AustralianFinance Conference Level8, 39 MartinPlace,Sydney,2000.GPOBox1595,Sydney2001

ABN13 000493907Telephone:(02)9231-5877Facsimile:(02)9232-5647e-mail:

27 November 2014

PPSA ReviewSecretariat

Commercial andAdministrativeLawBranch

Attorney-General’sDepartment

3-5National Circuit BARTON ACT2600Byemailto

Attention: Mr Bruce Whittaker

Dear Mr Whittaker,

REVIEW OF THE PERSONAL PROPERTIES SECURITIES ACT - RESPONSE TO CONSULTATION PAPER 3

We attach the response of the Australian Finance Conference, the Australian Equipment Lessors Association and the Australian Fleet Lessors Association to Consultation Paper 3.

If you would like to discuss our response, please contact me or Catherine Shand on (02)92315877 or byemail to .

Kind Regards,

Yours truly,

Ron Hardaker

Executive Director

AUSTRALIAN FINANCE CONFERENCE, AUSTRALIAN EQUIPMENT LESSORS ASSOCIATION AND AUSTRALIAN FLEET LESSORS ASSOCIATION

RESPONSE TO PERSONAL PROPERTY SECURITIES ACT CONSULTATION PAPER 3

28 November 2014

Review of the Personal Property Securities Act 2009

Consultation Response Template

Consultation Paper 3

Instructions:

Please use the form below to provide feedback with respect to the proposed recommendations and issues listed in each section of the form. Please refer and respond to the proposed recommendation or issue as set out in Consultation Paper 3. The heading and paragraph number of the relevant sections of the consultation paper are included to help guide you.

Please note your agreement or disagreement with the proposed recommendation by deleting either ‘Yes’ or ‘No’ where indicated. Comments can be provided in the box below each proposition. There is no word limit for comments but succinct responses clearly setting out the reasons for agreement or disagreement with the proposed recommendation will be of most use for the purposes of the review.

You may respond to as many or as few propositions as you wish.

