Protecting Your Gear On Site

February saw the collapse of WA based builder Cooper & Oxley accompanied by scenes of subcontractors climbing over fences and evading security guards in order to attempt to recover tools and equipment that they had left on project sites.  You can find an example here.

Since then, there has been an understandable increase in advice being offered to subcontractors as to how they might be able to protect themselves.  What has been less understandable, however, is the oft-repeated suggestion that a registration on the PPSR might act as some sort of golden ticket allowing a subcontractor to recover any of their gear they might have had stored on site.

If you are selling goods subject to a right to recover those goods if you’re not paid for them, then a registration on the PPSR is essential if you want to be able to exercise that right against a liquidator or administrator etc.  Similarly, if you are engaged in a long-term hire of goods (and by long, I mean at least 2 years) then, again, registration is essential to protect those goods from falling into the hands of an Insolvency Practitioner. 

However, such leasing arrangements and conditional sale agreements are specifically deemed to create security interests under the PPSA; simply storing your tools on a building site overnight is not.

When a company goes into liquidation, the liquidator is entitled to treat any property that is used as collateral in a security interest as having vested in the insolvent company and thus available to be liquidated for the benefit of creditors.  The only real exception to this is where that collateral/security interest has been registered on the PPSR.

 

Because a subcontractor’s tools are not the subject of a sale (conditional or otherwise) to the insolvent company and are not being leased to them, the liquidator has no right to treat them as if they were the property of the main contractor. If they're not collateral in a security interest, there's no danger of them vesting in the insolvent company.

If that is the case, why do we read about subcontractors and tradies being locked out of sites, unable to recover their tools?

One of the first jobs a liquidator needs to do, on arrival, is to take stock and evaluate what assets the company might hold.  They can’t do this effectively (or fairly) if there is a steady stream of people marching onto the site and walking off with whatever property they can lay their hands on – some of it may well be their own but some of it may be the company’s and some may actually belong to other subcontractors.

In this sense, the liquidator is a little like the coroner arriving at the site of a freshly discovered body in popular American TV shows.  Their first job is to protect the integrity of the crime scene and then, gradually, determine to what extent the items found in and around that scene were relevant to the body and the means by which it came to be dead.  If you happen to have lost your car keys in that area, it will be understandable if you have to wait a while before you can get them back!

And so it is with a liquidator, they’ll need to ensure they can identify what goods belonged to the company and what belonged to subcontractors and then they’ll need to ensure that the right gear is made available to the right subcontractor.  To do this properly will, unfortunately, take time.  

From subcontractors I’ve spoken to, while the delay in getting their gear back is extremely frustrating, they do eventually get their stuff back and, if they don’t, it’s invariably because it had been taken by another subcontractor trying to grab what they could, presumably, in an attempt to offset money owed to them by the company.

Not only is a registration on the PPSR not necessary and will do nothing for the rights of the subcontractor in recovering their tools, it may even create confusion, leading to further delays in the subcontractor being reunited with their gear.

There’s been a suggestion that, while it won’t be perfecting a security interest, a PPSR registration might nevertheless serve as some sort of ownership document ‘proving’ that certain tools belong to the particular subcontractor.

Given that a PPSR registration can be lodged by anyone, for anything against anybody so long as they have a credit card with an available balance of at least $6.80 and that there’s no checking or verification that its details bear any relationship to reality, there is absolutely no way that a liquidator is going to accept a PPSR registration along these lines at face value.

Liquidators spend large amounts of their time picking holes in, and generally finding fault in, PPSR registrations and will not be convinced by a registration that, effectively, says that “a box of spanners and a hammer with a red handle” are owned by a particular tradie.  Even being able to identify tools by serial numbers won’t be treated as any evidence of ownership.

If proving ownership is the issue, it will be far more effective simply to have your name inscribed/labelled on the tool than to have it registered on the PPSR.

In short, while suppliers selling goods on Retention of Title terms, and hire companies, hiring goods on a long-term basis would be foolish not to register their interests on the PPSR, it would be foolish for subcontractors and tradies, looking to protect their tools, to think that a PPSR registration would be of any help.

Proposed Fee Changes

On the 11^th April the Australian Financial Security Authority (AFSA), which operates the PPSR, issued a consultation document regarding changes to the PPSR’s fees intended to take effect from 1^st July 2018.

With the PPSR having, effectively, earned back its own development costs in its first 3 years of operation, its fees are now, pretty much, only there to ensure it covers its own running costs.  Given a steady growth in registration activity, AFSA believes that it can reduce its fees and yet still cover its own costs for the next few years and has thus proposed the following reductions:

Activity	Current	Proposed
7 year registration	$6.80	$6.00
7 to 25 year registration	$34.00	$25.00
Indefinite registration	$119.00	$115.00
Searches	$3.40	$2.00

The consultation document is silent on the matter of fees for ‘Minor Amendments’ and the reissue of Verification Statements.

