Typical security interests in construction contracts

Security interests can arise from a variety of arrangements or provisions commonly contained in construction contracts and supply contracts.

Common examples of security interests which may arise under construction contracts and supply contracts include the following:

  • take over rights that enable a principal to take possession of the contractor’s plant and equipment to complete works and sell the plant and equipment to recover outstanding amounts owed to the principal;
  • clauses which provide for security deposits, retention amounts or any other flawed asset arrangement under which moneys due to the contractor from the principal may be retained pending compliance with another obligation by the contractor;
  • interests under a clause which provides that the contractor must hold on trust for the account of the principal any amounts it receives which are otherwise due to that other party (called a turnover trust); 
  • the supply of plant or equipment on retention of title terms or on hire purchase;
  • any “PPS lease” (which is a lease of goods, or arrangement where a third party has possession of goods, for an indefinite term or a term of more than one year (or 90 days if the goods are aircraft, motor vehicles or watercraft), such as where the contractor’s plant and equipment is used on the principal’s site or goods are paid for but retained by the seller for a period).

If the secured party does not register these interests it may not be able to enforce its rights under these clauses, and potentially could lose ownership of its property.

Some of these security interests may be purchase money security interests (“PMSIs”) under the PPSA. A PMSI arises where the secured party has provided the finance required by the grantor to acquire the collateral. A hire purchase agreement, retention of title arrangement and PPS lease are also PMSIs. If registered in time by a registration that indicates that it is a PMSI, these are afforded a higher priority (called ‘super priority’) over an earlier non PMSI security interest that has been perfected (subject to some exceptions) .

Timing of registration

The best possible priority and protection will be gained by registration immediately before the relevant agreement giving rise to the security interest is signed.

In any event, PMSIs must be registered within timeframes specified under the PPSA in order to gain super-priority. There are different time limits depending on the nature of the collateral. The time limits are as follows:

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Where a security interest is granted by a company

Where the grantor is a company section 588FL of the Corporations Act 2001 (Cth) should be noted. This section requires security interests granted by a company to be registered within 20 business days after the security agreement giving rise to the security interest came into force. With limited exceptions, failure to register by that time can mean the security interest vests in the company on its insolvency (ie., the holder of the security interest will lose its interest in the property). If a registration is made after this time, the security interest remains subject to this vesting risk for 6 months after registration.

Whilst there is provision in the Corporations Act to apply for an extension of time to register security interests, recent cases indicate that there are limitations in the comfort obtained in making such an application, even if successful. In the matter of Apex Gold Pty Ltd [2013] NSWSC 881 and In the matter of Cardinia Nominees Pty Ltd [2013] NSWSC 32 the court extended the time for registration of the security interests under the Corporations Act, but in each case the extension was granted on conditions which substantially reduced the effectiveness of the extension. These cases indicate that an extension may not be granted where the delay to register was other than inadvertent, accidental or due to another sufficient cause, where other unsecured creditors would be disadvantaged or where there was a long delay.

Going forward

In conclusion, principals and contractors need to be aware of these very real risks in not registering or delaying registration of security interests on the PPSR. Whilst there may be commercial reasons for not registering security interests, it is worth the effort involved in considering each construction project at the outset and if the decision is made to register, to do so promptly.