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 indeed.
However, contractors or suppliers on credit need not resign themselves to this fate. Instead, contractors can secure unpaid debts:
- 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 subcontractor/supplier.
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 site:
- 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 principal.
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 principal's debt.
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.
