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Building industry participants must be aware of the serious implications of the Personal Property Securities Register (“PPSR”) under the Personal Property Securities Act 2009 (Cth) (“PPSA”) which came into effect on 30 January 2012 and has now been in operation for over two years. Registration of your security interests under the PPSA is a necessary measure to protect your interests in personal property that is not in your possession. Failure to do so can lead to your interests being defeated by other registered security holders or liquidators.
The importance of registering your security interests on the PPSR in relation to property used in the construction industry has been highlighted in a recent High Court decision in New Zealand [McCloy v Manukau Institute of Technology  NZHC 936].
In this case, Mainzeal Property and Construction Ltd (who were in Receivership and in Liquidation) (“Mainzeal”) entered into a contract to carry out works for Body Corporate 177519 (Hobson Gardens) (“Hobson”). The Receiver appointed to Mainzeal declined to complete the contracted works.
Hobson terminated the contract and declared that it was in lawful possession of the construction equipment. The Receiver claimed he was entitled to have the equipment returned pursuant to the “step in rights” contained in the building contract. The receiver claimed that the “step in rights” were a security interest and were subject to registration on the New Zealand Personal Property Security Register (“NSPPSR”). Hobson had not registered any security interest on the NZPPSR.
The Court held that step in rights are a security interest and are subject to registration. The security interest created in favour of Hobson by the contract was not perfected by registration. The Court further held that perfection of a security interest by possession would not apply in this instance as Hobson did have possession of the goods. The Court said that possession resulting from seizure or repossession did not comply with the provisions of the NZPPSA. As a result, the Receiver was entitled to recover the equipment.
Whilst this is a decision from the New Zealand High Court, there are similar provisions in the Australian PPSA.
Construction contracts generally contain clauses that set out what is known as “step in rights”. “Step in rights” are generally a power to take the work out of the hands of a contractor or subcontractor where a substantial default or insolvency event has occurred. Where an Administrator, Liquidator or Receiver has been appointed to a contractor and the appointee declines to complete the contracted work, “step in rights” typically allow:
The party for whom the work is being carried out to terminate the contract; and
Traditionally the interest of the equipment owner has been protected through the retention of title clauses in contracts but now may be deemed security interests under the PPSA and are known as 'PPS Leases', which are registrable on the PPSR. Legal title will not be sufficient to protect the owner's interests.
The New Zealand High Court decision in McCloy v Manukau Institute of Technology highlights the following important lessons: