• Ellison Moschella & Co

Security Interest in Building and Construction Contracts

Updated: Mar 9, 2021

Typical security interests in construction contracts

Security interests can arise from a variety clauses commonly contained in building and construction contracts which include the following:

  • security deposits or retention amounts pending compliance with 0obligation by the contractor;

  • rights to take over 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;

  • Where a contractor must hold on trust any amounts it receives for the account of the principal;

  • the supply of plant or equipment on retention of title terms or on hire purchase;

  • 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, 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 a secured party does not register these interests it may not be able to enforce its rights under these clauses, and potentially lose the benefit of the security.

Some of these security interests may be purchase money security interests (“PMSIs”) under the Personal Property Security Act. These arise where the secured party has provided the finance to acquire the collateral. Where these are registered in time and in a way which notes the PMSI, they will be afforded a higher priority than earlier non PMSI’s that have 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:

Collateral is inventory

  • ​If goods – before the grantor obtains possession of the goods.

  • If any other kind of inventory – before the security interest attaches to the inventory.

​Collateral other than inventory

  • If goods – within 15 business days after the day the grantor obtains possession of the goods.

  • If any other personal property – within 15 business days after the day the security interest attaches to the property.

Where security have been granted by a Company

Section 588FL of the Corporations Act 2001 (Cth) requires security interests granted by a company to be registered within 20 business days after the security agreement giving rise to the security interest was created. Failure to register within that time may invalidate the security on the insolvency of the debtor company. If registration is made after this time, the security interest remains subject to this risk for 6 months after registration.

Extending this time is problematic as demonstrated in the cases of Apex Gold Pty Ltd [2013] NSWSC 881 and Cardinia Nominees Pty Ltd [2013] NSWSC 32 where the court extended the time for registration of the security interests, but placed conditions which reduced the effectiveness of the extension.

An extension may not be granted where the delay to register was other than:

  • inadvertent;

  • Accidental; or

  • due to another sufficient cause.

This is particularly so where other unsecured creditors would be disadvantaged or where there was a long delay.

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