Anyone who provides any type of finance or credit for sale of goods or leases or hires out plant and equipment must become acquainted with the new Personal Properties Securities Act (“PPSA”) which came into effect on 30 January 2012.
The PPSA is a significant piece of legislation, reforming the law relating to security interests in property (other than real estate). It deems many arrangements to be securities which have never previously been seen as securities and can have some odd and even arguably unfair results. If you entrust your personal property to be held by anyone else, you need to think about the new PPSA regime or you could lose that property.
This article considers the impact of the PPSA on those involved in the construction industry, particularly those businesses which sell goods on a retention of title basis.
The PPSA regime
The PPSA applies to almost all forms of tangible and intangible property including money, goods, accounts receivable, motor vehicles, leases, hire purchase agreements and documents of title.
Any party with an interest in the personal property which for any reason is held, even temporarily, by another person or company, needs to register its security interest on the PPSA register to cement its ownership rights. The new general rule is, if you let someone else have possession of any item of property, you must consider registering your rights to that property otherwise you run the risk of losing your property rights to a creditor or banker of that party or that party’s liquidator. In most instances, you must register your interest in the goods before they are delivered into the possession of your customer.
PPSA and the Construction Industry
The PPSA affects multiple parties including principal, contractor, sub-contractors and design consultants and applies to many different types of construction property including, as follows:
- Temporary Works: Before the PPSA, contractors were able to rely on their ordinary ownership rights to property such as formwork, scaffolding and other plant and equipment and to remove those items at the end of the project. Now, under the PPSA, the project principal’s liquidator, being in possession of the works can convey good title of those items to a third party unless the contractor has registered its rights to the works under the PPSA.
- Take-out and/or Step-in Rights: Many construction contracts provide that, in the event of default by the contractor, the principal may take over the contractor’s construction plant and works, or perform the contractor’s obligations in place of the contractor. Prior to the PPSA these rights were simply contractual rights in favour of the principal/developer against the contractor. Now they need to be registered on the PPSR as security interests. If not, the principal risks being deferred to other, PPSR-registered claims on the contactor, for example, from the developer’s financier.
- “Romalpa” or “Retention of Title” (ROT) clauses: a key component of most procurement and supply contracts is a ROT clause which provides that ownership of goods does not pass to the purchaser until the full price is paid. Under the PPSA, ROT clauses are regarded as security interests. For example, a supplier to a contractor who has say, 30 days to pay for the goods should register its interest in the goods against that contractor. However, if the goods have been incorporated into the construction they have arguably become fixtures, to which the PPSA does not apply.
- Leases of Plant & Equipment: this is similar to the position of the supplier of temporary works. If the contractor defaults, the principal/developer will want to exercise its standard contractual right to retain constructional plant until the contractor fulfils its obligations under the contract. If the owner of plant and equipment who hires it out has registered its interest on the PPS register, its claim will normally prevail over the principal/developer’s right to the plant and/or any sale proceeds, even if that right predates registration of the owner’s interest in the plant. If the owner of the plant has not registered its interest it could lose its plant to the principal/developer or to the liquidator of the contractor or liquidator of the principal/ developer or the lender to the principal/developer.
What should you do?
Standard construction and other transaction documents will need only minor changes to operate under the PPSA. Developers, contractors, suppliers of goods on credit and owners who hire out plant and equipment will have to (if not already) implement administrative processes to ensure timely registration of security interests under the PPSA regime. Note though that unregistered “security” interests are still valid, but if you don’t register you risk losing out to an interest with a higher priority. So, ultimately whether or not you register under PPSA regime is a risk mitigation issue. For instance, registration of a security interest on the PPS register may not be considered absolutely necessary if the party you are dealing with is undoubtedly financially sound and/or the value of the property is low.
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This article is intended to provide general information in summary form on a legal topic, current at the time of publication. The contents do not constitute legal advice and should not be relied on as such. Formal legal advice should be sought in specific circumstances.