PPSA: NSW Court of Appeal decides on fixtures argument in US$44million PPSA case

On 6 February 2017, in Power Rental Op Co Australia, LLC Group Power Pty Ltd (In Liq) v Forge Group Power Pty Ltd (in Liq) (receivers and managers appointed) [2017] NSWCA 8, the New South Wales Court of Appeal dismissed an appeal against the well-known decision of the Supreme Court where a lessor lost its interest in turbines (worth US$44 million) because of its failure to register on the Personal Property Securities Register (PPSR).

The first instance decision

On 3 December 2015, the Supreme Court of New South Wales handed down the landmark decision in Forge Group Power Pty Limited v General Electric International Inc [2016] NSWSC 52.

In that case, General Electric International Inc (GE) leased turbines valued at US$44 million to Forge Group Power Pty Limited (Forge). GE did not register its interest in the turbines on the PPSR.

The Supreme Court held that GE had failed to perfect its interest by registration. Consequently, GE’s interest vested in Forge upon the appointment of administrators to Forge under the vesting provisions in the Personal Property Securities Act 2009 (Cth) (PPSA) (section 267).

GE put forward two arguments:

• The lease was not a PPS Lease for the purposes of the PPSA because GE was not regularly engaged in the business of leasing goods within the meaning of section 13(2)(a) of the PPSA.
• The turbines became ‘fixtures’ within the meaning of section 10 of the PPSA when installed on the site and therefore, outside the scope of the PPSA.

The Supreme Court rejected both arguments and held that:

• GE was regularly engaged in the business of leasing goods within the meaning of the PPSA.
• The words ‘affixed to land’, in the definition of ‘fixtures’ in section 10 of the PPSA, meant affixed according to common law concepts and that the turbines had not become fixtures.

For the purposes of the common law something is a ‘fixture’ if it is an item of tangible personal property that is annexed to real property in such a way to make it part of that real property. Whether this is the case requires consideration of the degree and purpose of annexation.

The appeal

The Supreme Court’s decision that the turbines were not ‘fixtures’ was challenged on appeal (note: the finding that GE was regularly engaged in the business of leasing goods was not challenged).

The appellants complained that the effect of the Supreme Court decision was to confer a windfall gain in the order of US$44 million on Forge. On appeal, it was argued that:

• The definition of ‘fixtures’ in the PPSA did not import the well-known common law concepts. It is a bespoke definition where the only question is whether the goods were physically affixed to the land (in a non-trivial manner). If that test had been applied correctly, it would have resulted in a finding that the turbines had become fixtures.
• Alternatively, if the definition of ‘fixtures’ does involve common law concepts, the Supreme Court failed to take into account the purpose of affixation and the physical characteristics of the turbines and took into account an irrelevant consideration, namely , the temporary nature of the affixation.

The Court of Appeal unanimously held, dismissing the appeal, that the Supreme Court:

• was correct in concluding that there is nothing in the PPSA which suggests that the term ‘fixtures’ in the PPSA is different to well-known common law concepts;
• did not fail to take into account the physical characteristics of the turbines or the purpose of affixation and the ‘temporary’ nature of affixation is a relevant consideration; and
• was correct in concluding that the turbines did not become fixtures in the common law sense.

In reaching this finding, the Court of Appeal noted that the Supreme Court had reviewed the contractual provisions relating to the installation of the turbines and their function, and that there was ample evidence that the turbines were installed for a temporary purpose, including, that:

• the turbines were designed to be demobilised and moved to another site;
• the turbines were only intended to be on the site for two years (subject to optional extensions);
• the removal of the turbines would cause no damage to the land or the turbines;
• the lease expressly stated that the turbines would remain personal property notwithstanding that they may be affixed to real property;
• the turbines were installed on the land for the better enjoyment of the turbines themselves and not for the better enjoyment of the land; and
• Forge was not the owner of the site and clearly did not intend to gift the turbines to the owner of the site;

all of which supported the conclusion that objectively the turbines were not intended to become part of the land.

The Court of Appeal also commented that:

…the appellants’ complaint that there has been a ‘windfall gain’ in the present case is not the point. Any such windfall gain is simply a result that flows from the operation of the legislation as a consequence of the fact that GE’s security interest in the Turbines was not perfected by registration on the PPS register at the relevant time.

Comments

This decision, following on the recent decision of Supreme Court of New South Wales in In the Matter of OneSteel [2017] NSWSC 21, again highlights the importance of registering interests on the PPSR.

Failing to register can lead to severe consequences such as in this case where the lessor lost ownership of personal property valued at US$44 million.

This case also particularly highlights the importance of properly identifying the nature of the transaction and the collateral to be registered.

All lessors and retention of title suppliers, should ensure that they have processes and procedures in place to identify transactions that ought to be registered on the PPSR – if in doubt, seek immediate legal advice before it is too late.

If you would like more information about these issues please contact Emma Allatt, Rocco Russo or Graham Roberts of our litigation and dispute resolution team on 07 3231 2444.