Contents
Introduction 2
Simplifying search results: A survey of information in financing statements 3
Simplifying search results: Survey results 4
Simplifying search results: Are uninformative collateral descriptions permitted under the PPS Act? 5
Simplifying search results: The problem of uninformative collateral descriptions 6
Simplifying search results: A proposal to include the value of the secured obligations in financing statements 7
Simplifying searching: Current search protocol – search on multiple identifiers 8
Simplifying searching: ASIC migration and multiple identifiers 9
Simplifying searching: A proposal for the Registrar to promote simple search protocols 10
Business non-compliance: Identifying companies by ABN 12
Simplifying PPS compliance for small business: Proposed carve-out for low-value transactions 13
Law Society of New South Wales, Young Lawyers Business Law Committee, PPS Act Review Working Group 15
Schedule 1 – Full survey results 16
Schedule 2 – Sample businesses 18
Schedule 3 – Extracts from financing statements 19
Schedule 4 – AFSA paper, 'Searching ASIC Migrated Data' 42
Introduction
New South Wales Young Lawyers is pleased to make a submission to the statutory review of the Personal Property Securities Act. Many of the 15,000 members of our association have directly participated in the realisation of personal property securities reform. This began for the wider business and legal community with the commencement of the Personal Property Securities Register on 30 January 2012. From explaining to clients the new functional concept of a security interest, to daily staring at the new social network of security interests populated by financiers, lessors and suppliers on the PPS Register, young lawyers have with a mixture of enthusiasm and trepidation turned their knowledge and skills to a personal property securities law and registration platform that has been designed for the digital age.
It is the job of many junior lawyers to deal with the day-to-day operations of the PPS Register: searching the register, interpreting search results, making registrations, amending registrations, discharging registrations, and communicating the information required or obtained to their clients. This familiarity with using the PPS Register may position us to identify and explain opportunities for cost-effective and high-value reforms that the Review may consider recommending to the Australian Government.
In our submission, it could be simpler to perform a search on the PPS Register and to interpret search results. The current complexity of searching the register and interpreting search results is a barrier to small business using the PPS Register.
We discuss two areas where small changes to the PPS framework would have the largest impact in reducing complexity and costs, to the benefit of small business in particular:
1. Following PPS reform, information about security interests in personal property is now more extensive and more accessible to business and consumers. This information is not always useful; it is not uncommon for a business to have upwards of fifty registrations made against them and for many of these to have uninformative or absent collateral descriptions. The quantity of information on the PPS Register will only increase with time. Registrations are being made faster than they are being discharged on the PPS Register. The surplus of registrations over discharges in the most recent quarter was 480,576 registrations. This is a growth rate in the number of registrations of 6.3% per quarter or 25.2% per annum.[1]
Requiring secured parties to give an indication in financing statements of the value of the secured obligations owed to them would enable financiers, purchasers of businesses and small business trade creditors to distinguish between material and ordinary-course-of-business security interests registered on the PPS Register. Search results would be simpler to interpret. The credit profile of small businesses would be easier to assess, which should increase the availability of small business finance and facilitate sale of business transactions for small business.
2. Searching the register is complex and costly. There is an opportunity to simplify searching and reduce costs by ensuring the grantor details in migrated registrations meet the PPS Act standards. Widespread non-compliance by businesses using ABNs to identify company grantors can be eliminated by the Review and the PPS Registrar shining a spotlight on the problem.
The PPS Registrar’s promotion of simple search protocols would increase accessibility to small business and reduce the costs of searching the PPS Register. Search costs in relation to companies can be reduced by around two-thirds, around approximately $3.8 million per annum in search fees alone.
We also discuss areas where the regulatory burden on small business of requiring them to register security interests under the PPS Act may outweigh the benefit to secured creditors and others of a public registration.
Simplifying search results: A survey of information in financing statements
PPS search results are complex because the PPS framework results in secured parties registering financing statements with uninformative collateral descriptions or no collateral description. NSWYL has conducted a survey of the information contained in financing statements registered in respect of a sample of small businesses. The results substantiate the claim that uninformative and absent collateral descriptions is the characteristic cause of complexity in PPS Register search results.
An obstacle to the technical evaluation of the success of PPS reform is the limited availability of empirical data. There is some information publicly available. The Australian Financial Security Authority publishes quarterly usage statistics for searches performed and registrations made on the PPS Register. Apart from that top-level data, there is little information about how financiers, lessors, suppliers and other secured parties are registering their security interests. We have conducted a survey to be a primary source of information on the registration practices that have developed in the years following the registration commencement time.
The survey has been designed to ensure that the results are representative of PPS Register registration practices in relation to small businesses generally. The sample size (20 small businesses) is large enough to capture registration practices that are not specific to any one business. The sample is made up of small businesses to enable an analysis of how the PPS reform has affected the ability of financiers to assess the credit of small businesses and to examine the information that a purchaser of a small business would obtain from a search of the PPS register, but in our experience registration practices in relation to small business are the same as in relation to business generally.
The businesses in the sample are based in various States and operate in diverse industries. They were winners of national business awards from 2010-2013 and are listed in Schedule 2. While the sample is not random in the sense that the businesses chosen are successful businesses, there is unlikely to be a correlation between business success and secured party PPS Register registration practices, so that the sample is random for the use that has been made of it.
The parameters of the survey were as follows.
