Powers of attorney and step-in rights as security interests?

The status of power of attorney clauses and “step-in rights” provisions under the Personal Property Securities Act 2009 (Cth) (PPSA) remains an issue of ongoing interest for liquidators, particularly in the external administrations of companies who are parties to construction contracts or joint ventures.

Power of attorney clauses

Power of attorney clauses are a common feature of many commercial contracts, including many finance agreements. A common example is a finance agreement for the funding of premiums payable under a company’s insurance policies. Such finance agreements typically contain a power of attorney clause appointing the lender as the borrower’s lawful attorney with power after an event of default to deal with the insurance policies and any insurance proceeds to the extent the attorney considers necessary in order to ensure repayment by the borrower of all monies owed to the lender.

In the absence of:

• the express grant of a ‘security interest’
• a charging clause
• a provision that results in the borrower’s property vesting in or being transferred to the lender upon the occurrence of an event of default
• other terms that give the donee a proprietary interest in the property to which the power of attorney relates

the rights under a power of attorney are merely contractual in nature and do not create a PPSA security interest, even if the clause contains prefatory words such as “to secure its obligations under this contract”.[1] This is consistent with established principle that power of attorney clauses are to be construed strictly in favour of the principal and that in the absence of clear contrary provision, a power of attorney clause does no more than enable the attorney to act in the management of the principal’s affairs.[2]

Step-in rights

The above reasoning is consistent with the limited judicial treatment of the status of “step-in rights” clauses which are frequently found within construction contracts and joint venture agreements. Those clauses typically provide that in the event of default by a contractor/joint venture party, the principal/other joint venture party may take over the defaulting party’s works and perform that party’s obligations in place of the defaulting party.

The status of step-in clauses under the PPSA has not yet been definitively addressed by an Australian court. The only guidance comes from a 2013 New Zealand High Court decision involving a step-in clause which gave a principal the right to step-in, use and sell the contractor’s materials and equipment if it went into receivership and the receivers failed to take over the construction work. The NZ court found this clause gave rise to a security interest.[3] Critical to this conclusion was the clause’s language which was clearly intended to ‘transfer’ to the principal the contractor’s equipment to enable the principal to complete the contract work and sell the equipment to cover any liability of the contractor resulting from its failure to complete the work. Most step-in clauses are not drafted in such a way as to create a proprietary interest and are more likely to be characterised as being contractual in nature rather than creating a proprietary interest.

Priority

In the event that a power of attorney or step-in right does constitute a security interest, such a security interest would be unlikely to have priority ahead of security interests perfected by other parties at an earlier time. For example, absent a priority agreement, the donee or beneficiary of such a clause would typically not be entitled to a purchase money security interest or other super priority, so it would rank behind earlier perfected security in the subject property.

Key takeaways

Liquidators should not necessarily be deterred by a PPSR registration of a security interest which relies on power of attorney or step-in clauses. Instead, careful analysis of such clauses is required to determine whether such clauses in substance secure payment or performance of an obligation by creating a proprietary interest in the counterparty’s personal property.

[1] Cf: Re Sims Battle Brewster & Associates Inc 1999 ABQB 830 at [17] and [19].