If a contractor happens not to have substantially completed its
own works under contract at the time of its principal's
insolvency, it may have to look outside the contract for a legal
entitlement to be paid for its services. Absent some enforceable
security for payment, the unpaid contractor will then likely be
relegated to the status of low-priority, unsecured creditor. That
far down the bread queue, getting fed becomes very unlikely
However, contractors or suppliers on credit need not resign
themselves to this fate. Instead, contractors can secure unpaid
against the land, and, thanks to the Act, the goods and money
of the principal in the case of the head contractor which has a
direct contractual relationship with the principal; and
in all other cases, again thanks to the Act, against the goods
and money of the contractor which engaged them as
Where debts are sought to be secured against property other than
land (including building materials that have become part of the
land by being "affixed" to it), the Act may apply in
relation to the following of the contractor's property on
unused building materials;
retention monies; and
plant, equipment and contractor's tools of trade.
What kind of asset protection does the Personal Property
Securities Act give construction contractors?
Unused building materials are likely to have the following
security interests attached to them:
a special security interest known as a "purchase money
security interest" to secure the supplier's entitlement to
be paid the price for their purchase by the contractor; and
an ordinary security interest to secure the contractor's
entitlement to be paid for works under the contract by the
The purchase money security interest will give the supplier
"super priority" as against all competing interests. This
means that if the contractor has not paid the supplier for the
materials that it purchased on credit, the supplier will be
entitled to discharge its debt, with interest, by:
taking back the materials unless they have already been
integrated into the building works; or
otherwise, seizing the proceeds of the "sale" (i.e.
supply) of the materials to the principal (who will have
effectively "purchased" them at the time of their
delivery to site).
If the contractor has paid the supplier but has not been paid by
the principal for materials which have not yet been used in the
works, a security interest in those materials may allow the
contractor to take them back and sell them in satisfaction of the
Retention monies will, by definition, have been earned by the
contractor, but be retained by the principal. The contractor may
strive for priority over other creditors with respect to payment of
those monies in the event of the principal's insolvency before
payment, by registering a security interest over those monies
(either specifically, or as part of all the present and
after-acquired assets of the principal). It is only the lender of
those monies, if they are loan monies, that is likely to have a
superior security interest over them.
As for the contractor's plant, equipment and tools of trade
on site, clearly, the contractor will either own these or have
hired them from someone who does. However, when it comes to
identifying which property is available to satisfy the debts of the
insolvent principal, as far as the Act is concerned, ownership
means nothing. Rather, if the contractor's property is on the
principal's site and therefore, arguably, in the
principal's possession, then in the event of the
principal's insolvency, this may be enough to entitle the
principal's liquidator to seize and sell it in satisfaction of
the principal's debts. To guard against this risk, contractors
should consider registering a security interest against any
property to be left on site during the whole or any part of a
large, or particularly risky, construction project.
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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