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Focus: Forge-ing ahead – the treatment of fixtures under the PPSA

21 February 2017

In brief: The Court of Appeal has confirmed that under the Personal Property Securities Act 2009 (Cth) 'fixtures' are to be understood in the same way as at general law and the same common law test applies to determining whether goods affixed to land have become fixtures (ie part of the land). In unanimously upholding a 2016 decision of the Supreme Court of New South Wales, the appeal decision serves as yet another reminder of the importance of registering security interests on the Personal Property Securities Register, including those arising under equipment leases. Partner Kim Reid (view CV), Senior Associate Przemek Kucharski and Associate Jonathon New, who acted for the successful party in this matter, report.

 
 

How does it affect you?

  • Perfection is imperative. Equipment leases may give rise to security interests for the purposes of the Personal Property Securities Act 2009 (Cth) (the PPSA). Lessors who fail to perfect such interests through registration on the Personal Property Securities Register (the PPSR) can lose all rights to the equipment on the insolvency of the lessee because the security interests 'vest' in the lessee.
  • Fixtures. The PPSA does not apply to land, including fixtures (ie goods that have become part of the land). While there is a definition of 'fixtures' in the legislation, this does not displace the general law understanding of fixtures. The common law test applies to determining whether goods have become fixtures (with the consequence that they fall outside the ambit of the PPSA).
  • Financiers. The vesting of unperfected security interests and consequent loss of equipment may not only affect the lessor but also any secured financiers of the lessor who may have thought their security extended to the equipment. Financiers should seek to ensure that any borrowers regularly engaged in the business of leasing goods give appropriate warranties and/or have adequate regimes in place to register all relevant security interests on the PPSR. 

Background

In March 2013, Forge Group Power Pty Limited (Forge) entered into a rental agreement with General Electric International, Inc (GE) for the lease by Forge of four mobile gas powered electricity generators (the turbines). The turbines were delivered and installed at a site owned by Horizon Power (Horizon) in Port Hedland, Western Australia, in accordance with an agreement between Forge and Horizon.
In the meantime, around October 2013, GE assigned its rights in the turbines and under the rental agreement to two subsidiaries of APR Energy Holdings Limited – Power Rental Asset Co Two, LLC and Power Rental Op Co Australia, LLC (the APR parties).

Neither GE nor the APR parties registered any security interest on the PPSR in respect of the rental agreement or the turbines.
Forge went into voluntary administration in February 2014 and its secured creditors appointed receivers and managers over the company.

The question was whether the failure to register on the PPSR meant that any security interest that arose under the rental agreement had 'vested' with Forge by operation of section 267(2) of the PPSA, with the effect that the APR parties lost all rights to the turbines.

Supreme Court of NSW decision

The APR Parties and GE took the position that the rental agreement did not give rise to a security interest because GE was not 'regularly engaged in the business of leasing goods' as required by s13(2)(a) of the PPSA. They argued that:

  • the rental agreement was the only transaction of its type that GE had entered into in Australia;
  • GE's international leasing business should not be taken into account in considering whether it is regularly engaged in the business of leasing good; and
  • the 'regularly engaged' test should be applied either at the time when Forge obtained possession of the turbines or when vesting was said to have occurred – by either of those criteria GE had sold the relevant part of its business and was no longer 'regularly engaged in the business of leasing goods'.

The court rejected these arguments, noting that:

  • 'regular' can 'connote periodic or recurrence at fixed times' but can also mean 'not abnormal in the context of the lessor's business' – the rental agreement in question was 'not abnormal' for GE, particularly given that it had actively advertised its rental business;
  • the lessor's operations outside of Australia should be taken into account – there was no compelling reason to restrict the relevant provisions of the PPSA to business operations in Australia; and
  • the relevant time for testing whether a lessor is 'regularly engaged' is the time at which the lease is entered into, which was before GE had sold its rental business.
GE and the APR parties also argued that the turbines had become 'fixtures' and so were excluded from the operation of the PPSA. They said that either:
  • the meaning of 'fixture' under the PPSA was a 'bespoke meaning of affixed to land, being a non-trivial attachment' rather than the common law understanding (which takes account not just of the degree of annexation but also the purpose or object of annexation); or
  • if the common law test applies, the turbines became fixtures at common law (and so became part of the land).

The court rejected both of these arguments, finding that:

  • one of the critical demarcation lines underpinning the operation of the PPSA is that between personal property and land, and applying the common law tests accords with this demarcation; and
  • numerous factual matters indicated that the turbines did not become 'affixed' to the land under the common law test (and so did not become part of the land). These included evidence of the intention of the parties at the time and the fact that the trailers holding the turbines remained on wheels at all times.

The court noted that 'one feature of these proceedings worthy of mention and brought about by the way the PPSA operates is that GE was impelled (counterintuitively one might think) to argue that objectively viewed, it intended to lose its own very valuable property' – that is, that the turbines had become part of land belonging to a third party.

Court of Appeal decision

Although GE did not appeal the trial decision, the APR parties appealed on the fixtures issue only. The Court of Appeal (Chief Justice Bathurst, President Beazley and Justice Ward) unanimously dismissed all grounds of appeal and upheld the first instance decision.

The court affirmed the first instance judge's finding that the definition of 'fixtures' under the PPSA imports common law notions of the term 'affixed to land', rejecting the appellants' contention of a bespoke definition, noting:

the irony of the stance adopted by the appellants is that, if applied to its logical extent… this would not bring the Turbines within the definition of a 'fixture' for the purposes of the Act because both forms of attachment… would be attachments to 'fixtures' not to 'land'.

 

The Court of Appeal then found, having regard to the circumstances of affixation and the physical characteristics of the turbines, that the first instance judge's conclusion that the turbines were not fixtures at common law was correct.

The Court of Appeal also noted that:

  • even if the correct test had been some other bespoke definition of 'fixtures', such as 'non-trivial physical affixation' as contended by the APR parties, one would be driven to the common law test of 'fixtures' at least insofar as it related to the nature and degree of annexation; and
  • had the test for annexation been one of the substance or enduring nature of the affixation, the reversible nature of the turbines' attachment indicated that they had not become fixtures for the purposes of the PPSA.

Conclusion

The unanimous decision of the Court of Appeal provides certainty in relation to the applicable test and principles of the meaning of 'fixtures' for the purpose of the PPSA.

The decision also highlights important points for lenders, borrowers and insolvency practitioners:

  • there can be significant consequences for equipment lessors should they fail to register their security interests on the PPSR and the lessee suffers insolvency;
  • there is a clear demarcation between personal property and land (including fixtures) under the PPSA and the common law test is to be applied when determining whether goods have become part of land;
  • financiers should take note – ensuring that any borrowers regularly engaged in the business of leasing goods have obligations to register all relevant security interests on the PPSR; and
  • foreign entrants coming into the Australian market should obtain local legal advice.

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