7 March, 2016
Forge Group Power Pty Limited v General Electric International Inc
What you need to know
- A lease of personal property that lasts, or may last, more than a year is likely to require registration as a security interest on the Personal Property Securities Register.
- The registration requirement does not apply where the lessor is not regularly engaged in the business of leasing goods or where the goods are fixtures to land.
- Whether the lessor is regularly engaged in the business of leasing will depend upon the activity of that person wherever it occurs, not just activity in Australia, and is to be determined at the time the relevant lease agreement is made (rather than when the leased goods are delivered to the lessee).
- In particular, international organisations that are regularly engaged in the business of leasing outside of Australia (but not necessarily in Australia) should carefully consider the need to register any leases of goods in Australia.
- Whether leased goods are fixtures to the land (and therefore not subject to vesting under the PPSA if the lease is not registered) is to be assessed according to whether they were affixed with the intention that they shall be permanently part of the land.
On 11 February 2016, Hammerschlag J handed down his decision in Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52 (Forge). The key question was whether the Personal Properties Securities Act 2009 (Cth) (PPSA) applied to turbines that were subject to an unregistered lease: if so, the turbines would vest in the lessee on the appointment of its voluntary administrators. The judgment has clarified the circumstances in which a lease of goods needs to be registered on the Personal Property Securities Register, including when leased goods will be fixtures and outside the ambit of the PPSA.
The key facts of Forge
In March 2013, Forge Group Power Pty Ltd (Forge Power) entered into an agreement with General Electric International Inc (GE) for the rental of turbines for a fixed term of 2 years (with provision for a further extension for up to an additional 2 years) and for the provision of services including installation, commissioning and demobilisation of the turbines (Rental Agreement). This agreement was not registered on the Personal Property Securities Register.
In October 2013, GE sold its large-scale, long-term, temporary power generation rental business, and it assigned the benefit of the Rental Agreement to the second defendant and the title to the turbines to the third defendant.
The turbines were delivered for installation to site in Western Australia in October and November 2013, with the lease period commencing under the Rental Agreement on 1 January 2014.
In February 2014, Forge Power went into voluntary administration and subsequently, in March 2014, into liquidation. At each time, Forge Power was in possession of the turbines.
The issues in Forge
The defendants wanted to establish that the PPSA did not apply to the turbines and hence that there was no obligation to register their interest in the turbines under the lease agreement to retain a priority interest in the turbines on the external administration of Forge Power. To this end, it was argued that:
- GE was not regularly engaged in the business of leasing goods, and hence the Rental Agreement was not a PPS lease; or
- the turbines had become fixtures, and hence were not personal property under the PPSA.
Both arguments failed.
Business of leasing goods
Subsection 13(2) of the PPSA excludes a lease by a lessor who is not regularly engaged in the business of leasing goods from the definition of "PPS lease". Whilst it was common ground that outside of Australia GE had been engaged in the business of leasing goods, it argued that it was not regularly engaged in such business inside Australia and hence the exclusion applied.
The decision in Forge clarified the following elements of this exception:
- a person can be engaged in the business of leasing goods regardless of whether the relevant activity takes place in Australia or elsewhere
- the time for determining whether the person is engaged in this business is when the lease is first entered into (not, for instance, when the lessee first obtains possession of the leased goods or when the lessee enters into external administration).
Fixtures
The Court held that the term "affixed to land" in the definition of "fixtures" in
section 10 of the PPSA means affixed according to common law concepts: it does not entail any specific test for the PPSA (such as "non-trivial attachment").
The approach taken by the Court in assessing whether the turbines remained personal property or became "affixed to land" was that the objective intention of the parties (having regard to the degree and object of the annexation of the turbines to the land) is the key to determining whether property becomes a fixture.
Factors that the Court took into account in determining that the turbines did not become fixtures included:
- the turbines were designed to be demobilised and moved to another site easily and in a short time
- the site where the turbines were installed was a temporary power station site and the turbines were leased under a rental agreement for two years with limited optional extensions
- there was a contractual obligation to return the turbines
- a design feature was that removal would not destroy or damage the turbines the Rental Agreement included express terms that property would not pass to the owner of the land and that the turbines would remain at all times personal property
- Forge Power did not own the land on which the turbines were installed and did not intend to make a gift of the turbines to the landowner
- GE prescribed the mechanism for attachment and plainly did not intend the units to become the property of the landowner.
Of course, if the turbines had been found to be fixtures, it would then have been necessary to establish a basis for recovering them from the landholder.
Conclusion
A key rationale underlying the Personal Property Securities Act is that third parties should have clear notice of a security interest in personal property, so as not to be misled. Given this, failure to register has the result that holders of unregistered security interests lose their priority over the relevant property in an external administration and must rank equally with other unsecured creditors.
The decision in Forge is practical and in line with these policy objectives.
For further information please contact:
Tony Ryan, Partner, Ashurst
tony.ryan@ashurst.com