Name: Ron Hardaker
Organisation:Australian Finance Conference
Australian Equipment Lessors Association
Australian Fleet Lessors Association
Background/Expertise/Interest in PPSA Review: Finance Industry Association
Contact Details: 02 9231 5877
2.2.1 Should Chapter 4 be mandatory, where it applies?
In what circumstances, if any, should the Chapter 4 enforcement mechanisms be mandatory?
Comments: We submit that the enforcement mechanisms should not be mandatory. Commercial parties should be free to negotiate their own enforcement rules. If the grantor is a consumer and the National Consumer Credit Protection Act 2009 (Cth) (NCCP) does not apply to the credit associated with the security interest, then Chapter 4 should continue to apply. PPS Leases that do not secure the payment or performance of an obligation should continue to be exempt from Chapter 4 altogether.
Only the NCCP enforcement provisions should apply to consumer credit and leases regulated by that Code. Those provisions should apply to the exclusion of those in the PPSA. A simple bright line is appropriate rather than the current muddled approach under which NCCP-regulated consumer credit must comply with NCCP requirements and potentially some PPSA ones during enforcement. This is exacerbated by the PPS Regs (Reg 4.1) which only deal with NCCP enforcement provisions as they apply to consumer credit. It misses the NCCP enforcement provisions (ss 178 - 179R) applying to consumer leases. This technically results in consumer lessors having to comply with both the NCCP and the PPSA during enforcement of leases. We understand that in practice the NCCP enforcement provisions are applied to NCCP regulated credit and leases and the PPSA ones are ignored.
It must be recognised that there are consumer finance transactions not regulated by the NCCP, in particular novated leases, to which no NCCP enforcement provisions apply. As a result, the enforcement of novated leases, to the extent they are for personal, household or domestic purposes with individuals, must comply with all relevant PPSA enforcement provisions. Therefore, the distinction of security agreements which are for personal, household or domestic purposes and those which are not, should remain, unless there is a basis for saying the likes of novated leases should be treated akin to commercial ones, with the flexibility to contract out of many of the PPSA enforcement provisions.
Therefore our preferred approach is Option (b), under which parties can agree their own enforcement remedies, and remedies under the Act are a fall back. Option (a) unduly restricts the freedom of parties to negotiate and agree their own terms. It also may not be appropriate for the Chapter 4 regime to be mandatory in relation to security interests where the secured party holds title to the collateral. For example, if a supplier sells goods on ROT terms, it is not clear why the grantor should be able to object to the supplier retaining the collateral (see s137(2)). Another example is that, if a finance lessor enforces its security interest, it is not necessarily clear why the lessee (as grantor) should be entitled to any “upside” proceeds of enforcement (see s140(2)(f)).
While there may be some argument that Chapter 4 should be mandatory in relation to certain grantors (eg individuals), our view as that the NCCP already provides sufficient protection for individuals and, if it is felt that further protection is required, this should be dealt with under the NCCPA regime rather than the PPSA. This would also produce a fairer outcome for consumers, as there would not be a distinction in approach between security interests to which the PPSA applies and those falling outside the Act. As a result, we are not in favour of “option (c)”.
2.2.2 The meaning of "default"
Proposed recommendation 3.2: That the Act be amended by replacing references to "default by the debtor" (or similar) with "default" or "default under the security agreement", and that the term "default" be defined in s 10 along the lines of the corresponding definition in the NZ PPSA.
Do you agree with the proposed recommendation? / Yes
Comments: We agree that the language of the Act is too narrow.
2.2.3 Section 109(1)(b) - incidental security interests
Should s 109(1)(b) be retained? If so, why?
Comments: We are not aware of any reason for retaining s 109(1)(b).
2.2.4 Section 109(2) - property located outside Australia
Proposed recommendation 3.4: That s109(2) be deleted.
Do you agree with the proposed recommendation? / Yes
Comments: We are not aware of any reason for such a provision, if it is necessary at all, to apply only to goods. We agree with the proposed recommendation. The fact that it may be difficult, as a practical matter, to apply the Act’s enforcement provisions is not an appropriate reason to disengage them. It is open to a secured party to take local law security to aid in ease of enforcement. However, if a secured party elects to rely on an Australian law governed security, the Chapter 4 enforcement provisions should continue apply in this situation.
2.2.5 Section 109(3) - investment instruments and intermediated securities
Is s 109(3) too wide, too narrow, or both? How should it be amended?
Comments: No comment.
2.2.6 Section 109(5) - personal, domestic or household collateral
Is s 109(5) necessary?
Comments: There should be a carve-out for security interests regulated under the National Consumer Credit Code (NCCC). S 109(5) is unnecessary because it is not appropriate to have different rules under the PPSA in relation to collateral used for personal, domestic or household purposes (particularly if the security interest secures business finance and falls outside of the of the NCCPA regime). To the extent that consumer protection in relation to the enforcement of security interests is required, this is dealt with in the NCCPA. This would produce a fairer outcome for consumers, as there would not be a distinction in approach between security interests to which the PPSA applies and those falling outside the Act.
