Safeguarding your assets and the importance of the PPSR in an uncertain construction economy
The building and construction sector in Australia recorded the largest increase in insolvencies in the past twelve months. Recent statistics from the Australian Securities and Investment Commission (ASIC) recorded the insolvency of 2,975 construction companies, representing 27 per cent of the total number of insolvency appointments in 2023-2024, surpassing any other industry sector. Refer to link here.
Why has insolvency risen in the construction sector?
As the Australian government wound back stimulus packages and the economy began to recover post-pandemic; the construction sector experienced an impact lag of increased material costs, supply chain disruptions, skilled labour shortages and higher inflation. Increased interest rates further compounded the issue for builders and contractors, leaving them vulnerable to cash flow pressures, resulting in:
- An increase in the number of builders going out of business
- Construction sites being shut down for lengthy periods of time
- Contractors and suppliers not being paid for work undertaken or goods delivered, and
- Extensive delays in completing contracted construction works.
The risk of insolvency, that is not being able to pay your debts when due, has grown within the construction industry. Businesses must be diligent and proactive to mitigate risks in such an environment to ensure their interests are protected. An effective risk management approach must always be implemented with business assets, and it is of critical importance to use the Personal Property Security Register (PPRS) to decrease exposure to insolvency risk.
What is PPSR and how is it administered?
The Personal Property Securities Act 2009 (Cth) is the main piece of legislation that underpins the operation of the PPSR and how it is administered. This law gives rights to enforce a security interest.
The PPSR is a national online database and is a prudent risk management tool which should be used to protect your insurable interests. Parties to a construction contract who have an insurable interest or ownership rights of unfixed assets on project sites can register their assets on the PPSR. Construction assets which are registered under the PPSA are enforced as a security interest should you need to register a legal claim in the event of any debt or insolvency.
Upon a debtor’s default, assets are typically sold off to pay creditors. If you are a secured party with your interests registered under the PPSA, you have legal enforcement rights to reclaim your assets or its value against the debtor before unsecured creditors.
The PPSR discloses whether a party is claiming security interest on assets or goods. Registration supports that an interest has been retained in the goods or assets being supplied or leased out for more than two years. By registering your interest, protection is provided whenever a customer does not pay or goes out of business placing you in the best position to get your goods or their value back.
Recent statistics published on the Australian Financial Security Authority’s (AFSA) website support that there has been a significant increase in usage of the PPSR with 521,602 registrations created for the quarter ending March 2024. This number increased by 9.2% compared to the March quarter 2023, when there were 477,500 registrations created. Commercial property accounted for the most common type of collateral with 79.2% of total registrations. Refer to link here.
Before committing to buy or lease assets, it is prudent to be diligent and conduct a search on the PPSR. Searches undertaken on the PPSR before a purchase can identify if money is owing against a motor vehicle or plant and equipment. Skipping this step could result in purchasing an item that could be repossessed by a creditor who has a prior legal claim over the asset leading to financial loss and legal disputes, despite you having paid for the item.
What can you register on the PPSR?
- Selling, bailing, leasing or hiring out construction plant and equipment machinery, either individually or as part of a works contract.
- Supply of goods on retention of title terms,
- Equipment leases, and
- Selling or buying materials on hire purchase.
Businesses within the construction industry can protect their security interests by registering their yellow assets, goods and items. Depending on the terms of the contract, there may be goods left on site which have interests that should be protected through registration. This includes:
- Registered motor vehicles and trucks which should be recorded against a serial number and VIN.
- Portable construction equipment and machinery such as bob cats, excavators, forklifts and cranes.
- Goods such as timber, lumber, tiles, formwork, scaffolding, pumps including mixed goods which contain items you have a security in, for example ingredients like cement and sand mixed to make concrete.
Selling, bailing, leasing or hiring out construction plant and equipment machinery, either individually or as part of a works contract.
It is important to maintain an updated register of items which you own, are in your possession or which you are responsible to insure and regularly monitor all your registrations on the PPSR to ensure accuracy. While the scope of the PPSR covers a number of items and scenarios, it does have exceptions which need careful consideration. The PPSR does not capture registration of land, fixtures or land or interests in land (including rentals or other payments coming from the land), state and federal government interests, approvals and finances.
How does the PPSR benefit your business and mitigate financial loss?
- Creating a legal record which demonstrates your interest allows you to enforce your legal rights to reclaim your asset or its value in cases of debtor insolvency or bankruptcy.
- Easily allows your business to enforce legal rights to recover assets as you have a security interest registered.
- Gives your business precedence and priority in insolvency claims for specified assets, ahead of other unsecured creditors attempting to recover their debts from the same debtor.
- Provides legal clarity and certainty as your interests are registered, which reduces the possibility of lengthy and costly legal disputes.
- Knowing that your security interests are protected and safeguarded can enhance business confidence when entering credit or leasing arrangements which can provide additional assurance when undertaking transactions and can strengthen business relationships.
- Provide opportunities to gain better financing and funding options as your security interests are registered which provides lenders with assurance knowing their interests are protected.
- Use of PPSR may help keep the cost of your trade credit insurance premiums down because PPSRs will mitigate your trade credit risk. Moreover, some trade credit insurers may require PPSR compliance as a prerequisite to cover or require proof of PPSR compliance as a prerequisite to the payment of a claim.
How Bellrock can assist
Navigating the intricacies of the PPSR is essential to protect your business from financial loss. It is important to be proactive with securing your assets and obtaining legal advice is essential if taking action to enforce a security interest. Bellrock can assist with providing advice regarding the benefits of PPSR and arranging coverage for your construction equipment and assets by appropriate insurance risk transfer.
