PPSA for Construction / Infrastructure
Commencement of Personal Property Securities Register
As if those in the construction/infrastructure industry do not have enough to think about at this time of the year (e.g. pre-shutdown project deadlines, last-minute payment claims or adjudication applications, new health and safety laws, etc), the Personal Property Securities Register (Register) under the Personal Property Securities Act 2009 (Cth) (PPSA) commenced on 30 January 2012.
It is critical for industry participants to be aware of the implications of the PPSA and ensure that they are sufficiently prepared to implement the necessary measures to protect themselves once it commences. Failure to register interests under the PPSA can lead to your interests being defeated by other registered security holders or liquidators.
Some of the issues that you need to be aware of are:
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Registration of 'step-in' rights
Many construction contracts provide for a power to 'take work out of the hands' of a contractor or sub-contractor in the event of a substantial default or an insolvency event. In most cases, this power is supplemented by a right to take over and use the plant, materials and equipment of the contractor or sub-contractor in order to complete the relevant work.
These 'step-in' rights are likely to create a security interest for the purposes of the PPSA. In order to preserve the protection afforded by those step-in rights, it may be necessary to register the contracts that may give rise to such a step-in right.
Obviously, for head contractors in particular (who are involved in multiple projects, each with multiple trade/subcontract packages at any given time), the process of registering every such contract can be an onerous and time consuming one. It is therefore important to ensure that measures are in place to enable the speedy registration of such contracts upon the commencement of the PPSA, which occured on 30 January 2012. A single registration can cover multiple agreements against the same subcontractor.
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Security interests in unfixed goods and materials
Most construction contracts include a regime providing for payment in respect of goods and materials that are either off-site or on-site but unfixed. The PPSA gives rise to certain risks in such instances – particularly in respect of the payment for goods and materials which are off-site (e.g. where payment has been made to a supplier in respect of goods and materials that remain on the relevant supplier's premises).
Under the PPSA, the agreements governing off-site materials may be a security interest capable of being registered. This is notwithstanding that payment has been made in full for the relevant goods and materials and that title may technically have passed under the terms of any agreement with the supplier. For this reason, regimes under construction contracts that provide for the payment of unfixed or off-site goods and materials may need to be supplemented with provisions making the registration of a security interest in favour of the party obliged to make payment a condition precedent to the making of such payments.
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Equipment hire and on-site temporary works
Most construction sites will include equipment hired from specialist providers and temporary works which will be removed (e.g. site sheds, scaffolding, etc). Traditionally the interest of the equipment owner has been protected through the retention of legal title.
Under the PPSA, equipment leasing and on-site temporary works can be caught as deemed security interests known as 'PPS Leases' and be registrable. Legal title will not be sufficient to protect the owner's interests. The contracts governing these arrangements will need to properly describe the equipment/temporary works and be registered.
Additionally, many contractors have intra-company arrangements in relation to the leasing or hire of plant and equipment. The impact of the PPSA on these arrangements will also need to be considered.
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Financier requirements
It remains to be seen how construction financiers will approach the complications associated with the registration of security interest under the PPSA – particularly the priority of such registered security interests.
It may be that, in addition to the side deeds and tripartite arrangements we are used to seeing for externally financed construction / infrastructure projects, financiers will require contractors (and perhaps even major subcontractors) to agree (e.g. via some form of priority deed) on the priority of any security interests registered in respect of construction work. If so, this will complicate and add to the cost of negotiating construction contracts.
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Registration
This link provides some useful information as to how you can go about setting up your organisation on the Register for the purposes of the PPSA – in order to allow you to commence registering contracts.
If you would like further information, please call your existing Maddocks contact or a member of our Personal Property Securities Team.