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:Organisation:Lawyer (formerly a partner with Allens, now in sole practice)
Background/Expertise/Interest in PPSA Review: I have advised a range of banking, mining and industrial companies on the impact of the PPSA on their businesses and transactions, and have authored an online guide to registration on the PPS Register (LexisNexis, Personal Property Securities Practical Guidance) and other materials.
Contact Details: email ; tel +61 420 937 159
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:
I am inclined to favour making Chapter 4 mandatory, though it would need careful review to ensure that it was sufficiently comprehensive to cater for all types of security interests to which it purported to apply. It would need to offer secured parties a regime that is no less favourable than they could currently achieve under well-drafted security agreements, and should not be a device for imposing consumer-style limits on the rights of parties taking security in commercial contexts.
That is, a mandatory regime should only be imposed on secured parties if, after consultation, representatives of financiers and their advisers are satisfied that the proposed regime does not detract from the position they would be able to achieve by agreement between grantor and secured parties under current law.
The enforcement rights of a secured party, outside the PPSA, are already constrained by rules of equity and statutory provisions such as s420A of the Corporations Act. So parties do not currently have the freedom to create their own self-contained enforcement code. Since the aim (or at least one aim) of the PPSA was to replace existing diverse sources of rules about security interests with a single code, the work might as well be completed in relation to enforcement.
It would only be worth doing this if it included receivership (that is, if existing s116 were changed). There seems little point in aiming for comprehensive coverage if such an important mechanism is not included.
One aim in having a comprehensive code would be to simplify the drafting of security agreements by enabling parties to omit enforcement provisions. However, it may not be possible to avoid including enforcement provisions where secured parties want to be sure that they will have the best available enforcement mechanisms for:
- property that is outside the scope of the Act (water rights, statutory licences, etc), or
- property that may be outside Australia.
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:
Agreed. It is particularly important that the concept of ‘default’ be expanded to cover enforcement triggers under the security agreement whether or not they represent failures by the debtor or grantor to perform its obligations. The current terminology (both in the PPSA and in other laws regulating enforcement) leads to the objectionable practice of secured parties seeking to make grantors undertake to prevent the occurrence of enforcement triggers, such as changes in market circumstances, which are clearly outside their control.
2.2.3 Section 109(1)(b) - incidental security interests
Should s 109(1)(b) be retained? If so, why?Comments:
I have not been able to work out a reason for retaining it, and so would see no objection to deletion. The scope of what is ‘incidental’ is uncertain.
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:
I agree it should be deleted. The laws of the foreign country where goods (or other assets) are situated may well decline to recognise Australian enforcement proceedings. But in other cases, the foreign law may be prepared to apply the Australian law, and it is difficult to see why s109(2) should, by this provision, prevent the foreign law doing so.
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:
I am inclined to favour deleting it. If the procedures and time limits in the Act are incompatible with market trading, then that would be a good reason for reviewing the procedures and time limits generally – not for selectively disabling them for certain categories of assets and perfection methods.
Further, if the enforcement chapter is intended to be a set of back-up enforcement procedures that are available where the parties have not specified any, then it is unhelpful to disable them. It would be better to allow parties to deal with specific deficiencies that may arise for their particular transactions by contracting out.
2.2.6 Section 109(5) - personal, domestic or household collateral
Is s 109(5) necessary?Comments:
I find it difficult to see why the remedies listed in s 109(5) should be inappropriate for personal, domestic or household collateral, and so would favour deleting the sub-section.
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:
I do not see a good reason why the tests that apply to exercise of enforcement remedies under Chapter 4 on the one hand, and under contract or general law on the other, should be different. I would prefer to see a single all-embracing test that applied to enforcement of security interests whether under Chapter 4 or otherwise.
It seems to me the test should be based on the well recognised principles of good faith and (as in s 420A of the Corporations Act) reasonable care, rather than ‘honesty’ (which presumably has a similar, but perhaps not identical, meaning to ‘good faith’) and the uncertain and subjective ‘commercially reasonable’.
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:
Yes, though it would still be a difficult test to apply in practice, as it will be necessary to prove what the grantor intended, at a historical point. Financiers would presumably attempt to cover this off by obtaining declarations of intended use, and then the question will arise whether they are able to accept these at face value or not.
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:
Yes, for the reasons stated in the paper.
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:
There are circumstances where exercise of a right of redemption on the terms of s142 would not be reasonable. For example, in the context of a joint venture cross charge, it could allow a joint venturer to default repeatedly on its financing obligations, allow enforcement to run nearly its full course, and then avoid enforcement by paying the overdue amounts at the last minute, only to default again the following month and begin the cycle all over.
I don’t see s 115(1)(q) as unreasonable.
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? / No
Comments:
I agree that s 116 is unclear and that this needs to be changed. However, I do not see the merit in receivership being treated differently from enforcement by a secured party.
2.2.9.2 Are the exclusions appropriate?
Is the current exclusion of corporate receivers from Chapter 4 appropriate?Comments:
I am unable to think of the policy reason for the enforcement rules for receivers being different from those for enforcement by a secured party directly.
If the rationale is that the current regulation of receiverships works so well that it should not be changed, then perhaps alignment should be achieved by conforming relevant PPSA provisions to their Corporations Act and general law equivalents, rather than the other way around.
