The Personal Properties and Securities Act (2009) (Cth) (PPSA) is a law about security-interests which applies to all personal-property Australia wide.[1]
The PPSA has created a national register over security interest called the Personal Property and Securities Register (PPSR).
The PPSR has replaced over 70 national registers which previously dealt with registered security interests over various classes of personal property.
For example, if you were to buy a motor vehicle prior to the introduction of the PPSA, you would determine who had a securitised interest over the vehicle via the REVS register. The REVS register has effectively become redundant as all securitised interests over vehicles would now be contained on the PPSR.
The PPSA was drafted for the benefit of the banks to record loans. Accordingly, the operation of the legislation is heavily skewed towards the banks interest.
Nonetheless, it is crucial for those in the construction industry to be aware of the legislation’s operation so that they can properly protect themselves in the event that capital equipment which they believe they have ownership over is subject to a registered interest by a third party.
The Ownership and Registered Interest Distinction
Under the PPSA, ownership or possession over personal property no longer defines who has title over the property. Title over any personal property will subsist with the entity that has a registered interest over the property, not the functional owner of the property.
Practical Applications to Subcontracts
Loans
Loans taken out by subcontractors from banks, may be securitised by banks (via a fixed and floating charge) to ensure that the subcontractor repays the loan.
Suppose a contractor engages a subcontractor to supply and install equipment on site.
The Subcontractor takes out a loan from a bank to provide finance for their business. The bank will more than likely hold a fixed and floating charge over the subcontractor’s assets and register such an interest on the PPSR.
In the event that the subcontractor becomes insolvent during the project, the bank will have the ability to repossess and realise any assets in possession of the subcontractor including plant and equipment.
As the bank has a registered interest over the subcontractor’s assets (stock), the bank will be able to exercise this right regardless of the provisions of the subcontract between the contractor and subcontractor.
Identifiable Assets
Entities may register an interest over personal property, provided that the said property is identifiable.
Identifiable property is property which contains a unique identifier (such as a serial number) and can be precisely identified for registration.
For example, suppose a contractor enters into a subcontractor for the supply of a pump with a serial number.
The company supplying the pump to the subcontractor will register their interest over the pump on the PPSR.
If the subcontractor delivers the pump to the contractor, the supplier will still have recourse to the pump should the subcontractor not pay the supplier the full purchase value of the pump.
Non Identifiable Assets
Security interests over non identifiable assets (assets including plant or equipment which do not have a unique identifier e.g. gyprock or plasterboard) cannot be registered on the PPSR.
Accordingly, if a subcontractor provides a contractor with plasterboard (which contains no serial number on the packaging) and does not pay the supplier, the supplier will not have recourse to the plaster board.
If on the other hand, the plasterboard was delivered in packaging which contained a serial number, there is a high probability that the supplier registered their interest over the plasterboard on the PPSR. Accordingly, should the subcontractor fail to pay the supplier, the supplier will have recourse to the plasterboard, regardless of whether or not the contractor has already started to use the plasterboard in its construction.
Affixed and Integrated Equipment
As the PPSA only enables an interest to be registered over property which is not affixed to land, should such material become affixed during the course of construction, the registered interest will be lost.
Suppose a subcontractor delivers an elevator to site and the supplier of the elevator has a registered interest over the elevator. If the subcontractor becomes insolvent prior to the elevator being installed, the supplier will have recourse to the elevator.
If however the elevator is installed into the building prior to the subcontractor becoming insolvent, the supplier will lose their securitised interest over the elevator as it has now become a fixture to the building.
When Does Equipment Become Affixed to the Property?
As mentioned above, the registered security interest over plant or equipment will be lost once that equipment becomes a permanent structure of the property.
Generally speaking, a piece of equipment will become affixed to the property where it cannot be removed without dismantling or destroying another part of the property.
For example, where a piece of steel is welded to existent steel contained on a building site, the steel will be deemed to have been affixed to the property and any registered security interest in the steel will be lost.
On the other hand, if an air-conditioning unit is installed onto the roof of the building and the unit can easily be unscrewed or removed, the registered interest in the air conditioning unit will not be abandoned after installation.
Practical Solutions for Contractors
In order for contractors to avoid pitfalls, it is crucial for the contractor to pay the subcontractor the full amount due for the equipment once it is delivered to site.
Step 1 Identify all Equipment
Prior to entering into a subcontract, contractors should identify all high value capital equipment and other identifiable materials which the subcontractor may deliver and/or install on site.
It is prudent for contractors to have subcontractors provide them with a list of all equipment which they will use throughout the course of the works that is subject to a registered security interest.
Step 2 Amend Contract
Once the contractor has identified the equipment, payment provisions of the subcontract must be amended into two sections.
The first section should state that upon delivery of equipment to site, the contractor will pay the subcontractor the full purchase value of the equipment. Retention should NOT be exercised over the purchase price of equipment as any registered interest by a third party will not be defeated unless full payment is made in respect of the equipment. If however, only partial payment is made in respect of the equipment a third party may still be able to exercise their interest over the equipment e.g. payment less retention.
The second section should state that progress payment will be made in relation to the installation and labour involved in the supply of equipment. Such payment will be subject to progress claims and retention.
Step 3 Pay and Convey
The final and perhaps most crucial step to take is to ensure that prior to payment, the security interest has been deregistered.
This is important as although you may pay the subcontractor the full purchase value for the equipment, if the subcontractor does not pay its supplier, the supplier’s registered interest will still subsist.
Accordingly, prior to payment, a mini conveyance should be held on site where the subcontractor provides you with documents from the PPSR which show that the interest in the equipment no longer subsists.
Such a transaction is analogous to a settlement meeting with regards to a purchase of land. The purchaser of the land would not hand the vendor a cheque until it is proven that registered interest in the land no longer subsists with the vendor. Unless the vendor provides such evidence, the purchaser would not purchase the land.
Contractors should follow a similar procedure when paying subcontractors for equipment. Failure to do so may cause third parties exercising their interest over capital equipment which the contractor has paid for.
Conclusion
The PPSA is a somewhat complex piece of legislation with far reaching impacts on the use and supply of equipment in respect of construction projects. Contractors should not ignore its implications when entering into subcontractors. Although the steps which contractors must take to protect themselves against registered security interests may be somewhat onerous, failure to do so may prove much more costly if such interests are ever exercised.
[1] Personal Property – Property that is either tangible or intangible excluding land and fixtures to land.