Practical examples

Practical example 1 – Hiring equipment

The scenario

Construkt Pty Ltd (Construkt) is a contractor engaged to perform construction works at a new shopping centre development site. Construkt enters into an agreement to lease a crane from Get Equipped Pty Ltd (Get Equipped) for 18 months. In this example we are assuming that the crane is not mobile. Get Equipped does not register its interest in the Crane on the PPSR.

To boost its cash flow, Construckt enters into a short term financing arrangement with Faster Finance Pty Ltd (Faster Finance) under which Construkt offers all of its current and future assets as security, including the crane. Faster Finance registers its security interest on the PPSR.

A few months later, Construkt defaults on its loan from Faster Finance and Faster Finance appoints receivers and managers over the assets of Consrukt’s business. Get Equipped contacts the receivers and managers and requests the immediate return of its crane.

Who is entitled to the crane – Get Equipped as the owner/lessor, or Faster Finance as secured creditor with an interest registered on the PPSA?

The position under the PPSA

A crane is personal property for the purposes of the PPSA as it is property other than land or a fixture and not a type of property that is expressly excluded.

Get Equipped has a deemed security interest in the crane in the form of a ‘PPS Lease’ which relevantly includes a lease of goods for a period of more than one year. Faster Finance has a security interest in the crane because it has all-asset security from Construkt.

To resolve the competing security interests, the priority rules apply. Get Equipped’s security interest is ‘unperfected’ as Get Equipped did not register its interest on the PPSR. Faster Finance however, ‘perfected’ its interest by registration. Therefore, despite Get Equipped’s security interest arising earlier in time, it is Faster Finance’s interest that will prevail.

The facts of this case study are similar to Maiden Civil (P&E) Pty Ltd, Re; Albarran v Queensland Excavation Services Pty Ltd [2013] NSWSC 852 and the New Zealand case of Graham and Gibson v Portacom New Zealand Ltd [2004] 2 NZLR 528.

Practical example 2 – Supply of materials on a retention of title basis

Background

Paul’s Pipe Emporium Pty Ltd (Paul’s Pipes) supplies pipes to Construkt on 30 day payment terms. To secure payment, Paul’s Pipes supplies the pipes under a supply agreement which includes a retention of title (ROT) clause.

Paul’s Pipes registers its ROT interest in the pipes on the PPSR. Paul’s Pipes has efficient PPSA procedures in place and recognises that it should register its interest as a Purchase Money Security Interest (PMSI) in order to give its interest higher priority. To do this, it registers its interest before delivering the pipes to Construkt and indicates that its security interest in the pipes is a PMSI.

Two months later Construkt fails to pay Paul’s Pipes for the pipes and Paul’s Pipes arrives on Construkt’s site to take possession of its pipes.

Can Paul’s Pipes recover possession of the pipes that have been delivered to Construkt?

The position under the PPSA

At the time of supply to the site, the pipes are personal property. Paul’s Pipes has a security interest as the ROT clause in the supply agreement secures payment for the pipes and therefore the PPSA applies.

Paul’s Pipes has also registered its security interest in accordance with the PMSI priority rules under the PPSA

Paul’s Pipes would therefore be able to recover possession of the pipes not yet incorporated into the works.

A further twist

Rather than the supply of pipes on a ROT being between Paul’s Pipes and Construkt, consider the following situation where the ROT supply is between Paul’s Pipes and its supplier.

Paul’s Pipes purchases the pipes on a ROT basis from its supplier, Pipeworks Pty Ltd (Pipeworks) who registers its interest on the PPSR. Paul’s Pipes then sells the pipes to Construkt in the ordinary course of business. Shortly after the sale, Paul’s Pipes fails to pay for the pipes.

Can Pipeworks seek to recover possession of the pipes from Construkt directly?

In this case, the main issue is whether Construkt takes the pipes free from the security interest granted by Paul’s Pipes to Pipeworks.

Under the ‘extinguishment’ rules, a buyer may take goods free from a security interest where the goods are sold in the ordinary course of the seller’s business (even if the security interest is perfected). Assuming that Construkt did not actually know that the on sale to it was in breach of the security interest (and there is no reason to suspect this on the facts), Pipeworks’ security interest in the pipes would be extinguished and Construckt would not be obliged to return them.

Pipeworks may have a continuing security interest over the proceeds of the sale that Paul’s Pipes received from Construkt. It could also still have a contractual claim against Paul’s Pipes for the unpaid purchase price.

