Debt Recovery Made Easy:
Personal Property Securities and Equipment Leasing
A decision of the NSW Supreme Court handed down last month, Forge v General Electric  NSWSC 52 should put to rest any lingering doubts which business owners involved in equipment leasing might have about whether the PPSA should be complied with.
Horizon Power was formed in Western Australia (WA) under the Electricity Corporations Act. It established a power station near Port Headland in WA. In January 2013, Forge Group Power Pty Ltd (Forge Power) agreed with Horizon Power to design the power station, and to construct and commission all equipment to be installed on-site.
Two months later, Forge Power signed a lease with General Electric (GE) under which Forge Power rented four mobile gas turbine generators from GE. GE rented the turbines to Forge Power for a fixed period and agreed to install and commission them.
Forge Power went into administration in February 2014, just after the turbines had been installed. GE had not registered any security interest it had in the turbines on the PPSR. One month later in March 2014, Forge Power went into liquidation.
Forge Power went to Court seeking a declaration that if any security interests were held by GE in the turbines, then they vested in Forge Power immediately before the appointment of the administrators, in accordance with s 267(2) of the Personal Property Securities Act 2009 (PPSA). If the Court agreed with Forge Power, then GE’s security interest in the turbines would be held by Forge Power, and could be realised by the liquidators to the benefit of Forge Power’s unsecured creditors.
Did the PPSA apply? It only applied if each lease was a PPS lease. Each lease would not be deemed to be a PPS lease if:
1) GE was not regularly engaged in the business of leasing goods (see s 13(2)(a) of the PPSA); or if
2) Each turbine had become a fixture – See s 8(1)(j) of the PPSA.
Was GE regularly engaged in the business of leasing goods?
Is business activity outside Australia relevant?
The Court wondered whether business activity outside Australia is relevant in answering the question whether GE was regularly engaged in the business of leasing goods. After deliberating for some time, the Court eventually concluded that business activity outside Australia could be taken into account in answering the question because:
(i) The plain words in the legislation did not impose this restriction, and the general operation of the PPSA was not confined to goods or property in Australia. For example, it applies if the grantor is an Australian entity, regardless of where the goods are.
(ii) The restriction would conflict with the policy underlying the application of the PPSA to PPS leases. For example, it is clear that the PPSA was written so that it did not apply to a grantor who only leased goods irregularly.
(iii) Transactions may involve cross-border activity. It applies to grantors who are regularly engaged in the business of leasing goods. That includes overseas businesses leasing goods in Australia, even if they also lease goods outside Australia.
When does the grantor have to be regularly engaged ?
The Court stated that s 13(2)(a) was directed to the point in time “at which the interest of the lessor under the instrument arises”. In this instance, that time was held to be the time when the lease was entered into.
What does regularly engaged in the business of leasing goods mean?
In construing s 13(2)(a), the Court looked at Canadian and New Zealand cases. The Court said that the approach was to determine whether or not at the material time, leasing goods was a “proper component” of GE’s business. In other words, was the leasing of goods a “regular part” of the business (and not abnormal to it)?
What does regular mean?
The Court said 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 was a regular part of the business.
The Court then qualified that statement by saying that “in considering frequency or repetitiveness as an element of regularity of business, account may be taken of more than simple actual transactions entered into”. An example of an instance where factors other than actual transactions should be considered would be if “an initial transaction was intended to be followed by others, but no more transactions of the type concerned actually eventuated, despite the best intentions, advertised willingness over a significant period of time and ability of the lessor to enter into more”.
In this case, the presence of frequency or repetitiveness of leasing in Australia was made out. GE was found to be regularly engaged in the business of leasing, both in the sense of it being a proper component of the business and also in the sense that if repetitiveness was an essential requirement, then the test of repetitiveness was also met.
Did the Turbines Become Fixtures ?
Two core issues
In determining this question, two core issues were considered. Firstly should the common law test for affixation be applied – i.e. whatever is affixed to the ground belongs to the ground. It should be remembered that the common law had developed to the point where the issue of affixation depends largely on objective intent.
Or should s10 of the PPSA apply? Section 10 redefines the meaning of fixtures as being something which is affixed to land. There is no objective intention written into the definition at all.
Secondly, a critical issue was, independently of either test, were the turbines affixed to land in a physical sense?
The Court concluded that the words “affixed to land” in s10 mean “affixed” as understood in common law concepts. This was a very clever way of getting out of a very difficult problem: the inconsistency between the common law definition and the wording of s 10 had been avoided.
The Court then considered whether or not the objective intention with which the turbines were placed was to become fixtures. The Court found that the objective intention was that the turbines would not become fixtures. This finding considered both the design of the turbines and the terms of the lease of the turbines.
The design of the turbines
Firstly, the turbines were movable and maintained wheels upon installation, meaning they could be removed and reinstalled. Secondly, the turbines were designed so as to not cause damage to land or the turbines themselves. Thirdly, the turbine’s corresponding kits were also movable for reuse. Lastly, the cost of removal was minor compared to the value of the turbines.
The terms of the lease
The Court considered that the following terms of the lease supported the conclusion that the objective intention of the parties was that the turbines would not become fixtures:
Firstly, the lease had a fixed term of two years, upon which the turbines were to be returned. Secondly, the Head Contract included an express term that the turbines would not become the property of the owner of the land. Thirdly, the lease included a term that the turbines would remain at all times on the property.
In considering the terms of the lease, the Court took into account the following facts: (i) the lessee of the turbines was not the owner of the site; and (ii) therefore it plainly did not intend to make a gift of the turbines to the owner; and (iii) GE prescribed the mechanism for attachment and plainly did not intend the turbines to become the property of the owner of the land.
The lease was a PPS lease, as defined in s 13(2)(a) of the PPSA. Following s 267(2), the interests of any of the defendants in the turbines vested in the lessee Forge Power immediately before the appointment of administrators and Forge Power’s right, title and interest in the turbines trumped the ownership interest of GE.
I am informed that GE has lodged an appeal.
If you have any debt recovery issue or want solid advice on where you stand with any equipment seized by a liquidator, then call Leigh at Leigh Adams Debt Recovery Lawyers on 02 99640022 for fast and efficient advice. We get you there.