Used correctly, the Personal Property Securities Act (PPSA) can offer a lot of protection for subcontractors, contractors and principals.
But if the PPSA is ignored or misunderstood, the result can be an epic nightmare the likes of which could destroy your business.
This guide is to help you avoid the nightmare.
What’s it All About?
The PPSA is intended to give you:
- The ability to find out what securities exist over the assets of people you deal with day to day;
- A mechanism to register your own interests in assets where needed; and
- A system to help figure out who gets what in the event that you, your head contractor or your principal become insolvent.
In practice, the way the PPSA gives you these things can be challenging to understand and cumbersome to administer. It has also added a requirement to register some interests that previously didn’t exist – and failing to do so can lead to huge problems.
A Common Story in the Building and Construction Industry
Over the years, players in the construction industry have experienced a significant amount of economic see-sawing. When things are going well – everybody wins for a time, but can start to get relaxed about protecting their commercial interests.
Things then start turning south – and all of a sudden the problems begin.
In theory, amongst other things, the PPSA is supposed to help suppliers who have handed over their goods but not yet been paid, should the client go into liquidation.
Back Here in The Real World
In practice, even with the PPSA in place the supplier might still get nothing.
First, the supplier needs to have heard of the PPSA in the first place.
Second, the supplier needs to understand how it applies to their business and how it can work to help protect them.
Third, the supplier needs to actually use the process correctly.
And fourth, a liquidator still needs to collect enough money to pay the supplier the amount that they are entitled to.
Construction lawyers can help the supplier out with the first three, but unfortunately the fourth is harder to control.
Let’s step through what you can do to sensibly protect yourself.
Does the PPSA Apply to You?
In construction, the common times the PPSA could apply include if you:
- Deliver goods to anyone and want to retain a right to reclaim those goods until your bills are paid; or
- Hire out equipment to anyone (including to your own company group).
Beyond that, the PPSA could also impact on:
- Payment for goods that remain off-site;
- Step-in rights;
- Construction of temporary works; and
- Retention monies.
The PPSA is about property that isn’t land (“personal property”). Personal property is a big concept – if it’s not land and you can think of it, there is a good chance that it’s property so far as the PPSA is concerned.
Lumber, concrete, tiles, formwork, scaffolding, pumps, trucks, aggregate and more – these are all property. If in doubt – assume that your “thing” is property.
So if your business involves property, and you’re doing any of the things we’ve set out above – there’s a good chance the PPSA should be part of your day to day operations.
How Could the PPSA Help You?
403 out of 2198 companies that went into external administration in the quarter up to June 2017 were in the construction industry
The most significant occasion that the PPSA is going to assist you is if your client or principal becomes insolvent.
Before you start thinking “that wouldn’t happen to me” take a look at the table below setting out the ASIC appointment data, and consider this: 403 out of 2198 companies that went into external administration in the quarter up to June 2017 were in the construction industry.
|Top 10 Industries||Jun Qtr 2016||Mar Qtr 2016||Jun Qtr 2017||% change Jun Qtr 2016||% change Mar Qtr 2017|
|Other (business & personal) services||761||575||776||2.0%||35.0%|
|Accommodation & food services||228||167||227||-0.4%||35.9%|
|Transport, postal & warehousing||114||87||95||-16.7%||9.2%|
|Information media & tele- communications||36||26||61||69.4%||134.6%|
|Education & training||129||26||50||-61.2%||92.3%|
|Electricity, gas, water & waste services||40||31||47||17.5%||51.6%|
|Rental, hiring & real estate services||42||43||39||-7.1%||-9.3%|
This table was extracted from ASIC’s publication here.
That’s over 18%. By industry, it’s the single largest number except for the category called “other”.
If that happens, the first question on your lips is going to be: “how do I get paid?”
The second question will be “can I get my stuff back?”
Used correctly, registering your interest on the Personal Property Securities Register (PPSR) will improve your chances of either getting paid or getting your stuff back.
How’s it Work?
If you’re feeling a little uneasy about the PPSA, then you’re in good company. A few years back General Electric International (GE) lost $40m (yes – forty-million dollars) worth of equipment because it failed to identify and register its PPS interest. Given that a PPS registration costs only around $16, that’s a bad day at the office….
