30/10/2013

On a number of occasions in the last 12 months and more, we have referred to the Personal Property Securities Act (2009) (Commonwealth) (“PPSA”). As previously stated, this is new legislation which does away with many old forms of security over personal property (ie property that is not real estate), such as bills of sale and registered charges. However, the PPSA does not just introduce new types of security over personal property. It also requires new ways of thinking about when property, other than land, may be caught by the PPSA. If you don’t "get into" these new ways of thinking or get some advice on them, the impact on your business or company could be dramatic and, in extreme cases, terminal.   

Three examples illustrate these comments

The first example concerns a principal's rights against a contractor. Old hands may have trouble recognising a potential PPSA situation where an agreement between a principal and a contractor allows the principal to take over work under the agreement, which was to be done by the contractor, in the event of default or delay by the contractor. The agreement may also allow the principal to take possession of materials and equipment to use to complete the work and to sell the equipment to cover the principal's losses as a result of the contractor's failures under the agreement.

These types of clauses occur routinely in construction contracts but there is no reason to suppose they are limited to those contracts.

Based on a recent New Zealand case, it is likely that these rights given to the principal are "security interests" under the PPSA. Consequently, a failure by the principal to register their interest over the contractor's property on the PPSA register could well mean the principal cannot enforce these rights!

Secondly, using the principal/contractor case above, Chapter 4 of the PPSA sets out detailed (and we mean really detailed) requirements when enforcing a security interest in such a case. Normally an agreement may require the principal to give notice to the contractor that the principal intends to sell the equipment. However, under the PPSA, the principal may also need to give notice, within certain defined time limits, of its intention to sell the equipment to any other secured party which has a higher priority in relation to the equipment.  Failure to give this additional notice could have unhappy consequences for the principal if it has not received appropriate advice or, in the event it is possible, it has not contracted out of the PPSA.

Finally, the secured party needs to be aware of PPSA provisions that apply when dealing with the proceeds of any enforcement action. Reverting to our principal/contractor example, section 140 of the PPSA provides the order in which proceeds from an enforcement action must be distributed, beginning with persons holding interests which have a higher priority than the principal. A principal/contractor agreement is likely to provide that if the principal sells the equipment it only has to pay any excess balance to the contractor.  So, again, our principal may be in strife if it doesn't know about the PPSA and there is a party on hand with a security which has a higher priority!

This article covers in a general way only a very small part of the PPSA. It is designed to help you understand situations where the PPSA may apply. It is not a substitute for legal advice, which you should seek and rely on in every specific case.

If you need help on any aspect of the PPSA or you simply want to know how and when it may apply to your company or business, please contact Townsends Business & Corporate Lawyers on (02) 8296 6222.