A Moving Issue: Fixture or PPS Lease?

February, 2016

By Ariel Borland, Partner; Jennifer O’Farrell, Associate; and Georgina Overend, Lawyer

One of the first tasks incumbent on a receiver, liquidator or administrator is to quickly assess the validity and enforceability of certain security interests under the Personal Property Securities Act 2009 (Cth) (PPSA). In particular, the appointment of a liquidator or administrator will result in most unperfected security interests vesting in a company to which the practitioner has been appointed under section 267 of the PPSA. This is known as the “vesting rule”.

To date, there has been limited comment from Australian courts as to when certain transactions will fall within the PPSA and hence, in some circumstances practitioners are uncertain as to whether the vesting rule is engaged. However, in the recent decision of Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52 (Forge), Hammerschlag J provides considerable guidance on whether the PPSA and the vesting rule is enlivened. In particular, whether:

(a) personal property is caught by the PPSA or not, on the basis that it is a “fixture”. This is important because “fixtures” are not subject to the PPSA (see sections 8 and 10 of the PPSA); and

(b) when personal property will be considered a “PPS Lease” within the meaning of section 13. PPS Leases are “deemed” security interests under the PPSA and must be perfected (typically by registration) in order for the secured party (the lessor) to be protected upon the appointment of an administrator or a liquidator. Hammerschlag J’s decision focuses on whether the lessor can be said to be “regularly engaged in the business of leasing goods” so as to be a “PPS Lessor”.

In relation to the latter point, Hammerschlag J concluded that “regularly engaged…” means that the leasing must be a proper component of the lessor’s business, but in determining this, it is possible to look at the lessor’s conduct outside of Australia.

Facts 

The dispute arose out of a lease of four mobile gas turbine generator sets (the Turbines) by a foreign company, General Electric International Inc (GE) to Forge Group Power Pty Ltd (Forge Group). At issue was whether the lease was subject to the PPSA. GE also argued that the Turbines were “affixed” to the land such that they were fixtures which are not subject to the PPSA.

Were the Turbines Fixtures?

The Court was also required to consider whether the Turbines were fixtures. If they were, they would not be subject to the PPSA: see section 8. Relevantly, section 10 defines fixtures as goods “that are affixed to land”. Hammerschlag J accepted Forge Group’s argument that the common law concept of fixture could inform the PPSA definition. That is, whether an item is a fixture depends upon the objective intention of the persons who put the item in place, having regard to the degree and object of annexation. Amongst other things, Hammerschlag J considered that because the Turbines were capable of demobilisation and could be moved (and would not cause any damage to the land in doing so), they were not fixtures within the meaning of the PPSA.

Were the Turbines Subject to a PPS Lease?

The Court noted that goods may be subject to a PPS Lease, unless subject to an exception in section 13(2) of the PPSA. Relevantly, a lease will not be a PPS Lease if the lessor is not “regularly engaged in the business of leasing goods”.

His Honour held that in determining this, regard is to be had to the lessor’s activities wherever they occur; the lessor’s activities need not be confined to Australia.

His Honour also provided substantial comment on the meaning of “regularly engaged”. In practice, this test often confounds insolvency practitioners. As his Honour noted, there has been considerable guidance from Canadian and New Zealand courts, but none from Australian courts to date.

Hammerschlag J stated that he preferred the Canadian formulation of the test, that is, “regularly engaged” looks at whether the lease is a “proper” part of the lessor’s business. Frequency or repetitiveness is a factor to be considered in determining this, but it may not be determinative.

Conclusion

In the Forge decision, Hammerschlag J has given insolvency practitioners a number of useful pointers as to whether the PPSA will be engaged and whether lessors are required to perfect their security interests to protect themselves against the vesting rule. It would seem that if leasing personal property is a proper component of a lessor’s business (within Australia or elsewhere), then the lease will most likely be a PPS Lease. It is also now clear that the common law test for what is a fixture informs the definition of “fixture” in the PPSA. As always, the question will be one for an insolvency practitioner to determine on all the facts available to him or her at the time.

Contact Mills Oakley

For more information, please contact:

ariel-borland

Ariel Borland | Partner

T: +61 3 9605 0015
E: aborland@millsoakley.com.au

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