Number of small businesses / 20Search type / Organisation grantor
Organisation Identifier / Primary identifier in accordance with the Personal Property Securities Regulations 2010 (Cth) – ACN for companies, ABN for trusts and partnerships
Selection criteria / National winners of a national Australian business awards competition from 2010-2013[2]
Number of employees / Maximum 200 full-time equivalent employees, including a number with fewer than 5 full-time equivalent employees
Industries / Agriculture, aviation, engineering, food, health, manufacturing, recycling, retail products, retail distribution and technology
Simplifying search results: Survey results
The results of the survey are presented in Schedule 1. Extracts of the collateral descriptions are set out in Schedule 3. Of the 20 businesses searched, 16 were grantors of a registered security interest.
In 39% of registrations the collateral the subject of the security interest was not identifiable from the information contained in the financing statement. As a searcher of the PPS Register, it was impossible to tell whether each of these security interests existed in a few items of property supplied on retention of title terms, or in hundreds of items of plant and equipment leased by the secured party that were necessary for the operation of the grantor's business.
The ways free text collateral descriptions in financing statements were uninformative fell into several categories.
Free text descriptions that referred to broad classes of collateral 'supplied by the secured party'. This was the most common type of uninformative collateral description. It was used in 20% of all registrations. Typical examples were:
- 'All equipment sold, leased, rented or otherwise made available to the grantor by the secured party'
- 'Collateral supplied by the secured party'
- 'Goods sold from time to time'
- 'All vehicles supplied by the secured party'
93% of the registrations that used this collateral description were purchase money security interests. This form of description informs the searcher of the existence of the relationship between the grantor and the PMSI secured party. It gives no indication as to how many goods or motor vehicles the PMSI secured party has supplied.
Blank collateral descriptions. 10% of registrations did not contain free text collateral descriptions. The information was not contained in any other part of the financing statement; no registrations with blank collateral descriptions attached the underlying security agreement (nor did any other registrations apart from migrated registrations).
Free text descriptions that referred to all-inclusive classes of collateral. 6% of registrations used this type of collateral description. Typical examples were:
- 'Except any personal property which is not from time to time subject to a security agreement in favour of the secured party (for registrations in the 'All present and after-acquired property – with exceptions' collateral class)'
- 'Any property which is subject to a security interest under [name of security agreement]'
- 'All goods and services'
These descriptions are like those that refer to goods 'supplied by the secured party' but they are even broader. Describing the collateral as anything subject to a security interest, or as everything except anything subject to a security agreement, is tautologous. It adds no additional information. By definition, collateral is what is subject to the security agreement. These collateral descriptions are all-inclusive and give no indication of what the collateral actually is to the searcher.
Free text descriptions that referred to broad general classes of collateral. 3% of registrations used this type of collateral description. Typical examples were:
- 'Office machines and equipment'
- A long list of the secured party's product categories
These descriptions give some information to the searcher. Typically they are not tailored to the grantor, so the secured party would use the same collateral description for all their registrations on the PPS Register.
The financing statements with uninformative or blank collateral descriptions did contain a collateral class for the security interest. They came from the following collateral classes. The proportion of collateral descriptions that were uninformative in that class is shown.
- All present and after acquired property with exceptions (14/14, 100%)
- Other Goods (124/241, 51%)
- Motor Vehicles (27/97, 28%)
- Intangible property (3/4, 75%)
- Financial property (1/1, 100%)
By contrast, the following types of registrations did have informative collateral descriptions:
- Those with free text descriptions that contained a serial number or related to particular items (28% of all registrations)
- Those which specified a serial number (20% of all registrations)
- Migrated registrations (10% of all registrations), because the underlying security agreement was attached, which provided more context for the grant of the security interest.
- All present and after acquired property without exceptions (3% of all registrations), because the security interest was in all the assets of the grantor.
The results show that the problem of uninformative or blank collateral descriptions is spread across collateral classes.
Simplifying search results: Are uninformative collateral descriptions permitted under the PPS Act?
There is no requirement in the legislation that a financing statement describe the collateral the subject of the security interest in any detail.
Section 153 of the PPS Act provides that a financing statement consists of a collateral description in accordance with all of the following rules:
a) the collateral must be described as consumer property or commercial property;
b) the collateral may or must be described by serial number, if allowed or required by the regulations;
c) the collateral must belong to a single class of collateral prescribed by the regulations;
d) any description of proceeds must comply with the regulations.
There is no rule requiring a description beyond the inclusion of a collateral class. For that reason the 10% of registrations disclosed in the survey that had blank collateral descriptions are effective.
A collateral description is useful to searchers of the PPS Register to the extent it limits the scope of the security interest. Searchers of the PPS Register are generally concerned to establish the degree to which the assets of the grantor are encumbered. Any registration on the PPS Register raises a red flag to a searcher that a substantial part of the grantor's property may be subject to a security interest. The significance of such a red flag can be lessened if the collateral class is narrow, such as motor vehicles, or if the collateral description limits the property covered by the security interest, such as by describing a particular item that has been leased to the grantor.
A collateral description is useful to secured parties to the extent it perfects any security interests that have been granted by the grantor to the secured party. To perfect a security interest, a registration must be effective 'with respect to the collateral'[3]. A broad collateral description is preferable, or the absence of any collateral description at all apart from the collateral class and whether the collateral is commercial or consumer property, as any specific collateral description limits the property that the registration can be 'with respect to'. If a secured party includes a detailed collateral description in a financing statement, it risks the non-perfection of its security interest in any collateral that does not fall within the description.
The current legislative framework gives secured parties an incentive to use uninformative collateral descriptions. The interests of secured parties diverge from the interests of searchers of the PPS Register in this instance.