Australia: PPSA and the Construction Industry

What is the PPSA?

The Personal Property Securities Act 2009 (Cth) (PPSA) is a law about security interests in personal property which applies Australia-wide. The PPSA is one of the most significant commercial law reforms in recent times and came into effect on 30 January 2012. The PPSA affects all "security interests" in personal property and impacts a broad spectrum of industries, including construction.

How does the PPSA work?

The PPSA regulates security interests in personal property, which is all property other than land and fixtures (subject to some exclusions) provided for by a transaction that secures payment or performance of an obligation. An excavator, crane, a lift intended for installation and even intellectual property can all constitute personal property. The PPSA also applies to certain deemed security interests that include many equipment leasing arrangements.

What is a security interest?

The PPSA covers security interests that we already recognise such as charges and mortgages. However, it also covers other arrangements which were not previously considered to be security interests, for example, conditional sale agreements, retention of title clauses and some leases of goods. Importantly, if Australian courts follow the approach of New Zealand courts, lawful possession of personal property (i.e. without legal ownership) is likely to be sufficient for a grantor to grant a security interest over personal property.

Other transactions are deemed to be security interests for some purposes of the PPSA, whether or not they secure debts or obligations. For example, a commercial consignment is deemed to be a security interest, and so is a Personal Property Securities Lease (PPS Lease). Broadly, a PPS Lease is a lease or bailment that can exceed one year, or can exceed 90 days for certain goods described by serial number. A transfer of an account or chattel paper (such as a lease agreement) is also a deemed a security interest.

Impact on the Building and Construction industry

The PPSA will have a significant effect on the Building and Construction industry. Some examples where security interests may be created are as follows:

  • Plant and Equipment leases – the owner of leased equipment could traditionally rely on its legal title to the goods for protection. Under the PPSA, any leases on vehicles or bailments of cranes or equipment may be caught by the PPSA. This could include IT equipment, portable buildings and construction materials. The leased goods will be at risk if the owner does not register this interest.
  • Retention of title – any situation where a vendor retains title equipment will be caught by the PPSA. This includes situations where title transfers at a later date (e.g. a hardware roll-out agreement where title transfers on payment).
  • Consumer contracts – any consumer contracts whereby a vendor maintains ownership of any hardware will be caught. This may include mobile phones, set-top boxes or modems.
  • Intellectual Property – software licences are not security interests under the PPSA. However, the PPSA makes it easier for a software developer that custom develops software for customers on an individual basis to take security over that intellectual property asset, such as software or a software licence, through a retention of title clause.
  • Goods provided as security – a company may finance its retail stock by providing security over the stock. This may include goods delivered on consignment.
  • Assignment of receivables – many technology contracts include assignments of receivables (e.g. for the purposes of factoring). These will be caught by the PPSA.
  • Take-out rights – 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 must therefore be registered to ensure priority.
  • Contractor's rights over its temporary work – temporary works comprise works that are required for the completion of a construction project but are removed at the end of the contract (e.g. 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.

Why is Perfection important?

All security interests will need to be perfected in accordance with the procedures set out in the PPSA (which includes registration, possession or control). In the majority of circumstances, registration will be the appropriate means of perfection. Perfection of security interests is important because a security interest has to be perfected to survive the insolvency of the grantor and protect the priority of the security interest over an unperfected security interest.

What should you do?

We recommend that you review all documents used in your organisation to determine if any security interest is or may be granted. If security interests are granted under those documents:

  • amendments will need to be made to account for the PPSA; and
  • procedures will need to be put in place for the security interest to be perfected.

Future steps to be taken include the following:

  • consider what could be security interests under the PPSA in your current and future projects;
  • identify existing registered securities, and check whether existing registered securities are properly migrated. Secured parties should participate in the "find and claim" service to assist them to identify and claim migrated security interests;
  • consider whether you need to take further steps, such as taking control of particular collateral or lodging another financing statement to notify serial numbers or other details;
  • consider whether your organisation is party to agreements that were not previously registrable but which will be considered security interests under the PPSA and ought to be perfected (e.g. a flawed asset arrangement or an equitable share mortgage granted by an individual or by a foreign entity with no presence in Australia);
  • lenders should consider whether they are exposed to any borrowers whose business puts them in the position of a secured party (e.g. as a lessor under an equipment lease or a supplier of goods on retention of title terms);
  • update standard agreements to incorporate provisions to deal with the PPSA;
  • update terms of trade and register retention of title security interests within purchase money security interest (PMSI) timeframes;
  • ensure that there is a written security agreement in place that covers the collateral that has been signed, adopted or accepted by the grantor of the security interest and register the security interest.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Keith Redenbach
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