Forge Group Power Pty Limited v General Electric International Inc
[2016] NSWSC 52
The long-awaited Forge decision is out. Mining services company Forge went into voluntary administration 2 years ago, then into liquidation. Forge had leased turbines, said in press reports to be worth around $50 million, from GE. GE failed to make a PPS registration to perfect its interest as lessor, apparently not considering the lease to be a security interest.
With the Supreme Court of NSW now ruling on the case, it has proved an expensive mistake. The Court held that the lease was a security interest; GE had not perfected it; and so it vested in Forge upon the appointment of administrators. That is, Forge acquired title to the turbines in place of GE.
Why it matters
The case shows the fundamental importance for lessors, and other equipment suppliers, of having processes in place to identify transactions that may be security interests, and perfecting them by registration.
GE’s arguments
GE had two main arguments:
- that it was not regularly engaged in the business of leasing goods, and
- that the turbines were fixtures, outside the scope of the PPSA.
The Court disagreed on both. The reasoning on both points usefully clarifies important points under the PPSA.
Regularly engaged in the business of leasing goods
A lease does not become a security interest as a ‘PPS lease’ unless the lessor is ‘regularly engaged in the business of leasing goods’. GE argued that only Australian business should be considered, and that it did not regularly engage in leasing business in Australia, even though it did on a worldwide basis. GE also said that after entering in the lease with Forge it had sold a significant part of its leasing business, and the test should be applied when the lease attached or when Forge obtained possession of the turbines (which was after the sale), not when the lease was signed.
The Court disagreed on both counts. Worldwide business should be considered, not just Australian. And the test was when the lease was entered into, not some later time. But even if it had ruled otherwise, the Court considered that the scope of GE’s activities in Australia was enough to constitute being regularly engaged in leasing business at all relevant times in any case.
Fixtures
The PPSA defines ‘fixture’ as ‘goods … that are affixed to land’. There has been debate whether this definition aligns with the common law definition of ‘fixture’, or means something different. Forge argued that the common law meaning applied, and that the turbines were not fixtures. GE argued that the meaning was broader than at common law, and that the turbines were fixtures, and so the PPSA did not apply to them.
The Court agreed with Forge. The common law meaning of ‘fixture’ applied. The common law test looks at the intent with the item was put in place, having regard to the degree of annexation and object of annexation. Here, the turbines were designed to be moveable (even though demobilisation and relocation would take some days), and were intended to be relocated after the lease term was expired. They were not fixtures.
Outcomes and consequences
- Forge. Other creditors of Forge might now recover more than otherwise, with the value of the turbines being available to creditors generally rather than just GE.
- Other leasing or rental businesses. The case is a warning to leasing businesses of the fundamental importance of ensuring PPS registrations are in place.
- US/Australia governmental relations. During the statutory review of the PPSA undertaken by Bruce Whittaker, at least 20 US interests – including the US Chamber of Commerce and various members of Congress – made submissions objecting to the impact of the PPSA on US leasing companies such as GE. Some were in quite strident terms. This was an unexpected development, given that Australia’s PPSA traces its history from reforms begun with Article 9 of the US Uniform Commercial Code. It will be interesting to see whether there is further US quasi-governmental or institutional pressure in support of GE.
Digest of PPSA cases
I have added the Forge case to my digest of reported Australian cases – please go to PPS cases for a link to the digest.