The awaited Forge decision provides further guidance on PPS leases

Overview

What is, and what is not, a PPS lease is defined within section 13 of the Personal Property Securities Act 2009 (Cth) (“PPSA”). The consequence of the Forge Group Power Pty Ltd (In Liquidation) (Receivers and Managers Appointed) v General Electric International Inc [2016] NSWSC 52 (“Forge”) decision is that the Court has provided direction on how to determine whether a lease is not a PPS lease under section 13(2) and what the court will take into account when determining a fixture.

The key facts of Forge are that:

  • GE and Forge Power entered into an agreement for the rental of turbines for a fixed term of 2 years, and for the provision of services including installation, commissioning and demobilisation of the turbines (“the Agreement”).
  • The Agreement was not registered on the Personal Properties Securities Register.
  • The turbines were delivered for installation on site in Western Australia in October-November 2013, with the Agreement commencing on 1 January 2014.
  • In March 2014, Forge Power went into liquidation.
  • At each relevant time, Forge Power had physical possession of the turbines.In February 2014, Forge Power went into voluntary administration.In March 2014, Forge Power went into liquidation.

Issues before the court

GE ran with the following two arguments:

Firstly, that GE was not regularly engaged in the business of leasing goods, and hence the Agreement was not a PPS lease, section 13(2)(a).

Secondly, the turbines had become fixtures and were therefore not to be considered as personal property within the meaning of the PPSA.

It is interesting to note the strangeness of the second argument, because in the event that GE was successful in establishing that the turbines were fixtures, it would likely lose legal title of them as they may then form part of the real property and title could vest with the landowner.

Business of leasing goods – exclusion under section 13(2)(a) of the PPSA

GE first argument failed, as the Court held that it did not regularly engage in the business of leasing goods within Australia and as such, the Agreement was excluded from the reaches of the PPSA.

The court provided 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 (as opposed to when the lessee first obtains possession of the goods or enters external administration).

Determining when goods are fixtures and not subject to the PPSA

The Court held that “affixed to land” in the definition of “fixtures” in section 10 of the PPSA was to be interpreted using the common law concepts of goods or items which are affixed.

The Court approached the issue of the turbines being fixtures by giving consideration to objective intention of the parties.  In doing so the Court took into account, amongst others, the following relevant factors:

  • The turbines were designed to be demobilised and moved to another site.
  • The site where the turbines were installed was a temporary site, further supported by the short term of the lease.
  • Forge Power was bound by a contractual obligation to return the turbines to GE at the expiration of the lease.
  • The turbines were designed to be removed from site without being destroyed or damaged, with the intention of possible relocation and future use.
  • The Agreement included express terms that the title of the turbines would not pass to the landowner (essentially exposing that it was ever the parties intention for the turbines to become fixtures).

Conclusion

Although the decision in Forge came as no surprise to many, it provides a clear reminder to ensure that your documentation is up to date and aligns with the provisions of the PPSA. Otherwise, the alternative of failing to register your security interest can have catastrophic monetary consequences.

18/03/2016

DSS Law insight articles are intended to provide commentary and general information. They should not be relied upon as formal legal advice. If you would like specific advice relating to this topic, please contact DSS Law on epost@dsslaw.com.au.