PPSA update: appeal dismissed in Forge Group case – lessors (and buyers) beware

WHO SHOULD READ THIS

• Owners of property who are leasing or hiring out their property to third parties.

THINGS YOU NEED TO KNOW

• The Forge decision confirms that the PPSA applies to the lease of equipment and demonstrates the critical need for lessors of equipment to consider PPSA issues (including legal issues around whether something is a fixture) and to undertake the necessary registrations or risk losing the equipment.

WHAT YOU NEED TO DO

• Ensure your property is adequately and appropriately protected, including by way of registration of security interests on the PPSR.

The New South Wales Court of Appeal (Court of Appeal) has dismissed an appeal by PowerRental Op Co Australia LLC (OpCo) and Power Rental Asset Co Two LLC (AssetCo) (Appellants) against the decision of the New South Wales Supreme Court in Forge Group Power Pty Limited (in liquidation (receivers and managers appointed) v General Electric International Inc & Ors (2016) 305 FLR 101 by confirming the Personal Property Securities Act 2009 (Cth) (PPSA) applied to the lease of equipment in question.

This confirms the critical need for lessors of equipment to consider PPSA issues (including legal issues around whether something is a fixture) and undertake the necessary registrations or risk losing their equipment.

Background

As we reported in our article of 20 October 2016, in March 2013 Forge Group Power Pty Ltd (Forge) entered into a lease with General Electric International Inc (GE) under which Forge agreed to lease four mobile gas turbine generator sets (Turbines) from GE for a fixed term.

In October 2013, the relevant part of GE’s rental business was sold to APR Energy PLC (APR). GE assigned the benefit of its lease to OpCo and assigned title in the Turbines to AssetCo, both American corporations. OpCo and AssetCo were formerly subsidiaries of GE and became subsidiaries of APR.

The question for the primary judge in the Supreme Court of New South Wales’ decision was whether the PPSA applied to the lease of the Turbines.

In that decision, the Court held that:

• the lease was for longer than 12 months and GE was regularly engaged in the business of leasing goods, and was therefore a ‘PPS Lease’ within the definition of section 13 of the PPSA, and
• the Turbines had not become fixtures to the land.

As such, the Court found that the PPSA applied to the lease and that AssetCo and OpCo’s interests in the Turbines vested in Forge and became Forge’s property immediately before Forge entered into administration in accordance with section 267 of the PPSA because they had failed to register their interests under the PPS Lease on the Personal Property Securities Register (PPSR).

Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liquidation) (receivers and managers appointed) [2017] NSWCA 8

AssetCo and OpCo appealed the decision in the New South Wales Court of Appeal. The Court of Appeal’s decision was handed down on 6 February 2017.

The Appellants advanced two lines of argument (either of which would have meant the Turbines did not become Forge’s property immediately before it entered administration):

• first, that the definition of ‘fixtures’ in the PPSA did not import well-known common law concepts but instead adopted a bespoke definition in which affixation was the only relevant definition. Correct application of that test, it was argued, should have resulted in a finding that the Turbines had become fixtures, and
• secondly, and alternatively, if the definition of ‘fixtures’ did involve common law concepts, the primary judge failed (or failed sufficiently) to take into account the purpose of affixation, the temporary nature of the affixation and the physical characteristics of the Turbines.

The Court of Appeal dismissed both lines of argument confirming the primary judge’s findings that the lease in question was a PPS Lease and confirming that the failure of the lessor to register its security interest in the Turbines on the PPSR had the consequence that Forge had better title to the Turbines than the owner or lessor of the Turbines.

In dismissing the appeal, the Court of Appeal held that:

• the definition of ‘fixtures’ in the PPSA was intended to import the common law notions of affixation that ‘a fixture is an item of tangible personal property that is annexed to real property in such as way as to become a part of the real property and that whether an item is a fixture “depends on the degree and purpose of annexation of the item as well as the rebuttable presumption that what is fixed to land is a fixture and that which is not remains a chattel”’ is the relevant test (not a bespoke test such as a fixture is a ‘non-trivial attachment’), and
• that the Turbines had not become fixtures for the purposes of the PPSA.

What does this decision mean?

The decision is an instructive and timely reminder of the vulnerability of owners of property when leasing or hiring out their property to third parties.

The decision also highlights the importance of thorough due diligence for any business acquisition. Due diligence which identifies a failure to register such as this could then either be dealt with by seeking registration in certain circumstances or obtaining appropriate indemnities or security from the seller.

Owners need to ensure their property is adequately and appropriately protected, including by way of registration of security interests on the PPSR.

We can assist you or your business with identifying how best to protect your interests under the PPSA.

If you have any questions about this case or would like any advice on PPSA issues, please contact us.

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.