The New South Wales Court of Appeal, in a decision released on 6 February 2017,1 has confirmed that the common law meaning of what is, or is not, a fixture applies under the Personal Property Securities Act 2009 (Cth) (PPSA). As a consequence, a lessor’s unperfected security interest in gas turbine generator equipment worth approximately US$44 million vested in the lessee immediately prior to the appointment of administrators to the lessee. In reaching its decision, the court observed:
“…the appellants’ complaint that there has been a “windfall gain” in the present case is not to the point. Any such windfall gain is simply a result that flows from the operation of the legislation as a consequence of the fact that GE’s security interest in the Turbines was not perfected by registration on the PPS register at the relevant time.”2
The dispute arose in connection with the installation, at a site near Port Headland, Western Australia, of mobile gas turbine generator sets as part of a temporary power station established by Horizon Power.
Horizon Power and Forge were parties to a design, build, operate and maintain contract entered into in January 2013 (Head Contract).
On 5 March 2013 Forge entered into a contract for the rental of power generation equipment and the supply of associated services with GE, under which GE agreed to rent the turbines to Forge for a fixed term and provide Forge with certain services including the installation, commissioning and demobilisation of the turbines (Lease). No financing statement was registered on the PPSR in respect of the Lease.
On 11 February 2014, soon after the turbines had been installed at the site, Forge appointed voluntary administrators and on 18 March 2014 Forge went into liquidation.
Forge sought declarations from the court that the interest of GE, and two other parties to whom GE had assigned its rights and title in the turbines, vested in Forge immediately before the appointment of the administrators.
At the initial trial,3 GE argued that the PPSA did not apply to the Lease on the basis that:
Hammerschlag J found for Forge on both points. It was the judgement relating to this second argument which formed the basis of GE’s appeal.
The main issues on appeal were: first, whether the definition of “fixtures” in s 10 of the PPSA imported common law principles relating to fixtures; and secondly, whether the turbines were fixtures within the common law meaning.
The court unanimously held that the definition of fixtures in s10 of the PPSA imported the common law meaning of the term. This decision was based on textual and contextual indicators within the PPSA:
“First… it might well be thought that use of the verb “affix” is intended to have a more technical meaning than that which would be conveyed by the more everyday language of “attach” or “install”. Second, there is the demarcation in the PPSA between land and personal property…. Third is the exclusion of “fixtures” from the definition of land…. Chattels that are affixed to the land but not so as to form part of the land at common law (i.e., that would fall within the appellants’ bespoke definition) would not need to be excluded from the definition of land. This is a strong textual indication to support the construction for which Forge Power contends and which his Honour found.”5
It was also held that there was a clear legislative intent discernible from the extrinsic material which supported the inclusion of the common law definition:
“At [8.13] [of the commentary to the Personal Property Securities Bill issued in May 2008], it was noted that the Bill referred to a fixture as tangible property that is affixed to land (s 128) and that this was “consistent with the common law doctrine of fixtures”…. it is clear from the commentary to the May 2008 draft Bill that the concept of “fixture” then understood as being within the proposed PPS regime was that of a fixture as that would be understood in accordance with common law principles (requiring a determination not only of the degree of annexation of the item but also its purpose).”6
Having concluded that the definition of fixtures in the PPSA imports the common law meaning, the court held that the reversible nature of the affixation and the fact that the turbines could be removed and reused on another site indicated that the turbines did not become fixtures for the purposes of PPSA. The court rejected the argument that the trial judge had failed to consider all the circumstances of the affixation (or lack thereof) of the turbines, citing the 12 factors of affixation which the trial judge had considered in arriving at his conclusion.7
The appellants argued that the “temporary” nature of the affixation of the turbines was an “irrelevant consideration”, however this argument was rejected by the court. It was held that the “temporary” purpose of affixation is a relevant consideration, and that the evidence that the turbines were installed for a temporary purpose supported the conclusion that objectively they were not intended to become part of the land.8
In an interesting aside, the court held that even if the definition of fixtures in section 10 had a bespoke meaning of “non-trivial attachment”, as the appellants contended, the finding that the turbines were chattels would likely stand due to the reversible nature of the attachment of the turbines to the land.9
The decision in the Forge case is not exceptional but it does confirm the perilous position of lessors who do not perfect their purchase money security interest and it helps to clarify a couple of threshold issues which have been the subject of some debate. Importantly, it is now clear that the definition of “fixtures” in the PPSA imports the common law meaning that considers the intention of the parties having regard to both the degree and object of the annexation of goods to land or buildings.
Security interests in equipment that is not a fixture require perfection under the PPSA. The secured party also needs to ensure it has any necessary priority and access arrangements in place with other secured parties and any relevant landholders. Security interests in equipment that is a fixture may necessitate the secured party entering into appropriate access and priority agreements with relevant landholders and mortgagees.
1Power Rental Op Co Australia, LLC v Forge Group Power Pty Ltd (in liq) (receivers and managers appointed)[2017] NSWCA 8. Ward JA, with whom Bathurst CJ and Beazley P agreed.
2Above n 1 [43].
3Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) v General Electric International INc [2016] NSWSC 52.
4s.8(1)(j), PPSA.
5Above n 1 [103].
6Above n 1 [46].
7Above n 1 [141].
8Above n 1 [150].
9Above n 1 [106].