Also refer to our comments under 2.2.1 above, in particular in relation to consumer and novated leases.
2.2.7 Section 111 - exercise rights under Chapter 4
Should s 111 also apply to rights duties and obligations under a security agreement or at law generally, in addition to those under Chapter 4?
Comments: We are not aware of any reason to widen or amend s 111. Given the potential uncertainty as to what is “commercially reasonable” in any particular situation, extending s111 to obligations under the security agreement or at law generally would provide an undesirable level of uncertainty in relation to any action taken by a secured party under a security agreement. In addition, a security agreement will not always take the form of a GSA, SSA or other traditional security document (eg it may arise under many forms of supply agreement). It would seem to go beyond the scope of the Act to extend the s 111 obligations in relation to contracts that, in many cases, govern a host of other commercial obligations between the parties that are unrelated to the grant of security.
2.2.8 Section 115 - contracting out - when should the "use" be determined, and how?
Proposed recommendation 3.8: That the words "is not used" in line 2 of s115(1) be replaced with "the grantor does not intend, at the time it entered into the security agreement, to use".
Do you agree with the proposed recommendation? / Yes
Comments: As discussed in 2.2.6, we query the rationale for applying different rules to property used for personal, domestic or household purposes (particularly where security over such assets is granted in connection with a business loan), given that the NCCC already protects consumers in relation to the enforcement of security interests and this rule. It may be preferable for the PPSA to provide an enforcement regime that applies to all collateral regardless of its use, but for that regime to be subject to the NCCC. If the carve-out for property used for personal, domestic or household purposes is retained, we agree with the proposed recommendation.
2.2.8 Section 115 - contracting out - the expression "contract out"
Proposed recommendation 3.9: That s115(1) be amended by replacing "may contract out of" in s115(1) with "may agree that a party need not comply with", and that a corresponding amendment also be made to s115(7).
Do you agree with the proposed recommendation? / Yes
Comments:
2.2.8 Section 115 - contracting out - Section 115(1)(q) - the right of redemption
Should parties be allowed to contract out of the grantor’s right to redeem collateral under s 115(1)(q)?
Comments: We do not have an issue with the current form of s115(1)(q), nor do we share the concern raised in the submission referred to, but if there is uncertainty it should be clarified that the parties should not be able to contract out of the right to redeem collateral. It is open to a grantor not to agree to contract out of s142 and, even if the section is contracted out of, a secured party would generally be willing to allow the redemption of the collateral if the borrower is able to discharge the secured obligations prior to the disposal of the collateral (or, for a deemed security interest, the secured party may be willing to transfer the collateral to the borrower on payment of an adequate price that the secured party considers adequate, or at a price determined in accordance with a formula in the security agreement).
2.2.9.1 The meaning of the section
Proposed recommendation 3.11: That s116 be amended to set out the principles described in Section2.2.9.1 more clearly and succinctly.
Do you agree with the proposed recommendation? / Yes
Comments:
2.2.9.2 Are the exclusions appropriate?
Is the current exclusion of corporate receivers from Chapter 4 appropriate?
Comments: Yes. Given the comprehensive regime in Part 5.2 of the Corporations Act, the exclusion of receivers from Chapter 4 is appropriate.
2.2.10 Section 112(3) - licences
Proposed recommendation 3.13: That s112(3) be deleted.
Do you agree with the proposed recommendation? / Yes
Comments: We agree that s112(3) can be deleted.
We also query the appropriateness of the wording in s112(1) and (2). It appears that s112(1) could be read to mean that, unless the grantor is the owner of the collateral, the secured party is not entitled to dispose of the collateral (as the grantor would not be entitled to dispose of collateral unless it were the owner). This cannot be the intention of the Act. For example, if goods are sold to a grantor on the ROT terms and the seller fails to register its security interest, then a perfected security interest granted in favour of another creditor of the grantor will have priority. It cannot be the intention of the Act that the holder of the priority interest, in this situation, should be prevented from selling the goods simply because the grantor does not have title to them. In this regard, we note the obiter discussion in the Maiden Civil case on s122, and the view that its ”concern was not with the nemo dat principle, title or priority, which were otherwise addressed; but with other limitations or restrictions imposed by law on a grantor’s ability to deal with the collateral.” In our view, s112(1) should be amended for clarity.
Section 112(2)(b) provides that a secured party is not prevented from transferring collateral simply because a transfer is prohibited under, or a default under, a security agreement. However, it does not say what happens where a grantor is not entitled to transfer the collateral because it does not have title to the collateral or due to an agreement to which the grantor is party where that agreement is not a security agreement. We suggest that section 112(2) be amended to clarify this.
2.3.1 Terminology
Proposed recommendation 3.14: That the headings to ss120 and 121 be amended to refer to security interests in "certain payment obligations" (or a similar expression), rather than to security interests in "liquid assets".
