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Contractors beware: What the PPSA means for you

Newsflash 01 May 2012

Most people are familiar with the idea of banks registering security interests like mortgages and charges over assets for residential and business lending. The sweeping reforms recently introduced by the Personal Property Securities Act 2009 (Cth) (PPSA) mean that many other businesses that have never registered security interests before, including within the building industry, will need to protect their own payment and ownership rights.

The PPSA does not apply to land or buildings. It fundamentally changes, however, the law and practice in relation to “interests” in most other kinds of property. This includes building materials, tools, machinery and equipment. Many of the basic processes used to protect ownership and rights to payment in building and subcontracting arrangements need to change. An understanding of the PPSA and the Personal Property Securities Register (PPS Register), which commenced in January 2012, is essential for all developers, builders, subcontractors and hire-companies.

The PPSA has expanded the traditional concept of ‘security interest’ to include other sorts of common commercial arrangements, including leases, hire purchase arrangements, the supply of materials, other goods, equipment on retention of title or deferred payment terms.

An important consequence of the PPSA for head contractors and sub-contractors in particular, is that any time valuable property is left on or supplied to a site prior to payment, a risk arises that title or the right to payment for that property could be lost unless rights and interests are registered on the PPS Register. A failure to do so may have far reaching consequences.

In what is known as the ‘Portaloo Case’ in New Zealand, which has had a similar system to our new PPSA since 2002, a building company, NDG, leased five port-a-loos from a hire company, Portacom. About the same time, NDG took out a secured loan from HSBC. HSBC registered its security interest over all of NDG’s assets. Portacom wrongly assumed that because it was the legal owner of the port-a-loos it did not need to register its interest against NDG. When NDG became insolvent, even though it had only hired and not purchased the port-a-loos, HSBC had the only registered interest in them. Portacom was not entitled to recover them and instead, they were sold off by the receivers.

Contractors can now face similarly serious consequences if the entity in possession of the property becomes insolvent or fraudulently sells the property. Why? - Because ownership is irrelevant under the PPSA. What is important is whether the “interest” has been “perfected” in one of the ways prescribed by the PPSA.

Examples of common arrangements that will now be affected include:

  • construction materials, equipment and other goods (e.g. frames, bricks, formwork, tiles, appliances) owned or purchased by the builder and supplied to the site prior to payment being received from the owner or developer;
  • tools, electrical or plumbing materials stored by sub-contractors in a site shed; and
  • cranes, forklifts, scaffolding or fencing supplied on hire to the site.

In each case, the PPSA will treat the person in legal possession of the property as having granted a security interest to the person or business who has supplied the property. Registering on the PPS Register ‘perfects’ the security interest, which means it will survive, for example, the insolvency of the developer and take priority over competing interests under the PPSA rules.

Like any major legislative reform, there are numerous complexities with the PPSA. Legal advice should be obtained to protect each contractual relationship and to establish whether a security interest has been created that should be documented under a PPSA agreement and protected on the PPS Register.


Andrew Whitelaw, Partner
Melbourne

Newsflash 01 May 2012
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