Personal Property Securities and the Construction Industry

By Belinda Montgomery, Leonard McCarthy and Sandra Steele, K&L Gates, Sydney

It seems hard to believe but come 30 January 2016, the Personal Property Securities Act 2009 (Cth) (PPSA) and the register it established will have been operating for 4 years. The PPSA has introduced far reaching conceptual and practical changes to Australian law. If you are part of the construction industry, to protect your rights, you need to ensure that any registerable interests are registered on the Personal Property Securities Register (PPSR).

How is the PPSA relevant to construction industry players?
Practices and concepts within the construction industry throw up a variety of ‘red button’ issues arising under the PPSA. These include:

• equipment hire and temporary works – if the hire of equipment and temporary works is for more than a year, in certain circumstances, the supplier must register its interest to avoid losing the property, should the party to who the equipment and temporary works have been supplied, become insolvent. This also applies to certain goods required to be registered by serial numbers (e.g. motor vehicles), if the hire of the goods is for more than 90 days and the hire agreement was entered prior to 1 October 2015;
• retention of title provisions – commonly, items are sold or supplied on the basis that they remain the property of the supplier unless and until the purchaser pays the purchase price for the items. For the purposes of the PPSA, this creates a security interest and should be registered;
• retention money– although this is a ‘grey’ area under PPSA, the right to retain money by a principal (in respect of a head contractor) or a head contractor (in respect of a subcontractor) may constitute a security interest under the Act. Arguably therefore, a retention agreement in a construction contract constitutes a security interest created by the retaining principal or head contractor (as relevant) and should be registered; and
• ‘step in’ rights – under a construction contract, if a contractor materially breaches the contract, it is common for the principal to have the right to take work out of the hands of the contractor to complete the works. The right to use any of the contractor’s property to complete the work on site, needs to be registered under the PPSA by the principal.

Practical considerations
The PPSA and PPSR come into particular focus when a company goes into insolvency.

The Hastie Group is a useful case study. The companies in the Hastie Group carried on a diverse engineering business with a focus on mechanical, electrical, plumbing, refrigeration and ventilation services.  In 2011, the revenue of the Hastie Group was approximately $1.9 billion. However, in May 2012, administrators were appointed to the Hastie Group. At that time, the business had approximately 1,600 projects underway throughout Australia and was engaged on approximately 1000 sites. It also operated from up to 40 different locations, in each state and territory of Australia.

The administrators appointed to the Hastie Group had a substantial amount of equipment in their possession belonging to third parties. The administrators were concerned that they would face particular difficulties trying to ascertain what property was in the possession of the Hastie Group and what rights the administrators should exercise in respect of that property.

There were 995 registrations noted in the PPSR. However, most of the registrations failed to specify in a meaningful way, which piece of equipment or security agreement the registration related to. The administrator wrote to all creditors who had an interest recorded against the Hastie Group in the PPSR, requesting that the creditor urgently provide notification of its interest. A substantial majority of those creditors failed to respond to the correspondence. Many of the creditors who did respond, failed to provide details that allowed the Administrator to identify which particular property the security interest related to.

The administrators applied (and obtained) orders under the Corporations Act 2001 (Cth) enabling them to sell the unclaimed equipment and keep the proceeds in a separate account until those claiming an interest in the property sold were able to establish their claim. If no claim was made within a certain period, then the administrators were able to use the proceeds of sale for the benefit of general creditors.

This represents the practical difficulties that arise under the PPSA and PPSR and the need for secured creditors, including lessors, to be able to quickly identify their equipment.