Do you agree with the proposed recommendation? / Yes
Comments:
2.3.2 Collateral to which the sections apply
Would it be appropriate to expand ss 120 and 121 to apply to some other types of payment obligations as well, or to payment obligations generally? Should the Act simply permita secured party to exercise any of a grantor's rights in relation to any collateral that is subject to the security interest?
Comments: We submit that a secured party should be permitted to exercise any of a grantor's rights in relation to any collateral that is subject to the security interest. We do not hold a strong view on this issue if option (b) (discussed at section 2.2.1) is adopted. However it may be beneficial for ss120 and 121 to extend to payment obligations generally or to exercise any of a grantor's rights in relation to any collateral that is subject to the security interest.
2.3.3 Should the availability of the remedy be tightened?
Should s 120 be improved to mitigate its impact on obligors? If so, how?
Comments: 10 business days would be more appropriate.
2.3.4 Effect of the five business day period in s 120(3)
Proposed recommendation 3.17: That s120(3) be amended to read as set out in Section 2.3.4.
Do you agree with the proposed recommendation? / Yes
Comments:
2.3.5 Sections 120(4) and (5) - the application of amounts collected
Proposed recommendation 3.18: That s120(4) be deleted, and that s120(5) be amended to require that all amounts recovered under s120 be applied in accordance with s140.
Do you agree with the proposed recommendation? / Yes
Comments:
2.4.1 Sections 123(2) and (3) - seizing intangible property - licences
(a) Should ss 123(2) and (3) be amended to apply to all personal property other than goods?
(b) Is there a reason for singling out licences under ss 123(2) and (3)?
Comments:
(a) Yes.
(b) We are not aware of a reason for singling licences out for special treatment.
2.4.2 Section 124 - security interests that are perfected by possession or control
Should s124(2)(b) be amended or deleted?
Comments: We suggest that s124(2)(b) could be deleted.
2.4.3 Accessions
Proposed recommendation 3.21: That the Act be amended to provide that a secured party with a security interest in an accession can remove that accession when enforcing its security interest.
Do you agree with the proposed recommendation? / Yes
Comments:
2.4.4 Section 126 - disposal of collateral from the grantor's premises
Should s 126(2) refer to "reasonably required by" rather than "necessarily incidental to"?
Comments: Yes, this would be consistent with other provisions in the Act.
2.4.5.1 Priority agreements
Should s 127 clarify that a higher ranking secured party can still be bound by an agreement to allow enforcement by a junior secured party?
Comments: We would not oppose clarifying the section in this way.
2.4.5.2 Competitions with non-security interests
Should the Act be amended to resolve who can control enforcement procedures as between a security interest and an encumbrance which is not a security interest but which is superior?
Comments: No
2.4.5.3 Section 127(4) - the hand-over period
Where a senior secured party gives notice to a junior secured party that it proposes to take over enforcement proceedings under s 127, the junior secured party has five business days to hand over the collateral. Is this appropriate?
Comments: Given that s127(4)(b) already provides some leeway for a secured party who may not be in a position to immediately hand over possession of the collateral, it would be reasonable for paragraph (a) to require immediate delivery of the collateral instead of allowing 5 business days.
2.4.5.4 Section 127(6) - recovery of costs
Should s 127(6) be deleted?
Comments: Yes. Section 140 should apply to determine how enforcement costs are dealt with. Any payment of enforcement expenses should be in accordance with s 140 (and in particular 140(2)(b)) and only when the secured collateral has been sold or disposed. As a general observation, section 127(6) appears to cut across s140(2)(b), which provides for reasonable enforcement expenses “secured by the security interests” to be paid after certain preferred claims but ahead of other amounts secured by higher ranking security interests. The wording of section 140(2)(b) seems to apply to all reasonable secured enforcement expenses (not just the first ranking secured party’s enforcement expenses) and would therefore capture enforcement expenses of a lower ranking secured party (ie enforcement expenses the subject of s127(6)). It is not clear why the lower ranking secured party’s enforcement expenses should enjoy better priority under s127(6) than they otherwise would under s140(2)(b). Therefore s127(6) should probably be deleted and all enforcement costs should be paid in accordance with the waterfall provided for in s140(2)(b).
2.5.1.1 Section 128(1) - need for seizure?
Should a secured party be able to dispose of collateral without seizing it first?
Comments: Yes particularly if it does not want to incur any liability that might arise from being in possession or control of certain types of assets.
2.5.1.2 Section 128(2) - method of disposal
Should a lease or licence of collateral be characterised as a "disposal"?
Comments: The key here is whether the characterisation of leases and licenses as disposals causes any issues. Considering the effect of disposal as set out in section 133, it does not seem appropriate for leases and licences to be considered a disposal. In the case of disposal by a lease, such a disposal may be used by the disposing secured party to take ownership of an asset free of lower ranking security interests. If leases and licences are classified as a disposal for the purposes of this section (as noted in the Consultation Paper, this appears to be a drafting convenience), the meaning of “disposal” and its usage should be clarified elsewhere in the Act, and any amendments will need to work in the context of this section.