Minor amendments include changes to:

• Free text description (collateral description)
• Subordination Indicator
• Giving of notice identifier
• Proceeds Indicator and description
• Vehicle Registration Number (i.e. the number plate of the vehicle)
• Aircraft Nationality
• Aircraft nationality code and registration marks assigned pursuant to the Chicago Convention (where not used as a serial number)

Minor amendments and the reissue of Verification Statements are currently charged at $3.40 each.  I’ve written to AFSA querying these omissions.

The consultation document can be found at https://www.ppsr.gov.au/cost-recovery-implementation-statement with any comments required to be forwarded to stakeholders@afsa.gov.au by 6pm on Friday 4^th May.

UPDATE: AFSA has now advised that 'Minor Amendments' such as changing Collateral Descriptions will (should the proposed new charges be accepted) no longer attract a charge from the PPSR.  Similarly, if the proposed new fees are accepted, the reissue of Verification Statements will also not attract a fee.

UPDATE #2: AFSA has issued a notice advising that the planned implementation of the fee reductions will need to be delayed in order to give certain stakeholder groups longer to prepare for the fee reduction.  I don't pretend to understand why it would need to take more than 2 months to prepare for a small fee reduction but, nevertheless, there will be a delay.  No fresh implementation date has been given at this point but I will update again when this is announced.


UPDATE #3: We've now had confirmation that the new fees will be implemented on 1st August 2018 following approval from the Attorney-General.

When does the Grantor take possession?

I recently had cause to read a helpful summary of a decision by the South Australian Supreme Court in the matter of Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd [2017] SASC 163.  While much of the background to the case is a little fiddly, I’ll give a short ‘broad strokes’ summary in order to help demonstrate why this might be a very useful decision for the hire industry.

For those wanting a more detailed look, I recommend the summary HERE  or, for those that want a real thrill, the full text of the judgment can be found HERE.

The case concerned Bill’s Motorcycles – a dealer, selling and servicing Kawasaki motorcycles.  Bill’s had been financing its floor stock with one financier but then struck an agreement with another (Allied Distribution Finance – ADF).  Bill’s stock of 40 motorcycles (secured by the original financier) was bought out by Kawasaki and, effectively, sold to ADF.  Bill’s maintained possession of the motorcycles and ADF lodged a PMSI registration on the PPSR to perfect its security interest over them.

When Bill’s went into administration a couple of months later, there was a dispute concerning those 40 motorcycles between Samwise, the holder of a General Security Interest (AllPAAP) over all Bill’s assets and ADF as a PMSI holder.

While a PMSI will usually take priority over an AllPAAP, in this case, Samwise argued that because Bill’s was already in possession of the motorcycles at the time ADF lodged their PMSI registration,  ADF had failed to meet the time-scale requirements of section 62 of the PPSA.

Section 62, effectively, states that, in order to achieve PMSI priority over inventory items, a registration must be lodged before the grantor obtains possession of the property.

Samwise argued that, as Bill’s had already been in possession of the motorcycles for some time before ADF lodged their registration, ADF was not entitled to PMSI priority.

In his judgment, Justice Blue determined that, in the overall context, the implication of section 62 should be taken to mean that the registration must be lodged before the grantor obtains the type of possession that would entitle them to grant a PMSI interest in the property.

Thus it is the grantor’s possession in the role of PMSI grantor that matters, rather than their mere physical possession of the property.

While this is unlikely to be of any assistance to trade credit suppliers forgetting to perfect their Retention of Title rights in time, it may have implications for the long-term hire industry.

Last year, the Government made changes to the manner in which hires and leases were caught up by the PPSA.  In short, the changes involved leases for less than 2 years no longer needing to be registered on the PPSR.  Where a lease was established for an indefinite period that may or may not extend beyond 2 years, the new legislation only required a registration to be put in place once that 2-year limit was breached.

When I posted about the new legislation, I wrote:

In order to be eligible for PMSI super priority where the collateral being used is designated as a non-inventory item, the perfecting registration must be lodged within 15 business days of the lessee taking possession of the property.

 However, where an indefinite lease is concerned and the lessor doesn’t lodge their registration until it becomes clear the lease may extend beyond the new 2 year qualifying period, that 15 business days period may long since have passed leaving the lessor’s claim to their equipment to fall behind those of other general security holders with registrations already in place.

Justice Blue’s decision in the Bill’s Motorcycles case suggests that, while a lessee may have been in physical possession of property for 729 days, it will only be at the 2 year mark they have possession in the capacity of a grantor of a PMSI right and it should, therefore, be at that 2 year point when the PPSA’s 15 business days countdown for a PMSI eligible registration should commence.

Whether this interpretation is sufficient to also satisfy the Corporations Act’s dreaded section 588FL is another matter!