New Zealand: A $60 million mistake – have you registered on the PPSR?

Brief Counsel
Last Updated: 23 March 2017
Article by Michael Arthur, Michael Harper, Daniel Kalderimis and Hamish Foote

Failing to register security interests on the Personal Property Securities Register (PPSR) - a simple and straightforward exercise - can be costly.

This was amply demonstrated recently when General Electric's attempt to argue that its $60 million wind turbines were exempt from the operation of the Personal Property Securities Act (PPSA) was rejected by the Supreme Court of New South Wales.

The case

General Electric International Inc (GE) leased four mobile gas turbine generators to Forge Group, which went into voluntary administration shortly after. One month later, Forge was in liquidation.

The liquidators argued that GE's interest in the turbines fell within the scope of the Australian PPSA, being a lease for more than a year, and that as GE had not registered this interest, its interest to the debtor company was forfeit.

GE said the Act did not apply because:

  • GE was not regularly engaged in the business of leasing, and
  • the turbines were "fixtures" so were part of the land on which they sat and were not caught by the Act.

The NSW Supreme Court found that GE's interest came within the ambit of the PPSA and that Forge's interest prevailed over GE's because the turbines were not "fixtures".

It dismissed the appeal. The two decisions are likely to be authority for the New Zealand courts.

It should be noted that, under the New Zealand PPSA, failure to register an interest does not result in the interest being extinguished upon liquidation. Registration is, however, still prudent as it determines priority.

The leasing argument - Canada has it right, New Zealand doesn't

Like the New Zealand PPSA, the Australian PPSA deems leases for more than one year to be security interests. There is a carve-out to this, however, for entities which do not regularly engage in the business of leasing. GE sought the protection of this exemption by arguing that the court should look only at its business in Australia.

The court rejected this argument. On the plain words of the section, and on policy grounds, the better approach was to consider all of GE's business activities.

In assessing what "regularly engaging in the business of leasing" meant, the court adopted the Canadian approach, and rejected the New Zealand position.

  • The Canadian courts do not consider the frequency of leasing determinative. Rather, as long as leasing is a proper component of the business, it can be said that leasing is regularly engaged.
  • The New Zealand Court of Appeal has taken a different approach, looking at the number of leases entered into.1

The court used the example of a person setting up an infrastructure company, and advertising its ability and willingness to lease equipment. That entity could be engaged in the business of leasing, even if no leases were ever entered into.

The fixtures argument

The irony of this argument is that GE was forced to argue that it had intended to lose title to its turbines to the owner of the land on which they were installed. If the turbines were fixtures, they would be part of the land, and outside the PPSA.

The concepts of fixtures and land are likely to have the same meanings under our Act and Australia's. The Australian courts applied the common law rules and determined that the turbines were not "fixtures". They were designed to be demobilised and moved easily, and were intended to be on site for the rental term of two years (with rights of extension). This finding was appealed, but to no avail.

The appeal decision provides helpful confirmation that common law concepts were intended to be imported into the definition of "fixtures" in the PPSA.

Comments

GE made a $60 million mistake in failing to register its security interest (for want of a $6.80 registration fee). Under the New Zealand PPSA, GE's interest would not have been entirely lost but its priority could have been affected.

The case provides a valuable reminder that businesses need to be vigilant in ensuring their security interests are registered on the PPSR, particularly in respect of deemed security interests. It also provides helpful guidance that the common law on fixtures is likely to be imported into our own PPSA.

Footnotes

1 Rabobank New Zealand v McAnulty [2011] 3 NZLR 192 (CA) at [46]-[47]. Click here for our discussion of that case.

The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.

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Authors
Michael Arthur
Michael Harper
 
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