When a company goes into liquidation, the liquidator has one primary job: collect the company’s assets, liquidate them into cash, and pay out that cash in the “correct” order.
The correct order of payments is determined by various different laws, including the PPSA and the Corporations Act.
Using the PPSA correctly in your business allows you to:
- get yourself higher in the order of payments; or
- get your stuff back.
If you ignore the PPSA then the chances are that:
- You’ll be lining up with everyone else for your money (which will quite possibly be your share of $0); and
- You won’t get your stuff back.
The best way to illustrate this is with some examples.
Example 1 – Gertrude’s Gravel
Gertrude’s Gravel sells gravel to Nasty Nathan builders.
Gertrude’s terms and conditions with Nathan contain the usual clause that Gertrude “retains ownership of all goods delivered but unpaid for”. Because she’s seen her lawyers recently, Gertrude’s terms also give her a right to a “Purchase Money Security Interest” or PMSI under the PPSA, and the right to register that interest on the PPSR.
Nasty Nathan goes into liquidation.
Option 1 – Gertrude Wins
Gertrude, because she’s smart, registers her interest in the unpaid gravel on the PPSR in the correct way.
When the liquidator is appointed, she conducts a search on Nasty Nathan which shows Gertrude’s interest in the gravel.
Luckily, Nathan hadn’t used the gravel yet, and it’s still sitting on site.
Gertrude is entitled to:
- Come and get her gravel back; or
- Let the liquidators sell her gravel if they can, and take the proceeds (after the liquidator’s costs of sale are taken out).
Option 2 – Gertrude Loses
Gertrude got busy in the yard and forgot to register her interest in the gravel on the PPSR.
When the liquidator does her search on Nasty Nathan, no PPSR interests for Gertrude show up.
Gertrude’s terms and conditions are useless, because the PPSA says that if she didn’t register her interest and a liquidator was appointed, then Gertrude’s interest is obliterated (although it doesn’t use that word).
The liquidator can happily sell Gertrude’s gravel and keep the money.
Gertrude lines up with the 240 other creditors for a piece of a non-existent pie in 12 months’ time.
Example 2 – Horton’s Hire
Horton’s Hire Co leases 2 articulated trucks, 3 backhoe loaders and 1 compactor to Dodgy Dave for a 3 year term. The equipment is kept on site. Horton has never heard of the PPSA.
The equipment Horton has just leased out have a market value of around $1.2m.
Dodgy Dave skips one too many payments to his bank, and goes belly-up.
The liquidators of Dodgy Dave arrive on site to find $1.2m worth of equipment.
Their investigations reveal the lease arrangement and the lack of any registered PPSA interest in the equipment.
The lease arrangement is governed by the PPSA and should have been registered. Because it wasn’t, the rights that Horton had “vest” in the liquidators.
In short: the liquidators get to keep, and sell, Horton’s equipment.
At this point, Horton will quite possibly go out of business, especially once it’s own bank realises that Horton has just given away $1.2m in assets.
The Number 1 Thing about PPSA for The Construction Industry
If you get only one thing from this article, it should be this: knowing your rights under the PPSA is only half the story.
More important than knowing your rights is implementing a system in your business to ensure that those rights are protected.
At a minimum, that might include teaching yourself and your employees to:
- Identify which parts of your business are affected by the PPSA;
- Register interests on the PPSA at the right times; and
- Conduct PPSA searches on customers.
How to Protect Your Construction Business with the PPSA
If you scrolled straight to the bottom, here are the take-away points:
- Find out if what you do is affected by the PPSA. If in doubt, assume it is.
- Get some advice on how best to protect your business in a way that is commercially viable.
- Implement a system and train yourself and your staff to ensure that what you decide to do actually gets done.
- If someone who owes you money or to whom you’ve leased equipment goes into receivership, administration or liquidation – get legal advice.
What do you think? Is the PPSA helping you in your business, or just an extra administrative headache?
If you need help figuring out what to do with it, get in touch and we’ll be happy to help.