What is the PPSA?
The Personal Property Securities Act 2009 (Cth) (PPSA) will provide a federal, streamlined approach for dealing with security interests in personal property. It will impact a broad spectrum of industries, including construction.
The current target date for commencement of the PPSA is 31 October 2011. Accordingly, it is now timely for organisations to consider the implications of the Act on their businesses and to determine what action, if any, needs to be taken in anticipation of the commencement of the new regime.
The PPSA sets up a register on which interested parties can protect their security interests in personal property.
How does the PPSA work?
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The PPSA regulates security interests in personal property, which (generally speaking) is all property other than land and fixtures, subject to some exclusions. An excavator, a lift intended for installation and even intellectual property can all constitute personal property.
A security interest is an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation. The PPSA also applies to certain deemed security interests that include many equipment leasing arrangements.
How does the PPSA apply to the construction industry?
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It is likely that the PPSA will apply to many different types of personal property which play a role in construction. By way of example, a key component of most procurement and supply contracts is the principle of retention of title (ROT) whereby ownership of goods does not pass to the purchaser until the full price has been paid. Under the PPSA, ROT clauses will be regarded as security interests and should be registered to give the vendor the best possible chance of the interest being legally protected against competing security interests in the property.
Consider also this scenario:
- a principal engages a contractor under an AS 2124 – 1992 form of construction contract
- clause 44.6 of that contract provides that the principal can, when exercising rights to take works out of the contractor’s hands after contractor default, retain the constructional plant to secure the performance of payment obligations of the contractor and if a payment obligation is not satisfied “after reasonable notice” the principal can sell the equipment and retain the proceeds up to the value of the debt – the standard 44.5 wording was amended to remove the precondition to the principal’s rights that the plant be owned by the contractor
- the principal exercises this right
- when the work is complete, the contractor owes money to the principal
- the principal retains the crane used by the contractor to secure the performance of that payment obligation (being aware of the PPSA when it entered into the contract the principal registered its security interest in the contractor’s equipment, including the crane, at that time)
- unknown to the principal the crane is actually owned by a third party owner (a leasing company) who leased that crane to the contractor after the commencement of the PPSA. This leasing arrangement is also a security interest as either an in-substance security interest or a deemed security interest under the PPSA. However, the leasing company was not aware that its ownership interest in the crane could be lost to the principal and did not register its interest on the new register set up under the PPSA
- the principal after giving reasonable notice to the contractor still hasn’t been paid and gives notice in accordance with the PPSA that it is going to sell the crane and keep the funds
- the principal then sells the crane and retains the funds to the detriment of the owner (the leasing company)
- the leasing company, to protect its rights, should have registered its security interest in the crane when the lease was entered into.
Before the introduction of the PPSA, the principal’s interest in the crane would not have been registrable and the interests of the leasing company as owner of the crane would have prevailed over that of the principal.
What should you do?
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- Consider now what could be security interests under the PPSA in your current and future projects.
- Once you have identified your security interests, make sure that there is a written security agreement in place that covers the collateral that has been signed, adopted or accepted by the grantor of the security interest and register the security interest or take possession of the property (if you have an entitlement to do so) as soon as possible to protect your security interest against any other third parties (however possession by seizure is not sufficient).
- If you are the principal in the above type of example, you should ensure that your contract satisfies the requirement of a security agreement and register your security interest as soon as possible, to avoid your interest being trumped by another person with a security interest in the same property.
- If you are the leasing company in the above example (as the owner of the crane) you should register your security interest as soon as it arises. This interest would normally be a “purchase money security interest” that can rank ahead of most other security interests if it is registered within tight timeframes.
A more detailed explanation of the principles and terminology that apply under the PPSA.
We can assist you to review relevant documentation and draft clauses to protect your interests. Please contact one of the lawyers listed on the right hand side if you require advice on the PPSA and its possible application to your business.