If you administering a contract:
- where goods or equipment are located at another party’s premises;
- that involves hire equipment on a long-term basis;
- that contains Romalpa (retention of title) clauses;
Then, the Personal Property Securities Act 2009 (Cth) (PPSA), that came into effect on 30 January, 2012, could affect your business.
The PPSA supersedes approximately 70 Acts and 46 registers that deal with personal property, and makes fundamental changes to the laws governing personal property in Australia.
What is the aim of the PPSA?
The PPSA aims to standardise the registration of securities over personal property, through a single online Personal Property Security Register (PPS Register) governing security interests with respect to personal property.
The PPSA introduces priority rules for competing security interests based on the concept of “perfection”. A perfected security interest is one in which the interest has been registered on the PPS Register, or in which the secured party has either possession or control (for certain limited types of property) of the collateral. In general, perfected security interests take precedence over unperfected security interests, with the perfected interests receiving precedence according to the date of perfection.
The exceptions to this order of priority are:
- interests perfected by control (for certain limited types of property) take precedence over interests perfected by possession or registration; and
- a registered security interest that arises from providing the purchase money for the collateral (Purchase Money Security Interest, or PMSI) takes precedence over a perfected security interest that is not a PMSI.
How does the PPSA affect the construction industry?
The PPSA affects the following aspects of the construction industry:
- the operation of Romalpa, or retention of title, clauses in procurement and supply contracts;
- a principal’s right to take construction plant out of the contractor’s hands in the event of a contractor default;
- a contractor’s right over its temporary works on site; and
- equipment hire contracts.
Procurement and supply contracts
Retention of title clauses were and remain common in standard supply contracts. They allow the supplier to retain title to the goods until the goods have been paid for in full by the purchaser. Retention of title clauses are generally not able to be registered, but under the PPSA all retention of title clauses will need to be registered to effectively protect the supplier’s interest. Failure to perfect will lead to a loss of title.
A principal’s right to take construction plant out of the contractor’s hands
Under many construction contracts, a principal will have an express right to take the work from the contractor and seize the contractor’s equipment in the event of a contractor default. Under the PPSA, a principal will have to register such take-out powers as a security interest to ensure that those powers are fully effective (particularly against a liquidator).
A contractor’s right over its temporary works
Temporary works such as scaffolding and formwork are often left on the principal’s site during construction. These works never form part of the works under the contract and title remains with the contractor. Under the PPSA the “nemo dat” rule (no one can give better title than they possess) may not protect a contractor from the possibility that the principal (or a liquidator) will sell or grant security over the temporary works. Contractors must fully describe the temporary works in their contracts and have their interests registered.
Equipment hire contracts
Equipment hire arrangements may potentially be caught by the PPSA. A hire arrangement will be a PPS Lease as defined by the PPSA if it has an effective term of more than one year, or a term of 90 days where the leased equipment has a serial number that is required to be used in the registration of that equipment under the PPSA.
Where certain equipment hire contracts are not PPS leases, but “in substance secure payment or performance of an obligation”, then these will, in any event, be security interests that should be registered to protect rights of the supplier. A PPS Lease is deemed to be a security interest under the PPSA and therefore it is necessary to register the lease and protect its interest, against third parties.
Protecting your client’s security interest under the PPSA
Under the PPSA the secured party must take the following steps to ensure its interests are protected:
1. Identify security interests
Identify the goods and equipment owned by the company and any existing arrangements under which the company possesses a registrable security interest over those goods (e.g. equipment leases, temporary works).
2. Ensure the interest is enforceable
A security interest is only enforceable against a third party if it is attached to the property. Attachment occurs when either:
- the secured party has the property in its possession; or
- if the secured party enters into a signed, written agreement with the grantor with adequate identification of the goods where the agreement reasonably indicates the grantor’s intention to adopt or accept the written terms.
3. Perfection of the interest
The PPS Register commenced in January 2012. It operates as an “electronic noticeboard” of security interests over personal property. To register an interest, an application form known as a financing statement must be submitted either online or by providing a hard copy to the Registrar Contact centre. An application fee is payable and most fees are anticipated to be nominal.
In many cases, the first party to register its interest on the PPS Register will have priority over other claims to the same asset. Those considering taking an interest over an asset will be able to search the PPS Register to determine if there are any competing interests over that asset.
4. Maintain the registration
A secured party must periodically renew its registration in order to maintain its priority position on the PPS Register. Registration lasts between seven years and an indefinite end time, depending on the nature of the property over which the interest is secured.
What happens if a security interest is not registered?
While it is not an offence to fail to register a security interest under the PPSA, an unregistered security interest may prove to have unfavourable consequences for a party which has failed to register.
Failure to register may result in a party:
- losing priority to all registered holders of security interests over those goods; and
- being treated as an unsecured creditor to prove in a liquidation process, and receiving payment only to the same percentage as all other unsecured creditors, after secured and priority creditors have been paid in full.
The transition period and temporary perfection
From January 2012, various existing property security registers will be migrated to the PPS Register.
A 24-month transition period also began at that time, to allow holders of security interests that were previously not required to be registered and those on registers, which will not automatically migrate, time to perfect their interest. During this period, security interests that cannot be migrated to the PPS Register will receive temporary perfection. Temporary perfection means that an existing security interest may keep the priority it had before the PPSA commenced.
While secured parties will be protected by temporary perfection for 24 months, parties to contracts which extend for more than 24 months should register their security interests to avoid losing priority at the end of the transition period.
How should you prepare?
We strongly recommend that:
you familiarise yourself with the legislation, how it operates and the statutory requirements for compliance by visiting the government website – http://www.ppsr.gov.au/Pages/ppsr.aspx; and
You contact Construction Trade Industry Lawyers to obtain advice and assistance on this major change to the way you do business. 12-Leg-0201