An update on on our previous article: 60 million reasons to perfect your security interest

The Full Court of the Supreme Court of NSW has rejected an appeal against the decision in Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc NSWSC 52 (11 February 2016).

Quick overview:

1. General Electric International Inc (GE) (an American company) owned 2 mobile turbines (Turbines).

2. Forge Group Power Pty Limited (Forge) (an Australian company) and GE entered into a lease agreement whereby Forge agreed to lease the Turbines from GE in Australia for a period of 2 years (with a provision for further extension of the lease term) (Lease Agreement).

3. The Turbines were worth approximately AUD$60 million.

4. GE failed to register a financing statement on the Personal Property Securities Register (PPSR) in respect of its interest in the Turbines created by the Lease Agreement (Security Interest).

5. GE did not otherwise perfect the Security Interest.

6. Forge went into voluntary administration (and subsequently into liquidation) and at the time was still in possession of the Turbines.

Decision of the primary judge

1. GE was regularly engaged in the business of leasing in Australia (notwithstanding the leasing business in Australia was only a relatively minor part of its business operations).

2. The Turbines were not fixtures – the Court noted, among other things, that the Turbines were designed to be demobilised and moved to another site easily in a short time and Forge was required under the Lease Agreement to return the Turbines at the end of the lease term.

3. The Security Interest was regulated by the Personal Property Securities Act 2009 (Cth) (PPSA).

4. GE failed to perfect the Security Interest by registration of a financing statement on the PPSR.

5. The Security Interest vested in Forge immediately before the appointment of the voluntary administrators.

6. Forge's right or title to, or interest in the Turbines, was superior to that of GE.

Questions on Appeal

1. GE argued that:

   • that the definition of "fixtures" in the PPSA was different to the common law concept of "fixtures", meaning that that the Turbines had in fact become fixtures and therefore had never vested in Forge because they were affixed to the land; and

   • alternatively, if the definition of "fixtures" was the same as the common law concept, the primary judge did not take into account the purpose of affixation, the temporary nature of the affixation, and the physical characteristics of the Turbines (such as pipeline connections, electrical/fuel connections) which they submitted meant that the Turbines were fixtures.

2. Forge argued that:

   • the common law concept of "fixtures" was the correct approach; and

   • the evidence plainly showed that the Turbines were not fixtures for reasons that included that: the affixation of the Turbines to the land was for the more efficient use of the Turbines as chattels, the Turbines were intended to be re-used at a new site, the power station was temporary, and the Turbines were leased for a fixed term.

Appeal dismissed

1. The Full Court of the Supreme Court of NSW unanimously held that:

   • the clear legislative intent of section 10 of the PPSA was to use the common law concept of affixation. Further, the reversible nature of the attachment and the reusable nature of the Turbines indicated that the Turbines did not become fixtures for the purposes of the PPSA (i.e. the Turbines could be demobilised with little damage done to them relative to their worth);

   • the primary judge did not fail to take into account the physical characteristics of the Turbines. The Turbines were installed for the better enjoyment of the Turbines themselves and not for the better enjoyment of the land. The affixation of the Turbines was not so substantial as to warrant a finding that the Turbines had become fixtures;

   • there was considerable amount of evidence that the Turbines were not intended to become part of the land; and

   • the Turbines did not become fixtures in the common law sense and therefore the security interest vested in Forge.

Key lessons affirmed

1. If you are secured party, you must perfect your security interest strictly in accordance with the PPSA.

2. Failure to perfect a security interest can mean a security interest is ineffective and cannot be enforced. This will cause loss and damage for a secured party.

3. Registration of a financing statement on the PPSR is normally the easiest way to perfect your security interest (and is inexpensive), but you must get it right to have the maximum protection under the PPSA.

How can we help?

If you are a secured party and you are unsure of your rights and obligations under the PPSA or require assistance in perfecting your security interest, please contact Chris Wilkinson, Charles Cheah or Suzanne Howari.

The material in this article was correct at the time of publication and has been prepared for information purposes only. It should not be taken to be specific advice or be used in decision-making. All readers are advised to undertake their own research or to seek professional advice to keep abreast of any reforms and developments in the law. Brown Wright Stein Lawyers excludes all liability relating to relying on the information and ideas contained in this article.

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