Thinking | 15 February 2016
PPS Leases – Regularly engaged in the business of leasing
The dispute arose out of the installation at a site south of Port Hedland, Western Australia, of four mobile gas turbine generator sets (Turbines) as part of a temporary power station established by Regional Power Corporation.
Horizon Power retained the plaintiff, Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) (Forge Power) to design the power station and supply, construct, test and commission all equipment installed.
On 5 March 2013, Forge Power, in turn, entered into a written contract for Rental of Power Generation Equipment and Supply of Associated Services (Lease) with the first defendant, General Electric International Inc. (GE), under which GE agreed to rent the Turbines to Forge Power for a fixed term of 2 years, and to install, commission and demobilise the Turbines.
The Turbines were received at the delivery point in Houston, Texas on 19 October and 11 November 2013.
On 11 February 2014, Forge Power appointed voluntary administrators. On 18 March 2014, Forge Power went into liquidation.
GE did not register a financing statement on the PPSR.
Issues and decision
The main question the court considered was whether the Lease was a PPS Lease for the purposes of the PPSA.
A PPS Lease includes a lease of goods for a term exceeding one year. Accordingly, the Lease is a PPS Lease unless GE was not regularly engaged in the business of leasing goods (within the meaning of s 13(2)(a)), or if the Turbines became fixtures (within the meaning of s 10).
If the PPSA applied to the Lease as a PPS Lease, GE’s security interest would vest in Forge Power immediately before administrators were appointed (by virtue of s 267(2) of the PPSA). In such circumstances, GE’s interest in the Turbines would be lost and GE would be an unsecured creditor in the liquidation.
Was GE regularly engaged in the business of leasing goods?
The parties were in dispute as to whether GE was regularly engaged in the business of leasing turbines in Australia and also regarding the point in time that this was to be tested.
Forge Power contended the relevant date was the date the security interest was created (i.e. the date the Lease was entered into). GE contended it was on the date the security interest attached to the collateral (i.e. the date Forge Power obtained possession of the Turbines) or the date of the appointment of the administrators. GE also argues that it was not so engaged in the business of leasing goods in Australia from after 22 October 2013 when GE’s ‘large-scale, long-term, temporary power generation rental business was sold’.
In testing whether a person is (or is not) regularly engaged in the business of leasing goods, The Court said that regard is to be had to activity wherever it occurs, and not only to activity in Australia. The Court also considered the policy underlying this exclusion, namely to not to impose the implications of s13 on ad hoc lessors who should not be expected to have investigated the application of the PPSA. It was said that, ‘A leasing transaction within Australia, by an entity regularly engaged in such business internationally, cannot fairly be described as ad hoc.
After reference to various Canadian and New Zealand authorities, the Court held that the question was whether or not, at the material time, leasing goods was a proper component of GE’s business. The word “regular” can connote periodic or a recurrence at fixed times, but in this case it was accepted to mean normal, that is not abnormal in the context of GE’s business, but a proper component of it. The Court said that ‘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.’
The Court considered evidence of GE’s activity in respect of leasing turbine engines. It was found on the evidence that from 2003, continuing until the present day, GE had been regularly engaged in leasing both in the sense of it being a proper component of GE’s business and also if repetitiveness was an essential requirement.
Further, the Court held that the test applies at the time that the Lease was entered into.
Did the Turbines become fixtures?
Again, the parties were divided on this issue. Forge Power contended that in determining whether the Turbines were fixtures or not, the common law test that ‘whatever is affixed to the ground belongs to the ground’ should apply. GE contended that the definition in s 10 of the PPSA ‘introduces a bespoke meaning of affixed to land, being a non-trivial attachment’.
The parties were divided as to whether, on either test, the Turbines had become affixed to land. Forge Power contended that the Turbines remained chattels and did not become affixed. Ironically, GE contended that the Turbines had become affixed to Horizon Power’s land, therefore arguing that it intended to lose its own valuable property.
The court considered among other facts:
- The Turbines were delivered in October and November 2013.
- The Turbines were leased for a fixed term, commencing on 1 January 2014 and continuing for two years ending on 31 December 2015.
- Article 9 of the Lease provided that, ‘The Equipment is, and shall at all times remain, personal property notwithstanding that the rented Equipment or any part thereof may now be, or hereafter become, in any manner affixed or attached to any other personal or real property.’
- The method of transporting, stabilising, installing, commissioning and decommissioning the Turbines.
It was held that:
- The words ‘affixed to land’ in the definition of fixtures in section 10 of the PPSA means affixed according to common law concepts. The common law test of whether an item has become a fixture depends upon the objective intention with which the item was put in place, having regard to the degree and object of annexation. But each case depends on its own circumstances: Agripower v Blomfield  NSWCA 30 at –.
- The Turbines did not become fixtures. Various factors led the court to the conclusion that the objective intention of the parties at the time the Turbines were put in place was that they should not become fixtures. For example, under the Lease title to the Turbines was to remain with GE, Forge Power was contractually obliged to return the Turbines at the end of the rental term, the Turbines were designed to be demobilised and moved to another site easily and in a short time and the attachment of the Turbines to the land (via connection to utilities and a wind kit to ensure their stability) was for the better enjoyment of the Turbines, not the land.
Ultimately, it was found that the Lease was a PPS Lease and that, by operation of s 267(2) of the PPSA, the interests of GE in the Turbines vested in Forge Power immediately before the appointment of voluntary administrators on 11 February 2014. Accordingly, GE effectively lost its Turbines to Forge Power.
The decision is important as it provides clarity to several important sections of the PPSA, particularly what a Court will consider in determining whether or not a lessor is ‘regularly engaged in the business of leasing goods’.
Further, it has now been confirmed that the Courts will have regard to the well-established common law test in determining whether a good is a fixture or not, for the purposes of the PPSA. It is important to have clarity on this issue, as ‘one of the critical demarcation lines underpinning the operation of the PPSA is that between personal property and land… Applying the common law definition accords with this demarcation because goods affixed, according to common law concepts, become part of the land’.
This case stands as another stark illustration of the (perhaps unexpected) impact of the PPSA brought about by the relatively simple omission or error on GE’s part in failing to register its rights on the PPSR. It was a steep cost for a relatively inexpensive registration.
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