Australia: Business practice considerations for universities under the PPSA

Universities procuring goods and entering into supply or construction agreements need to understand how the Personal Property Securities Act 2009 (Cth) (PPSA) may affect their business practices and contracting requirements.

In this article we cover issues regarding the PPSA that were previously raised in the 2013 and 2014 SOUL Conferences.

Confidentiality

The PPSA obliges a secured party to provide certain information to the grantor of a security interest, a person with another security interest in the relevant personal property or an execution creditor with an interest in that property. The information that may be requested by these persons includes a copy of the security agreement, a statement of the amount or obligation secured (and the terms of payment or performance of the obligation), approval or correction of a list identifying personal property that is the subject of the security interest, and approval or correction of the obligation amount, terms of payment or performance of the obligation.

The secured party doesn't need to comply with such a request if complying means it would disclose information protected by a duty of confidence. The secured party also doesn't need to comply with such a request if the secured party and the debtor (the person owing the payment or performance of the obligation—even if they're also the grantor) have agreed in writing that neither party will disclose the information. In order for the written agreement to be effective against a disclosure request, it must be made by the time that the relevant security agreement is made. A written agreement can't be used to refuse a disclosure request if the debtor is in default under the security agreement at that time, although the duty of confidence ground may still be invoked.

Universities entering into contracts, under which security interests are granted to them, should consider including appropriate provisions limiting the university's obligation to provide information to requesting parties, other than the grantor, regarding those security interests.

Retention monies, bank guarantees and insurance bonds

Contracts that universities enter into may include provisions deferring payment of the whole of the contract price until the counterparty has performed certain obligations. The contract may also require the counterparty to provide a bank guarantee or insurance bond to secure the performance of their obligations. This is a standard approach, particularly in construction contracts. In such contracts, the university may withhold payment (often 5% of the contract price) until the works have been completed, with half of that amount payable to the contractor upon completion and the other half payable when the defects liability period expires following completion. Alternatively, the university may pay the contractor the full contract price but require the contractor to provide a bank guarantee or insurance bond (often 5% of the contract price), which reduces in amount in the same manner as payment of retention monies.

A question arises as to whether retention monies, bank guarantees or insurance bonds—each existing to secure performance— constitute a security interest. If so, the university should register that security interest on the Personal Property Securities Register to protect those forms of performance security. Bank guarantees and insurance bonds typically contain an unconditional obligation on the issuer to make payment upon demand, although the obligation may be conditioned by the instrument having an expiry date. That right of the beneficiary under the instrument is not an interest in personal property and, accordingly, is not a security interest.

The position regarding retention monies is more complicated. Where retention monies are retained by the university as part of its working capital until the time they are to be paid to the contractor, there is no identifiable personal property created. It follows that, in those circumstances, no security interest is created. If retention monies are drawn down and placed in a separate bank account or are held on trust for the contractor, the university's contractual rights in relation to those funds will constitute a security interest. In these circumstances, the university should register its security interest. It would also be prudent for the university to restrict the contractor from registering its own security interest in retention monies held in a bank account or upon trust. It is noted, however, that any prior registered security interest (e.g. by the contractor's financier) will have priority ahead of the university's security interest. It is therefore recommended that retention monies are not separated from the university's working capital.

Intellectual property licences

An intellectual property licence will not be considered a security interest except in limited circumstances. Whether an intellectual property licence constitutes a security interest depends upon the licence being transferable by the licensee. If a university is granted an intellectual property licence that is not transferable, it will need to consider whether that licence constitutes a security interest.

Liens

A lien in personal property arising under common law, in equity or by statute is not a security interest. The PPSA provides that such a lien under common law or in equity has priority over a security interest if the lien arose in relation to providing goods or services in the ordinary course of business and without the knowledge that the lien constitutes a breach of the security agreement that provides for the security interest. This priority position also applies to statutory liens if stated by the relevant jurisdiction's legislation. An example of this is the Building and Construction Industry Security of Payment Act 1999 (NSW), which gives priority to the statutory lien in respect of unpaid amounts over unfixed plant and materials.

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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