The recent High Court of New Zealand decision in McCloy v Manukau Institute of Technology [2013] NZHC 936 has held that step-in rights in a construction contract allowing a principal to ‘step-in’, use and then sell the contractor’s materials and equipment may constitute a security interest under the New Zealand personal property securities legislation.  In light of the similarities between the New Zealand and Australian personal property securities legislation, companies should review their step-in and termination clauses to ascertain if those rights should be registered on the Personal Property Securities Register.

Facts

Mainzeal Property and Construction Limited (“Mainzeal”) was engaged to perform construction work for Hobson Gardens under a construction contract.  That contract was not registered on the New Zealand Personal Property Securities Register and contained a ‘step-in’ clause allowing Hobson Gardens to ‘step-in’, use and then sell Mainzeal’s materials and equipment if Mainzeal went into receivership and the receivers failed  to take over the construction work.  Subsequently, the Bank of New Zealand (“BNZ”) appointed receivers to Mainzeal pursuant to security which included a registered general security agreement.  Following their appointment, the receivers gave notice to Hobson Gardens that they would not continue with the construction work.  Hobson Gardens asserted possession over Mainzeal’s materials and equipment pursuant to the step-in clause contained in the construction contract.

Decision

The court held that the step-in rights granted in favour of Hobson Gardens constituted a security interest under the New Zealand personal property securities legislation.  As that security interest was not registered, BNZ’s prior registered security interest took priority over the rights contained within the step-in clause and Hobson Gardens lost the right to “step in” as provided for in the construction contract.

Implications

As the definition of “security interest” in the Australian Personal Property Securities Act 2009 (Cwlth) (“PPSA”) closely follows the wording used in the New Zealand legislation, Australian courts will be guided by the approach adopted by the High Court of New Zealand and are likely to adopt a similar approach.

As a result, companies should review any step-in clauses and termination clauses (which often contain step-in rights) contained in their construction contracts to ascertain if those rights should be registered on the Personal Property Securities Register.  If contracts contain step-in clauses that are not registered (but should be registered as creating a security interest) then in the event that a third party (such as a financier) enforces its security, or the contractor becomes insolvent, there is a risk that the right to step in will be lost.

Our construction and PPSA teams have specialist knowledge of this area and how to quickly register interests and are happy to quickly review any ‘step-in’ clause to let you know whether a security interest is created.  In the event that such an interest is created, further consideration can be given to registering the interest.