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:
Yes, for the reasons stated in the paper.
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:
Yes, for the reasons stated in the paper.
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:
I agree with the reasons in the paper for suggesting that ss 120 and 121 could be broadened. I would also support the suggestion of the Act allowing the secured party to exercise any of the grantor’s rights in relation to the collateral. That is what the parties drafting the enforcement provisions in a security agreement try to achieve; and if Chapter 4 is to succeed in the goal of being able to replace the need for parties to draft their own enforcement provisions, then broad provisions such as that will assist.
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:
It would be good to clarify whether the obligor is entitled to rely on the notice without being obliged to make further enquiry, or not.
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:
One further difficulty with the 5 business day period in s120(3) is that, read literally, it may override the underlying payment terms, not by adding 5 business days, but by shortening a pre-agreed longer period. For example, arguably (though this is probably not what was intended) it requires the obligor to pay the secured party within 5 business days even if the underlying account had specified payment terms of 30 days. The suggested drafting overcomes this.
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:
Yes, for the reasons stated in the paper.
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, for the reasons stated in the paper.
(b)I cannot think of a reason.
2.4.2 Section 124 - security interests that are perfected by possession or control
Should s124(2)(b) be amended or deleted?Comments:
I think it 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:
Yes. I do think this is already implicit, but if there is doubt then clarification would be worthwhile.
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:
I don’t see any particular problem with ‘necessarily incidental’. The same words are also used in s 92.
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:
I consider this should be clarified. It’s not clear that the secured parties can contract out of the statutory right under s 127.
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:
It would be satisfying to know the answer to the question of which prevails; but there are likely to be different policy considerations for the many different kinds of encumbrances that would need to be considered; and I would query whether these kinds of conflicts arise with sufficient frequency to make the analysis worthwhile.
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:
It is possible to think of scenarios where 5 business days, at least, is eminently reasonable: for example a complex corporate insolvency where the handover would be an extremely complex task. And there are others where it might be thought far too long, for example where the junior creditor is a related entity of the grantor who is mishandling the enforcement. Five business days seems a reasonable compromise.
I don’t see that the position of the junior creditor needs to be aligned to that of the grantor (who, after all, has defaulted or at least tripped an enforcement trigger).
2.4.5.4 Section 127(6) - recovery of costs
Should s 127(6) be deleted?Comments:
I think the effect of s 127(6) should be modified so that the junior secured party is only entitled to reimbursement of its costs in accordance with s 140, when there are proceeds of enforcement to pay them.
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. The secured party should be able to select from the menu of whatever enforcement options are available, not be compelled to pursue them in a pre-determined order. It is reasonable for a secured party to be able to avoid liabilities that would attach to the property if it were seized: security enforcement is not meant to be a system that delivers windfall gains to third parties by compelling the property to pass through the hands of a deep-pocketed secured party.
2.5.1.2 Section 128(2) - method of disposal
Should a lease or licence of collateral be characterised as a "disposal"?Comments:
This point highlights the need for greater consistency throughout the Act on use of terms such as ‘dispose’ and ‘transfer’. The outcome should be that unless the parties have agreed otherwise, the secured party should be free (just as a receiver, acting as agent for the grantor, would be free) to derive proceeds from the collateral by any means including sale, lease and (whether or not the collateral is intellectual property) grant of licences or other rights. This needs to be achieved by terminology which is consistent with the remainder of the Act.
This outcome would also require amendment of s 128(4). If (as I think should be the case) Chapter 4 is meant to be a set of enforcement provisions that remove the need for secured parties to document their own, then the rule should be that the secured party may exercise powers of leasing or licensing unless prohibited in the security agreement. Not, as s 128(4) may currently imply, that these powers only arise if specifically granted by the security agreement.
2.5.1.3 Section 128(3) - timing of disposal
Is there a need for s 128(3)?Comments:
Not that I can see.
2.5.2.1 Restrictions on the right
Is s 129(3)(b) useful, or should it be deleted?Comments:
It seems sensible to me. As I see it, the policy intent is that the grantor should be subject to the same protections as would apply under s131 (market value, or best price reasonably obtainable), except that the ‘best price reasonably obtainable’ test perhaps cannot sensibly apply when the secured party is the purchaser and so is ‘obtaining’ the price from itself.
This may leave a secured party unable to use s 129 where there is no market value; though that is no real hardship for any secured party that is able to use a related company as purchaser.
Although logically it might be argued that no pricing protection is needed when the grantor is able to object to the purchase under s 129(2), I think the protection is still appropriate to safeguard grantors who may perhaps not be aware of their objection rights.
2.5.2.2 Notice of objection
Is the objection procedure set out in s 130(1) necessary, given the protections available in s 129(3)?Comments:
Given the novelty of the self-purchase right, I am inclined to favour retention of this protection. (Even though, as noted above, most secured parties could get around it relatively easily by arranging purchase by a related company.)
2.5.3.1 Section 130(1) - notice to the debtor
Proposed recommendation 3.32: That s130(1) be amended to require the secured party to also provide the notice contemplated by that section to the debtor.Do you agree with the proposed recommendation? / No
Comments:
It should be up to grantors and debtors to keep each other informed of things that affect them both. The secured party should not be required to take responsibility for this.
2.5.3.2 Sections 130(1) and 144 - notice to higher-ranking secured parties