Australia: Grand theft backhoe: PPSA, contractor insolvency and priority over construction equipment and materials

There are various Personal Property Securities Act 2009 (Cth) disasters occurring in the construction industry following contractors' insolvency or default. These typically arise from a failure to register against leased/hired or retention of title (ROT) equipment or materials, late registration, or incorrect financing statements.

In some cases, legal owners of equipment or materials have lost title to those goods or lost out to secured financiers in a priority dispute.

Suppliers can take steps to mitigate their risks and our four key lessons to avoiding potential PPSA landmines are:

1. Realise that title is no longer everything: Instead it is now generally treated as a security interest which should be registered.
2. Clearly written agreements: you should have a clearly written agreement which specifically identifies the relevant goods and is signed by the contractor who has possession of those goods. This is necessary for the security interest to be enforceable against third parties. In particular, ROT provisions should be clearly drafted.
3. Register early, register often: you should register as early as possible. This is particularly important where the security interest is a purchase money security interest (PMSI). You can register before a supply agreement is signed provided you believe on reasonable grounds that you will have a security interest in the future.
4. Register against the correct serial number: registrations in relation to serial-numbered goods (for example, motor vehicles) should be registered against the correct serial number, which for motor vehicles is the VIN. If the motor vehicle doesn't have one, then the chassis number or the manufacturer's number. If there is any error in the serial number, the registration will be ineffective.

TITLE IS NOT EVERYTHING

Prior to the PPSA, suppliers would typically rely upon their ownership of the goods to defeat other secured claims. With the introduction of the PPSA, the distinction between title and security interest is largely irrelevant.

If the owner of the goods is taken to have a PPS security interest in those goods and they fail to perfect that security interest (typically by registration on the Personal Property Securities Register (PPSR)) or in some cases they fail to perfect that security interest within 20 business days after the relevant security agreement comes into force, the owner's position may be compromised.

In particular the owner may lose its rights to those goods¹ on the occurrence of certain insolvency events² or lose out in a priority dispute on the appointment of a receiver.

If the owner is not taken to have a PPS security interest in the goods, the standard pre-PPSA position will apply with the owner's interest typically prevailing.

PMSI SUPER-PRIORITY

The silver lining for owners is that their security interest will typically be a purchase money security interest (PMSI) which will generally have "super-priority" over all other security interests (including prior perfected security interests).

However to achieve this level of priority, you must perfect your security interest in the goods by registration as a PMSI on the PPSR. This must happen prior to delivery if the goods are inventory and within 15 business days of delivery if they are not inventory.

There is considerable complexity and uncertainty about compliance with these timeframes where supply agreements are executed after delivery or where a supplier sells its interests in the goods without the purchaser retaking possession to those goods.

There are two main areas in which title-based PPS security interests arise: ROT arrangements and leases/bailments.

ROT ARRANGEMENTS

ROTs (also known as Romalpa clauses) involve the supplier retaining title to inventory until payment of the full purchase price at which point title transfers to the contractor. As ROTs will constitute PPS security interests and PMSIs, timely registration is vital.

Supply agreements should include a clearly drafted ROT provision and should include an acknowledgement that the ROT constitutes a PPS security interest and PMSI.

If goods are attached to land, they will no longer be subject to the PPSA and you will not have security in the land (unless you have a separate Torrens interest like a mortgage). This is a complex area and there is a real risk that your security interest will not trace into proceeds that arise after attachment to land.

LEASES AND BAILMENTS

Leases and bailment (possession without ownership) can give rise to PPS security interests.

There is widespread concern within the hire and rental industry that PPS Leases impose a significant burden on their industry, particularly as shorter term arrangements may be caught. In particular, there is doubt as to whether a lease which does not specify a term but in practice will never extend past the required timeframe should be treated as a lease or bailment for an "indefinite term" and therefore a PPS Lease.

The definition of "PPS Lease" may well be amended to exclude shorter term arrangements. The Government has introduced a bill to Parliament³ that would exclude PPS Leases in the case of serial-numbered goods which were for a definite term of less than one year (rather than the existing 90 days).

In addition, a consultation paper released as part of the statutory review of the PPSA⁴ (Consultation Paper) recommended the reference to indefinite term be removed so that incidental short-term arrangements will be excluded.

There is also a concern more widely in the construction industry that the concept of bailment will pick up a number of unexpected situations (for example, construction equipment being stored on site).

While bailments will only give rise to PPS Leases where the bailor is regularly engaged in the business of leasing or bailing goods and the bailment is for value, there is conjecture as to what this means (and conflicting authorities overseas). The Consultation Paper recommends that the references to bailment are removed which would remove significant uncertainty in relation to the PPS Lease concept.

However, until these amendments are made or the Courts clarify the definition of "PPS Lease", it is prudent to assume these requirements will generally be satisfied by suppliers in the construction industry. That is, you should assume that a short-term arrangement which does not specify a term will constitute an "indefinite term" and that suppliers will be supplying for value, and be regularly engaged in the business of leasing or bailing goods.

Footnotes

¹In the matter of Maiden Civil (P&E) Pty Ltd; Richard Albarran and Blair Alexander Pleash as receivers and managers of Maiden Civil (P&E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd & Ors [2013] NSWSC 852.

²PPSA s 267. In summary, when either liquidation (or bankruptcy in the case of individual debtors), voluntary administration or a deed of company arrangements occurs.

³Personal Property Securities Amendment (Deregulatory Measures) Bill 2014 (Cth).

⁴Review of the Personal Property Securities Act 2009, Consultation Paper 1, Reach of the Act released 22 September 2014.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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