Proceedings recently commenced in New South Wales by the receivers for Forge Group Power Pty Ltd (in liquidation) (receiver and managers appointed) (Forge Group) against APR Energy are a further reminder to all businesses of the risk of not registering security interests in accordance with the Personal Property Securities Act 2009 (Cth) (PPSA).
The US giant, APR Energy, had leased four gas turbines worth approximately $50M to Forge Group for power station construction work, but APR Energy did not register its interest in the turbines on the Personal Property Securities Register (PPSR).
By not undertaking the simple process of registering its interest in the turbines on the PPSR, APR (despite being the legal owner of the assets) could:
- lose priority against all other registered holders of security interests over the assets; and
- be treated as simply an unsecured creditor in the liquidation of the Forge Group.
It is a lesson to all businesses to ensure that they are properly registering their security interests on the PPSR.
Overview of the PPSA
The PPSA requires that the holder of a security interest over personal property (which includes all tangible and intangible property, but not land and fixtures to the land) register their security interest on the PPSR to maintain their priority against other creditors. As demonstrated below, the requirement to register can also apply to the owners of the relevant property, who can no longer simply rely upon their ownership of the property to maintain their priority over other creditors.
What is a security interest?
A security interest is defined under the PPSA as an interest in personal property which secures payment, or secures the performance of an obligation, by another party.
The PPSA also deems as security interests some arrangements not previously considered to involve security. For instance, the PPSA deems (in particular circumstances) a lessor’s interest in leased goods as a security interest, and a supplier’s interest in the goods it supplies under consignment or a retention of title arrangement as a security interest, which must be registered on the PPSR.
The PPSA also introduced the concept of a Purchase Money Security Interest (PMSI), which provides the secured party with a “super priority” when the secured party has enabled the other party to acquire the particular property, or has provided the funds for the acquisition of the property. A PMSI includes retention of title arrangements, leases falling within the definition of a PPS Lease, hire purchase agreements, lease finance arrangements and the interests of lessors and bailors.
In the construction industry, some examples of security interests which must be registered on the PPSR include:
- Lease of equipment: As outlined above, owners of leased equipment previously relied solely on their legal title for protection, but now (if the lease falls within the definition of a PPS Lease under the PPSA) the owner’s interest in leased goods is a deemed security interest, which must be registered on the PPSR.
- Retention of title clauses: Where an agreement provides that ownership of goods or materials does not pass to the purchaser until the price has been paid.
- Principal’s right to “step in”: Many construction contracts allow, in the event of a default by the contractor, for a principal to take over the works and to use the contractor’s plant and equipment to complete the works. As the principal’s rights to take over the works and use plant and equipment give rise to a security interest under the PPSA (because they secure performance of the contractor’s obligations), the rights of the principal and the contractor in the plant and equipment must be registered on the PPSR to ensure priority.
Consequences of not registering on the PPSR
A failure to register a security interest on the PPSR may result in:
- a secured party losing its priority over the relevant property against other secured creditors; and/or
- if the other party to the security agreement becomes insolvent, the secured party losing its security interest entirely and being treated as an ordinary unsecured creditor in the liquidation of the company.
What do you must do?
You should ensure that you:
- develop a program for identifying potential security interests you hold in personal property;
- negotiate your agreements to appropriately protect your security interests; and
- register your security interests in accordance with the requirements and time frames of the PPSA.