The Facts
Parties enter into written contract for rental and supply of turbines
In this case, a power company had been retained by a government body in Western Australia to design, construct, test and commission a temporary power station.
In March 2013, the power company entered into a written contract with a conglomerate to lease four mobile gas turbine generators to the power company for a fixed term. At the end of the lease the turbines were to be returned to the conglomerate.
The Personal Property Securities Register
By way of background, in 2012 the Commonwealth government introduced a new national online register for security interests, called the Personal Property Securities Register.
The register operates as a risk management tool for Australian consumers and businesses, so they can verify whether any security interests have been recorded against personal property, people or organisations that they are dealing with.
Vice versa, consumers and businesses can register priority claims against personal property they’ve supplied to others, such as equipment, stock or other goods and assets (excluding land, buildings, or other fixtures, which are not included in the scheme).
Importantly in this case, the existence or non-existence of a recorded security interest on the register can be relevant when assessing who has a better claim to ownership of particular property.
Power company enters voluntary administration, then placed in liquidation
In 2014, shortly after the turbines were installed, the power company appointed voluntary administrators and subsequently went into liquidation. At that time the conglomerate had not registered its interest in the turbines on the register.
It was up to the court to determine who had the better claim to ownership of the turbines – the power company or the conglomerate that had provided the turbines on lease.
Expert commentary on the court's decision
Supreme Court finds in favour of power company
In Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52, the Supreme Court of NSW found in favour of Forge Group Power Pty Ltd, that the arrangement was a PPS lease, and that Forge had superior right or title to interest in the turbines.
The dispute concerned whether the rental agreement between Forge and GE constituted a security interest (or “PPS lease”) within the meaning of the Personal Property Securities Act.
Ultimately there were two key issues that were examined in deciding whether the PPSA applied. These were whether General Electric International Inc (GE) could be considered to be regularly engaged in the business of leasing goods, and whether the turbines could be considered to be fixtures.
Regularly engaged in the business of leasing goods
The PPSA specifically excludes leases if the lessor is “not regularly engaged in the business of leasing goods” (section 13(2)(a)).
A number of issues were argued, including whether the lessor’s leasing activities outside of Australia should be considered; when the correct time is for determining that the lessor is regularly engaged in the business of leasing goods; and the interpretation of what “regularly” actually means.
Application of PPSA to business activities outside of Australia
The court found that GE’s global business should be considered, and it should not be restricted to business activity occurring solely within Australia, with the wording offering no geographic limitation nor restriction on the activity to be assessed.
This was contrary to GE’s argument that despite its international operations including leasing activities, it was not regularly engaged in leasing activities in Australia at the time Forge obtained possession of the turbines (which they argued is the time the security interest attached to the collateral), nor when the administrators were appointed.
Timing of test for when being “regularly engaged in the business of leasing goods” applies
The court also found that the test for being regularly engaged in leasing applies at the time the lease was entered into, as Forge had argued, and not at the time of performance of obligations, such as payment of rent or passing of possession of the leased goods.
Regardless, the court found GE was regularly engaged in the business of leasing goods at each of these times anyway.
Determining whether a business is regularly engaged in the business of leasing goods
The court found that the correct approach in determining whether a company was regularly engaged in the business of leasing goods is to recognise whether leasing goods is an actual component of the business.
That is, while frequency or repeated transactions are factors relevant to the assessment and could well be critical factors, it is also important to consider whether the business has established infrastructure and invested in setting up leasing as an element of the business.
Simply having regard to frequency or repetitiveness of transactions could exclude a business, for example, that has intentions to engage in leasing, but has been unable to commence or follow through on leasing transactions to meet the test of frequency or repetitiveness.
In any event, according to the court, the facts of the case established that GE was regularly engaged in the business of leasing.
Were the turbines fixtures?
As the PPSA is concerned with “personal property”, it excludes fixtures – defined as goods affixed to land – as these are considered to be part of the real estate.
GE argued that the turbines became affixed to the land, and were therefore “fixtures”. As part of its argument, GE contended that the PPSA introduced a bespoke meaning of “affixed to land”.
However, the court agreed with Forge that the well-established common law test for affixation applied. This 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”.
The court found that the objective intention with which the turbines were put in place was such that they should not become fixtures.
This was based on a number of factors, including the turbines being designed and constructed to be moved easily between locations, that their use was for a temporary power station site, and that Forge was contractually obliged to return them at the end of the rental agreement term.
Based on these findings, the court held that the agreement between Forge and GE was a PPS lease, and Forge had a superior right to the turbines.
Implications for businesses involved in ad hoc leasing – your activities may trigger a need to comply with the PPSA
This case has implications for all businesses that lease goods. Even if they do not frequently lease valuable items or consider leasing to be central to their operations, their rental arrangements may be considered to be PPS leases as a result of the court’s interpretation of an entity being “regularly engaged in the business of leasing goods”.
Consequently, businesses that lease goods to others should ensure they register their interests on the Personal Property Securities Register, or they may risk losing title to those goods.