The Personal Property Securities Act 2009 (Cth) ('Act') and its impact on the construction, manufacturing and supply industries

If your business is involved in the construction industry whether as a builder, subcontractor, manufacturer, supplier or installer, you face the risk of significant losses if you ignore this new Act.

This Act has overhauled the laws relating to the registration, priority and enforcement of security interests and applies to virtually all personal property other than real estate. The reforms affect not only consumer transactions, but many aspects of commercial and contract law.

A security interest is something that secures the payment or performance of an obligation. The Act applies to tangible property such as plant and equipment, goods and materials, as well as to intangible property, such as intellectual property rights, contractual rights and book debts.

Under the Act, there will be a single national register according to a uniform regime for creating valid security interests, with rules as to how the priorities between competing interests are to be decided.

The Act impacts upon the performance of construction and engineering contract as well as the manufacture, procurement, supply and installation of plant, equipment, temporary works, goods and materials.

October 2011

In October 2011, various existing property security registers will be "migrated" to the Personal Property Securities Register. However, the changes to the law mean that the migration will be far from comprehensive. There will be a 24 month transition period, allowing those with security interests that were not required previously to be registered and those on registers, which will not automatically migrate, time to register.

There will be only temporary protection for security interests that cannot be migrated to the PPS Register. This means that an existing security interest may keep the priority it had before the Act commenced. Although secured parties will have temporary protection for 24 months, parties to contracts should register their security interests to avoid losing priority at the end of the transition period.

In short, come October 2011, both existing security interests and security interests that arise after the introduction of the Act require immediate registration in order to have the best possible protection and gain priority over other secured interests. The risks of doing otherwise are too great.

If a business fails to register its security interest, this could cause it to lose its priority against other parties who also have a secured interest.

The party that gives the security is called the "grantor", and the party taking the benefit of the security is the "secured party". Depending on the transaction, this can be easy or more challenging to define at first instance.

Retaining title to goods and materials

Many businesses sell goods on the basis that the purchaser does not own the goods until the full price has been paid. This is known as "retention of title". Under the Act, retention of title clauses will need to be registered in order to give the best legal protection.

Where a retention of title clause is not registered within the applicable time limits, it is also possible that the holder of the interest in them (the party selling them, for which payment has not yet been received) can lose the interest if, for some reason, the purchaser sells them to a third party buyer, for new value, even if the buyer has notice of the interest.

If a supplier of construction goods and materials sells them with a retention of title clause in the supply contract, it is the customer (say, the builder / head contractor or other contractor) who is the grantor of a security interest and the supplier who is the secured party.

This can be a challenging concept for suppliers to grasp, as a supplier's natural reaction would be to ask "how could a supplier, who has not given away title to the goods, become just the secured party and the builder being the customer become the grantor of a secured interest?". But this is the way the Act works.

Lease / hire agreements

In the same way, if goods, plant or equipment are leased, it is the lessee (the user of those things) who grants the security interest in favour of the lessor. Whether the lessor actually is the owner of the goods does not affect this for the purposes of the Act.

Where plant and equipment are leased long term or indefinitely due to the commercial relationship between two parties, the terms of trade need to be adjusted and security interests need to be registered.

If the lessor does not register the security interests (in essence, telling the world that "this is my property"), then the lessor will risk having what is known as a deemed but unperfected (essentially, unregistered) security interest, being a lessor under a PPS Lease. This could translate into losing the property completely if the lessee builder becomes insolvent, allowing a liquidator, administrator or secured creditor access to the property.

How else does this affect the construction industry and related sectors?

• Suppliers of goods and materials need to review their terms of trade in order to make them consistent with the Act and to implement business processes to register security interests.

• Lessors of construction plant and equipment need to do likewise. The Act captures plant and equipment hire arrangements where the lease is for an indefinite period or for more than a year, or a term of 90 days where the leased plant or equipment has a serial number that must be used in registering it under the Act.

• Address intellectual property rights, depending on the project delivery model.
• Bank guarantees and retention monies clauses need to be revised. Bank guarantees and retention monies are "Liquid Assets" under the Act. The enforcement procedure for a security interest in a liquid asset such as a bank guarantee or retention monies is simpler than for other assets such as a charge over plant and equipment, or retention of title arrangements for goods and materials. In relation to enforcing bank guarantees or having recourse to retention monies, the legislative Liquid Asset provisions are in addition to the construction contract
• It is vital to register the security interest, such as money owing under a plant or equipment lease, within the required time. If a builder goes insolvent and its supplier has failed to register the security interest in the leased plant or equipment, then the lessor may not be able to recover or maintain any rights over the plant or equipment.
• Goods and materials that obviously do not form part of a construction project need to be dealt with specifically. For example, temporary works such as extensive form work and scaffolding, which can be left on a purchaser's or principal's site, will need to be registered. In the absence of registration, a contractor's title in temporary works may be at risk, so that the principal or a liquidator may sell or grant security over the temporary works.
• Form work and scaffolding hire companies should register their interests to protect against the risk of customer insolvency, as priority can be lost otherwise. Key construction plant and equipment should be registered in addition to form work, scaffolding and other equipment, such as temporary site offices and mobile cranes being sold to third parties with retention of title clauses.
• There are also special rules that apply to property that must be described by a serial number, which includes intellectual property rights such as designs, patents, trademarks or a licence over any such intellectual property rights.
• Contractual restrictions on assignments of debts under contracts may not be effective. In other words, the other party to the contract could assign to new parties its rights in relation to amounts payable by you under contracts, even if you do not want to consent to this.
• Confidentiality issues arise – some parties can request copies of the security agreement that creates the security interest. Although there can be confidentiality agreements between the parties, they may not be effective in preventing access if there is a default.

Assess "take out" provisions in construction contracts. Many construction contracts allow the principal to take the works out of the hands of the contractor after the contractor defaults, and allow the principal to take control of and use the contractor's plant and equipment in order to complete the works. Sometimes such clauses extend to being able to sell and use the proceeds for compensation. In order to give maximum effect to such clauses, these interests need to be registered.

• Do your due diligence and work out your existing contracts and transactions that may be affected – if necessary, get legal advice
• Pay particular attention to standard form contracts, "home grown" contracts and "contractual dinosaurs"
• Look at registration – identify the existing security interests requiring registration during the transitional period and the affected assets
• Set up a PPSA management, compliance and registration team

What your business now needs to do

security for performance provisions. A holder of a security interest under a construction contract may consider contracting out of the enforcement of security provisions of the Act, as these provisions may impose additional obligations and procedures to those in the contract.

• Implement a maintenance and training regime.

Help is on its way!

Any significant change to the law can be daunting. However, our law practice is accredited by the Law Institute of Victoria as Commercial Law Specialists. We have a team of lawyers who can help with all legal and compliance concerns you may have. Please just email or phone us on 1300 205 506 and help is on its way!

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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