It is now more than 18 months since the Personal Property Securities Act 2001 (Cth) (PPSA), which regulates "security interests" in personal property, came into force.
While many involved in the construction industry by now have an awareness of the PPSA, most are still coming to grips with precisely what the PPSA means for them. In this article we identify the top 5 issues under the PPSA which can catch principals and contractors out.
- Take-out rights under a contract
One of the biggest issues for principals and contractors is being able to recognise when a security interest under the PPSA arises. Traditional forms of security, such as charges and mortgages over personal property, are easily recognised as creating security interests for the purpose of the PPSA and cause little difficulty. It is when the PPSA extends to cover interests in personal property which have not traditionally been thought of as forms of security that principals and contractors can be caught off guard.
One such example of this is a principal's take-out rights under a construction contract. Most construction contracts contain terms enabling principals to take over the contract works in the event of contractor insolvency.
For example, clauses 39.4 to 39.6 of Australian Standard AS4000-1997 give a principal the right to take work out of the contractor's hands, take possession of certain materials and equipment to facilitate completion of the work and sell such equipment to cover debts owed by the contractor.
The recent New Zealand High Court decision in McCloy v Manukau Institute of Technology  NZHC 936 (1 May 2013) (which is likely to be followed in Australia) has held that such rights are a security interest for the purpose of the PPSA. As discussed below, if a principal fails to register this on the personal property securities register (PPSR), the principal could be prevented from enforcing these rights.
- PPS Leases
A further example of the PPSA extending to cover interests not traditionally thought of as being a form of security arises in relation to "PPS Leases".
A PPS Lease is defined under the PPSA to include a lease or bailment of personal property for a term of more than a year, or which may or actually does run for a term of more than one year. (For consumer goods and things with serial numbers it is 90 days.) The interest of the lessor or the bailor in the personal property in that case is deemed to be a security interest for the purposes of the PPSA.
It is the inclusion of bailments in the definition of a PPS Lease which is most likely to catch principals and contractors off guard. A bailment arises where possession of goods is held by someone other than the owner and the possessor is obliged to return the goods at some point in time.
For example, where payment is made in relation to materials or goods which are then held for an indefinite period by the supplier or some other party rather than being delivered to the purchaser, a PPS Lease will arise. In that case the purchaser's interest in the materials or goods purchased are deemed to be a security interest under the PPSA.
PPS Leases have a special super priority if registered in time – before delivery for inventory or within 15 days for other things. Unless the purchaser registers that interest on the PPSR, its claim to those materials or goods could be defeated by another party, despite the fact the purchaser is the owner of them.
- Consequences of failing to register
Registering an interest on the PPSR is the main way to "perfect" a security interest under the PPSA. The consequences of failing to register a security interest on the PPSR include the following:
- all unperfected security interests rank in priority behind perfected security interests.
In relation to take-out rights, this will mean that the security interest of the contractor's bank (which will probably have a registered charge) will rank in front of the principal's take-out rights. Similarly, the interest of a principal or contractor who pays for goods which are then held by the supplier for an indefinite period will rank behind the registered security interest of the supplier's bank; and
- all unperfected security interests are effectively void against administrators and liquidators.
This will mean that unregistered take-out rights will not be able to be exercised against an administrator or a liquidator of a contractor, and the ownership rights of a purchaser in goods paid for cannot be asserted against an administrator or liquidator of a supplier which retains in possession of those goods for an indefinite period.
Those with security interests which arise under construction contracts entered into before the PPSA came into effect on 30 January 2012 are likely to be protected from the above consequences until January 2014 by the transitional provisions under the PPSA. After January 2014 the old rules will no longer apply.
Where a failure to register a security interest on the PPSR is belatedly identified, that interest should still be registered at that later date. However, belatedly registering a security interest may not provide the principal or contractor with the protection they would otherwise have enjoyed.
Firstly, any security interests which may have been registered by others in the meantime will have priority. Secondly, it is impossible to obtain the super-priority conferred by purchase money security interests if registered late. Thirdly, security interests over companies that are not registered within 20 business days of creation will be void against a liquidator or administrator appointed within 6 months of the security interest being registered.
- Enforcing security interests
Chapter 4 of the PPSA sets out a number of provisions which a secured party must comply with when enforcing a security interest. The steps which principals and contractors must take in order to comply with the requirements of Chapter 4 may differ from those required to be taken in order to comply with the terms of the construction contract.
For example, clauses 39.4 to 39.6 of AS4000-97 provide that, before exercising the right to sell materials and equipment taken out of the hands of the contractor, written notice to the contractor must be provided.
Pursuant to Chapter 4, however, the principal would also be required to provide notice of its intention to sell those materials and equipment to any other party with a higher ranking security interest in the materials and equipment before that right could be exercised. Simply complying with the terms of the construction contract in that case would have resulted in the principal breaching its obligations under the PPSA.
- Applying proceeds following enforcement
Any proceeds realised as a result of the enforcement of a security interest must be applied in accordance with s140 of the PPSA. This obligation may be inconsistent with the terms of the construction contract.
For example, clauses 39.4 to 39.6 of AS4000-97 provide that the balance of proceeds from the sale of material or equipment taken out of the hands of the contractor must, after payment of the debt owed to the principal, be repaid to the contractor. This is inconsistent with s140 of the PPSA which would require the principal to pay the balance of proceeds to any other party with a security interest in the materials or equipment before the contractor is paid.
Again, simply complying with the terms of the construction contract in that case would result in the principal breaching the PPSA. In this regard, where the terms of construction contract are inconsistent with the PPSA, it is the PPSA which must be complied with.
Given the number of potential pitfalls which principals and contractors face under the PPSA, we recommend that advice be sought whenever principals or contractors are contemplating:
- entering into contracts relating to personal property;
- obtaining security in respect of personal property; or
- enforcing an interest in personal property.
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.