Failure to properly use the PPSR cost lessor $60m
Because General Electrical International Inc (GE) failed to register its security interest in two mobile turbines worth $60m, it lost ownership.
A court ruled that because GE failed to record, on the PPSR, its interest in the turbines leased to Forge Group Power Pty Limited (in liquidation, receivers and managers appointed) prior to the appointment of Forge’s administrators, that interest was therefore vested in Forge.
If GE’s interest in the turbines was indeed a “security interest”, it was indisputable this interest became vested in Forge immediately before the administrators’ appointment under s267 (2) of the Personal Property Securities Act (PPSA).
Thus a crucial issue for the court to decide was whether the PPSA was applicable to this situation, which required a ruling on whether the lease was a “personal property security lease”.
The fundamentals of this case are applicable to every leasing company in Australia, and it’s essential that business advisers understand them.
The battle’s opening salvo
GE argued that because it wasn’t regularly engaged in leasing [s13(2)(a)] its lease to Forge was an exception under the Act. Therefore there was no requirement for PPSR registration.
Furthermore, said GE, the turbines had become fixtures, and if the court accepted this, then under [s8(1)(j) a security interest in fixtures also isn’t required on the PPSR.
Was GE regularly engaged in the business of leasing? This is where Macks Advisory believes the court has shown desire first, to clearly embrace aspects of the commercial world which it might well have elected to shun, and second, to move towards rapprochement with other countries. This case shows an Australian court is willing to consider legislation abroad that differs from Australia’s – even in countries yet to enact PPSR-style legislation.
Because no cases relevant to the GE/Forge matter have been heard in Australian courts, Justice Hammerschlag of the NSW Supreme Court in this instance decided to look at reasonably comparable cases in Canada and New Zealand. He concluded it was important for him to decide in this case, whether at the relevant time GE was engaged in leasing goods.
Accordingly he ruled the relevant time was when GE entered into its leasing agreement with Forge, and this was a time when GE was clearly leasing goods both in Australia and overseas. Subsequently GE shut down its Australian business, but His Honor took a global view that at the relevant time GE was a lessor in Australia.
Wait, there’s more
But the court noted that its considerations should not be limited merely to whether leases have or haven’t been entered into. It decided “the correct approach is to recognise 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 business being engaged in is regular, and in this regard, had regard to GE’s overseas operations”.
The court also observed that “regular” can mean “normal”, that is not abnormal in the context of the lessor’s business, but a proper component of it.”
It didn’t matter to the court where goods are located for leasing or PPSR registration. (This, it seems to Macks Advisory, offers extra territorial application; although making it work could be somewhere between problematic and academic.)
We’re now at a point where the court has decided GE, when involved initially with Forge, was regularly conducting a lending business, and was therefore obliged to record a security interest on the PPSR. This was unless it could be established its turbines had become fixtures (in which case the PPSA would not apply).
The court’s view on fixtures
GE argued the PPSA allowed a “bespoke” or “tailored” meaning for “affixed”, that being a non-trivial attachment – which should apply to the turbines.
Not so, according to the court, which said the words “affixed to the land” in the definition of fixtures in s10 of the Act, meant “affixed according to common law concepts”.
Judge Hammerschlag referred to Australian Provincial Assurance Co Ltd v Coreneo (1938) 38 SR (NSW) 700, a case that made it clear courts should, in ruling whether an object was affixed, consider the purpose of the object and the degree of annexation in particular circumstances.
Common law factors, usually taken into account when trying to determine whether objects have been “affixed to the land”, are:
• Whether the objects’ removal would cause damage to the land or building to which they’re affixed, or to the objects themselves.
• The mode and structure of annexation of the objects to land or buildings.
• And whether removal costs would exceed the affixed objects’ value.
Relevance to this case
The court said as far as GE’s turbines were concerned:
• They were designed to be demobilsed and moved from one site to another easily and quickly, were mounted on wheeled trailers for leasing, were intended for rental use for two years on Forge’s temporary power station site – with limited extension rights – and were to be returned to GE when the lease expired.
• Anchoring equipment intended to protect the turbines against cyclones was designed for ready removal for use elsewhere, and the turbines’ attachment to the land was for their better enjoyment rather than betterment of the land.
• Their removal would damage neither turbines nor land, would not cost more than their value, and the Head Contract had a retention of title provision assuring the turbines would not pass to the land’s owner.
• The lease stated expressly that at all times the turbines remained GE’s personal property notwithstanding being affixed or attached to any other person or real property.
The court having ruled GE was indeed in the business of leasing, that the PPSA was applicable to the Forge lease, that no credence could be given to the desperate claim the turbines didn’t need to be on the PSSR because they were fixtures. GE lost its turbines to Forge’s liquidator.
Here are valuable lessons. The PPSR is there to protect your assets, to provide you with cheap and highly effective insurance, and to give you priority as a creditor. Use it, and use it properly otherwise risk losing assets when insolvency intervenes.