Practical example 3 – ‘Step in’ rights (use of contractor’s plant and equipment)

Background

The body corporate for the Northgate Village (Northgate) residential tower enters into a standard form construction contract with Construkt for remedial works to the building.

The contract contains a clause allowing Northgate to take the works out of Construkt’s hands and receive a transfer of Construkt’s interest in the works and its equipment in order to complete the works if Construkt defaults or goes into receivership. Northgate does not realise that this ‘step in’ right could be a security interest under the PPSA and does not register its interest on the PPSR.

Construckt enters into a general security agreement arrangement with THE Bank Pty Ltd (THE Bank) under which Construkt offers all of its current and future assets as security. THE Bank registers its security interest on the PPSR.

To perform the works, Construkt placed two hoists on Northgate’s building. However, shortly into the project, Construkt defaults on its loan to THE Bank and THE Bank appoints receivers. The appointment of the receivers triggers the ‘step in’ clause in the building contract and Northgate seeks to acquire Construkt’s interest in the hoists.

Who is entitled to the hoists – Northgate as the principal with a step in right, or THE Bank as secured creditor with an interest registered on the PPSA?

The position under the PPSA

These facts are based on a decision from the New Zealand High Court in McCloy v Manukau Institute of Technology [2013] NZHC 936. The PPSA follows the New Zealand legislation and so this decision could reflect the Australian position. Australian courts have already cited New Zealand decisions when considering the PPSA.

In the McCloy case, it was held that the relevant hoists were personal property and that a step in right in a construction contract does give rise to a security interest which should have been registered on the PPSR. Applying to the above facts, the New Zealand court’s decision would be that Construkt’s step in rights would not have priority over THE Bank’s interest in the hoists and therefore THE Bank’s security interest would prevail.

A further twist

Following the Bank’s registration on the PPSR, Northgate’s lawyers write to it advising that the step-in right under the construction contract may constitute a security interest under the PPSA. Northgate subsequently instructs its lawyers to make an appropriate registration on the PPSR.

Who is entitled to the hoists?

As Northgate’s registration is not a PMSI, the applicable priority rule under the PPSA provides that the security interest which is perfected earlier in time takes priority. As the Bank’s registration was made prior to Northgate’s registration, its security interest was perfected earlier in time and takes priority.

Practical example 4 – Confidentiality of security agreements

Background

Construkt purchases most of its construction material from Site Supplies Pty Ltd (Site Supplies) on a ROT basis. A clause of the supply agreement required the parties to keep the terms of the agreement confidential. Site Supplies registers its security interest on the PPSR as a PMSI.

Construkt enters into a short term financing arrangement with Faster Finance under which Construkt offers all of its current and future assets as security. Faster Finance registers its security interest on the PPSR. While the financing agreement did not originally contain a confidentiality clause, the parties subsequently enter into an agreement to keep the terms of the financing agreement confidential.

Site Supplies is worried that Construkt may default on its lease and decides to investigate other parties which may have an interest in Construkt’s property. Get Equipped searches the PPSR and discovers Faster Finance’s security interest.

Site Supplies wants to get information about the security agreement between Construkt and Faster Finance. Can Site Supplies do this?

Applying the PPSA

Under the PPSA, certain ‘interested’ persons may request a secured party to make available information regarding a security interest, including the amount of the interest and a copy of the security agreement. An interested person includes a person with another security interest in the relevant personal property. Site Supplies is therefore entitled to request information about the security interest notified in the financing agreement from Faster Finance.

However, a secured party may resist disclosing the information above where it has entered into a confidentiality agreement, but only if the parties entered into the confidentiality agreement no later than the time that the parties entered into the security agreement was entered into (ie the confidentially provisions can be contained in the same document that creates a security interest).

An example of a clause which deals with confidentiality in the context of the PPSA is as follows:

A party’s obligation not to disclose Confidential Information does not apply to:

(a) disclosure to the extent they are required by Legislative Requirements (other than section 275(a) of the PPSA to the extent that the disclosure would not be required by that section if the disclosure breached a duty of confidence)…

As Faster Finance did not enter into a confidentially agreement with Construkt until after entering into the financing agreement, Faster Finance must provide Site Supplies with the requested information.

There are some circumstances where a confidentiality agreement will not be able to be relied on to prevent disclosure, for example where the debtor is in default under security agreement. For further detail, refer to section 275 of the PPSA.