), the correct test to be applied is whether leasing goods was a “proper component” of GE’s business and, for the purposes of this case , it was and therefore GE was “regularly engaged” in the business of leasing of goods for the purpose of s 13(2)(a).

16. On the basis of the above, his Honour found in favour of Forge on this issue and held that section 13(2)(a) did not to exclude the Lease from the operation of the PPSA.

17. His Honour went on at paragraphs 73 to 135 of the judgement to consider the second critical issue, namely whether the turbines became “fixtures” as defined in s 10 of the PPSA and for the purposes of s 8(1)(j) of the PPSA.

18. In summary, his Honour found:

• the correct test to be applied as to the definition of “fixture” is the common law test known by the maxim quicquid plantatur solo, solo cedit or “whatever is affixed to the ground belongs to the ground”;
• whether an item becomes a fixture at common law depends on the objective intention with which the item was put in its location and each case depends on its own circumstances;
• relevant considerations in determining whether an item has become a fixture include but are not limited to:

1. whether the item as attached for the purpose of better enjoying the property generally or whether it was attached for the better enjoyment of the land;
2. whether the item was to be in position temporarily or permanently;
3. whether removal would cause damage to the land;
4. the mode and structure by which the item is attached to the land;

• in this case:

1. the turbines were designed and installed in such a way as to allow easy and quick demobilisation and relocation to another site with no damage being caused to the turbines;
2. the turbines were only intended to be in position for the term of the Lease, being two years;
3. the attachment of the turbines to the land was for the better enjoyment of the turbines as turbines, not for the better enjoyment of the land;
4. removal of the turbines would not cause damage to the land;
5. the Lease contained a term to the effect that the turbines would at all times remain personal property regardless of whether or not they became affixed to land; and
6. GE prescribed the mechanism for attaching the turbines to the land and plainly did not intend the turbines to become the property of the owner of the land.

19. On the basis of the above, his Honour held that the turbines had not become “fixtures” and therefore that the operation of the PPSA was not excluded by section 8(1)(j) of the PPSA.

Decision

20. Given that there was no provision of the PPSA upon which GE was able to rely to exclude the operation of the PPSA, his Honour held that s 267 of the PPSA was applicable and that the property interest in the turbines had in fact vested in Forge immediately prior to the appointment of voluntary administrators.

Implications

21. This case reinforces the importance of registering applicable security interests under the PPSA. Failure to register an interest can, as in the case outlined above, lead to significant loss and potentially catastrophic damage to business.

22. The judgement of his Honour Hammerschlag J in this matter also provides helpful guidance as to the operation of the PPSA, particularly as it applies to the leasing of valuable goods between commercial parties and the application of the “vesting rule” in s 267 of the PPSA.

23. Ignorance or confusion in relation to the PPSA will be no excuse for a party which finds itself on the wrong side of the operation of the PPSA. If you have any questions about the PPSA or believe you may need to register a security interest under the PPSA please contact our firm and we will be happy to assist you.

This communication is sent by Kreisson Legal Pty Limited (ACN 113 986 824). This communication has been prepared for the general information of clients and professional associates of Kreisson Legal. You should not rely on the contents. It is not legal advice and should not be regarded as a substitute for legal advice. The contents may contain copyright.