GE vs Forge Group (aka APR Energy vs KordaMentha)

The 11^th February saw a decision handed down in the NSW Supreme Court in the battle between the receivers of the Forge Group (KordaMentha) and the US-based, General Electric International Inc over KordaMentha’s claim to gas turbines totalling $50 million.

I've already written here concerning the outcry from US business and politics regarding the matter, now we get to hear the court's view.

In case you haven’t already read elsewhere, I won’t keep you on tenterhooks, the decision represented a victory for KordaMentha. 

Justice Hammerschlag ruled that the absence of a PPSA registration in respect of turbines leased by GE to Forge Group under an agreement in March 2013 meant that title to those turbines vested in Forge Group upon their insolvency the following March. Put simply, a win for the receivers, who get an extra $50 million in assets to play with, and a loss for the American company that actual holds (held) title to the property.

While there will no doubt be more than a few headlines hailing this as a ‘victory for the PPSA’, the legal argument was a little more nuanced.

The issue before the court concerned some technicalities of the PPSA, and the right provided by the Act for PPSA security interests to be vested in the insolvent company was never actually in dispute.

GE instead chose a two-pronged argument:

• That the goods represented fixtures (the PPSA explicitly does not apply to fixtures); and
• That GE, while having leased the turbines, was a company not regularly engaged in the business of leasing goods (the PPSA also does not apply to leases in such circumstances).

On the matter of fixtures, J Hammerschlag found that the weight of evidence made it clear that, not only was there no intention that the turbines become fixtures but, their very nature (designed to be demobilised and moved to another site, quickly and in a short time, there was an obligation for the turbines to be returned at the end of the lease period, that the turbines could be removed at a relatively low cost without damage to either the land or the turbines themselves etc) meant that they should not be deemed fixtures for the purposes of the Act.

As to whether GE was regularly engaged in the business of leasing, this was relatively easily confirmed by a simple review of GE’s leasing history.  This confirmed that from 2003 to the present time GE had been no stranger to leasing its equipment, that it was a “proper component” of their business and conducted with sufficient repetitiveness to satisfy the court that their leasing arrangement with Forge fell under the auspices of the PPSA.

Therefore, not so much a victory for the PPSA as much as it is a victory for the PPSA’s definitions.

Those wanting to read up on the case in detail can find the full judgement at this link.

Clive Palmer vs the PPSA

I’ve just read an 'excited' article by The Australian, entitled “Clive Palmer firms jump queue of creditors for Queensland Nickel” which you can read here (although you may get caught out by The Australian’s paywall).

The meat of the article concerns the ‘last minute’ registration on the PPSR of security interests against Queensland Nickel by companies in which Clive Palmer has an interest.

“Four days before Clive Palmer’s Queensland Nickel Industries collapsed into voluntary administration, two of his companies staked a claim on all of the refinery’s assets in an apparent attempt to squeeze out redundant workers and other creditors.”

The article goes on to say that,

“Legal experts said the manoeuvre could disadvantage sacked workers, already furious at being denied access to their redundancy entitlements.”

Apparently, The Australian and its ‘legal experts’ are not especially familiar with the workings of the PPSA or the Corporations Act once insolvency practitioners become involved.

Firstly, any creditor who had lodged a security interest on the PPSR prior to Palmer’s recent registrations will benefit from greater priority under the PPSA (at least a dozen of which were registered under the facilities that I personally oversee).

But, perhaps more importantly, in the context of The Australian’s article, are the implications of the Corporations Act for security interests registered within 6 months of a company failure.

While I’ve previously explored this at some length in my post ‘The PPSA vs The Corporations Act’, the short version is that 588FL of the Corporations Act provides a very clear deadline by which a registration needs to be lodged in order to be effective against a liquidator.

If a registration was not lodged within 20 business days of the security interest coming into force or was lodged during the 6 months leading up to the liquidator’s appointment, then “The PPSA security interest vests in the company” and the creditor’s security rights are effectively lost.

So, while opportunistic, last minute registrations may make for a relatively entertaining news story, they don’t make for very effective security.

Simplifying the Registration Process - Review Recommendations

When the results of the official Review of the PPSA were released earlier this year, I was tempted to hurriedly put out a number of posts describing its recommendations.  However, this temptation was tempered somewhat by the realisation that, not only was it something of a major job trying to sort through 394 recommendations in a 542 page report, it was highly unlikely that any of the report’s recommendations were likely to be implemented in the very near future.  

This was not from of any lack of confidence in the quality of the recommendations but merely because of the sheer number of recommendations being made and the fact that it took well over a year for the last PPSR amendment Bill to be passed addressing only a single issue (not counting the time taken to decide that a Bill was appropriate in the first place!).

Now that I’ve stuck my toe in the water of the Report’s recommendations in my last, catchily titled, post on the Cross-Collateralisationof PMSIs, I thought I’d draw attention to some of the Report’s recommendations aimed at simplifying the registration experience.

 Consumer property or commercial property?  - Recommendations 86 and 87 propose doing away with the distinction entirely.  No more confusion caused by the uninitiated thinking that ‘commercial property’ means the same thing as commercial premises.

Purchase Money Security Interest (PMSI) applies? - The PPSR’s ‘PMSI Box’ is widely misunderstood with many registrations rendered largely ineffective because a secured party didn’t understand what was meant by a Purchase Money Security Interest.  In both Canada & NZ there is no requirement to ‘flag’ a registration as a PMSI but, instead, PMSI priority will be determined by the nature of the security interest itself whenever competing security interests need to be assessed.  Where ROT suppliers are concerned, recommendation 241 proposing the removal of the PMSI Box is one of the biggest (if not the biggest) recommendations contained in the report.

The collateral is inventory? -  Recommendation 88 proposes doing away with the question, finding that it added little value and merely served to create confusion and uncertainty – as well as an opportunity for liquidators to dismiss an otherwise correct registration.

Current assets are subject to control? – On of the least understood of the questions facing anyone trying to lodge a registration against inventory, the Report’s recommendation 89 also proposes removing this question, again finding that it added little value and that it’s absence would be less confusing.

This registration is subordinate to another? – Again, this is found to be merely confusing and absent of value, thus recommendation 90 advocates its deletion.

Proceeds to be claimed? – Recommendation 180 seeks to make it clear that if a security interest over goods supplied is properly perfected by registration then it should automatically apply to any proceeds from those goods, thus recommendation 98 proposes the removal of the proceeds question when lodging a registration.

Giving of Notice Identifier (GONI) – Recommendation 122 suggests doing away with the expression “GONI” on the register and replacing it with a term that more clearly indicates its purpose as the supplier’s internal client reference number.  GONI was always a ridiculous and misleading term for something that was otherwise so straightforward.

In conclusion, should the Report’s recommendations be adopted, lodging a registration in the future will be simply a matter of identifying the grantor/buyer, choosing a collateral class, entering a brief (but suitably vague) description, choosing a registration period and pressing submit. Too easy!!

But, as I said at the outset, don’t expect much to happen in the short term.