Australia: PPSA and the construction industry – a practical guide

The Personal Property Securities Act 2009 (PPSA) has come into effect and the online register which it establishes is now live. The PPSA aims to consolidate and standardise the registration of securities over personal property through a single online register. This article focuses on the impact of this new scheme on the construction industry and provides practical recommendations for principals and contractors in relation to registration and amending their transaction documents.

Broad overview of the PPSA

If you take a security interest over personal property, you must now register that interest to ensure your priority. Companies can no longer rely on legal ownership to protect their interest in goods.

The PPSA adopts a substance over form definition of 'security interest' – the interest must, in substance, secure payment or performance of an obligation. Further, the PPSA also deems some transactions which are not traditionally considered to involve security as creating security interests. An example of a deemed security interest is a lessor's interest in leased goods and the interest of a supplier who supplies goods under a retention of title clause.

As a general rule, if you part with possession of property, you must consider registration or else you run the risk of your interest being defeated if the party with possession attempts to grant a later security interest in that property or goes into liquidation.

Particular scenarios in the construction industry affected by the PPSA

Contractor's rights over its temporary works

Temporary works comprise works that are required for the completion of a construction project but are removed at the end of the contract (such as formwork and scaffolding). Before the PPSA, contractors were able to rely on their ownership of temporary works to protect their interests. Under the PPSA, a person who has possession of goods can pass good title to a purchaser, so there is a new risk that the contractor's interest in goods left on the principal's land may be defeated by other creditor's claims if left unregistered.

Principal's rights on take out

Many construction contracts entitle the principal to take over the contractor's construction plant and works in the event of default by the contractor. This is likely to be considered a security interest under the PPSA as it secures performance of the contractor's obligations and therefore must be registered to ensure priority.

Retention of Title

It is common for supply contracts to include a clause providing that title to the goods will not pass to the purchaser until full payment has been received. Under the PPSA, such a clause will give rise to a security interest in favour of the supplier and must be registered to be able to enforce it against third parties.

Lease of Plant Equipment

The owner of leased equipment could traditionally rely on its legal title to the goods for protection. Under the PPSA, if the lease comes under the definition of a 'PPS Lease' then the owner's interest in the leased goods will be a deemed security interest. The leased goods will be at risk if the owner does not register this interest.

What changes need to be made to construction documents?

Waiving PPSA obligations

Chapter 4 of the PPSA provides procedures for notices and enforcement on default which run parallel to any enforcement rights otherwise agreed to between parties. Subject to some restrictions, parties can vary or contract out of these procedures.

Further, certain administrative rights and obligations may be waived by parties. For example, a person holding a security interest in goods (secured party) may insert a waiver clause into its contract providing that the grantor of the security interest waives its right to receive notice of verification statements (a statement which the secured party receives upon registration).

Undertakings

A secured party may want to obtain an undertaking that their counterparty co-operates in relation to executing registration. This may include signing and producing documents and providing information on request for the purposes of obtaining registration.

A secured party may also include a clause prohibiting the other party from creating any further security interests over the property.

Restricting the disclosure of information

Section 275 of the PPSA provides that certain 'interested' parties can request documents and information relating to a registered security interest. This may mean that potentially confidential information can be disclosed to third parties. Section 275(6) allows parties to refuse information requests if a confidentiality provision which provides that neither party will disclose or authorise the disclosure of such information is included in their contract. However this is subject to exceptions contained within s 275(7).

Conclusion

Standard transaction documents will only need minor changes to operate under the PPSA. The requirements are largely administrative and companies will need to develop processes for ensuring timely registration of security interests. In addition, it is worth noting that an unregistered security interest is still a valid interest under the PPSA, although it risks losing priority. Registration can be seen as a commercial decision to mitigate this risk. It follows that registration may be an over precaution where the grantor is financially strong or the value of the property is low.

Whether the issue is to advise on amendment to transactional documents, setting up registration protocols, attending to registration or advising on priorities, Gadens is happy to assist.

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This report does not comprise legal advice and neither Gadens Lawyers nor the authors accept any responsibility for it.