By Ariel Borland, Partner; Jennifer O’Farrell, Associate; and Molly O’Neill, Lawyer

In February 2016 we reported on the decision of Forge Group Power Pty Limited (in liquidation) (receivers and managers appointed) v General Electric International Inc [2016] NSWSC 52.  That decision can be read here.

In that decision, Hammerschlag J found that four mobile gas turbines were not “fixtures” within the meaning of the Personal Property Securities Act 2009 (Cth) (PPSA), because they were transportable.  Hence, the Court found that the turbines fell within the ambit of the PPSA, and the lessor, General Electric International Inc (GE), should have registered its interest in them on the PPSR as a “PPS Lease”.  Because GE did not, its unperfected security interest in the turbines vested in the lessee, Forge Group Power Pty Ltd (Forge) when administrators were appointed to Forge.

The appellants, Power Rental Op Co Australia, LLC (Power Rental) (who effectively acquired the benefit of the lease when GE sold its large scale power generation rental business to the Power Rental’s holding company), challenged his Honour’s decision on the following grounds:

1. first, that the definition of “fixtures” in the PPSA did not import common law concepts but adopted a “bespoke” definition where affixation was the only relevant criterion; and
2. secondly, if the definition of “fixtures” did involve common law concepts, that the primary judge failed to take into account the purpose of affixation, the temporary nature of the affixation and the physical characteristics of the turbines.

The three judges of the Court of Appeal unanimously dismissed the appeal.

Common law concepts of “affixation”

The Court of Appeal confirms that the definition of “fixtures” in section 10 of the PPSA did import common law notions of affixation.  Hammerschlag J did not err in concluding that the turbines were installed for a temporary purpose. The Court held that, objectively, the mode of attachment of the turbines to the ground was one which was intended to be reversible and temporary.  Hence they were not “affixed” within the common law meaning of that expression.

Some useful indicators in determining whether something is a “fixture”, or is “affixed” (within the common law meaning of that word, which applies to the PPSA) appear in the judgment, namely:

1. whether the equipment is designed to be demobilised and moved to another site easily and in a short time;
2. whether removal of the equipment would cause damage to the land or an attached item of property;
3. whether the cost of the removal of the equipment would exceed the value of the equipment;
4. whether a design feature exists whereby removal will not destroy or damage the equipment;
5. whether the lessee is contractually obliged to return the equipment at the determination of the rental term; and
6. the function to be served by the annexation of the equipment.

Conclusion

Whether an asset is a fixture or not is another matter which insolvency practitioners should assess when determining parties’ rights upon appointment.  If a party asserts ownership an asset that is ostensibly a fixture, consider whether the relevant asset is “affixed” to land within the common law sense of the word.  If it is, then the owner’s rights will be governed by the law outside of the PPSA.  However, if the asset is not “affixed”, then it falls within the PPSA.  When this occurs, practitioners should carefully scrutinise the relevant PPSR registration to determine whether it is defective or not.  If there is no registration relating to the asset, and it does not appear to be a fixture, then the interest in the asset  may have vested in the relevant company upon appointment.