Review of the Personal Property Securities Act 2009

Consultation Response Template

Consultation Paper 1

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 1. 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: King & Wood Mallesons
Organisation: Law firm
We are a large Australian law firm which has significant corporate financing and insolvency practices. Since the inception of the reform process which introduced the Personal Property Securities Act 2009 (Cth) (“PPSA”) and the Personal Property Securities Regulations 2010 (Cth) (“PPS Regs”), we have seen them operate in practice in a wide variety of transactions and have advised a wide variety of business clients on them. We regularly undertake registrations and searches on the Personal Property Securities Register (“PPSRegister”). We have published numerous articles and contributed chapters to various books in connection with PPSA. We lecture on the PPSA at universities and regularly speak at industry conferences in Australia.
Contact Details:
Helena Busljeta
T +61 2 9296 2541 | M +61 438 640 493

4.2.1.3The meaning of "transfer" – outright legal transfers
Proposed recommendation 1.10: That s 12(3)(a) not apply to a transfer of an account that is an outright legal transfer.
Do you agree with the proposed recommendation? / No
Comments:
We consider that s 12(3)(a) should not exclude a transfer of an account that is an outright transfer in respectof which notice has been given to the debtor on the account (“legal transfers”) for the following reasons:
1It is inconsistent with the underlying policy of a PPSA regime. One of the fundamental policy aims of the PPSA is to treat all security interests in the same way without regard to distinctions as to form or whether or not an interest is legal or equitable. Generally speaking, the PPSA applies the same priority rules to in substance and deemed security interests. It is inconsistent with these policy aims to exclude outright legal transfers but continue to regulate outright transfers in respect of which notice has not been given to the debtor (“equitable transfers”).
2It creates new uncertainties. It is not clear how a priority dispute between a PPSA security interest and a security interest which is not subject to the Act will be resolved. The PPSA does not contain rules to resolve such a priority contest except for the limited circumstances set out in s73. If s73 is inapplicable, the priority dispute falls to be determined under general law principles which are preserved by s254 of the Act.[1] It is not certain how a court would apply those principles to determine priority.
To illustrate the effect of this proposed change, consider the following example.
Example: On 1 October 2014, Bill’s Bakery transfers its accounts to Freddy Factor. Freddy does not register the security interest on the PPS Register. On 1 November 2014, Bill’s Bakery transfers its accounts to Simon Securitiser. Simon searches the PPS Register, finds no security interests registered against Bill Bakery and registers the security interest on the PPS Register on the same day. On 1 December 2014, Freddy gives notice to the debtor on the accounts.
Under the PPSA as currently drafted, Simon has priority. However, if the PPSA is amended to provide that a legal transfer is not a security interest, it is not clear who has priority when general law principles are applied. It is not clear to what extent a court in applying the general law would take into account the fact that the interest of the equitable owner is regarded as a statutory security interest under the PPSA. The priority outcomes may differ depending on how the court answers this question.
3It will create greater complexity. Different rules will apply to a transfer at different points in time. In the example above, until Freddy gives notice, the priority between the transfers will be governed by the PPSA because they will both be security interests. However, after Freddy gives notice, Freddy’s security interest will no longer be a security interest and general law principles will apply to resolve the priority dispute. This is further complicated by the fact that notice can be given inadvertently or by a person other than the transferee.
4It will dilute the value of publicity. A third party dealing with the grantor will have no way to determine if there has been a dealing with an account other than by contacting the debtor on the account. In essence, this is reverting to the pre-PPSA position for outright legal transfers. One of the advantages of the PPS Register is that it enables third parties to conduct searches against a grantor to determine if the grantor has transferred accounts. While the PPS Register does not provide any detailed information about which accounts have been transferred, it does serve as a notice board and will indicate whether a searcher should make further enquiry.
Perfecting a transfer of an account by giving notice to the debtor
We also note that Consultation Paper 2 considers the suggestion that a transfer of an account should be able to be perfected by giving notice of the transfer to the debtor on the account on the basis that this is analogous to perfection by possession or control of other types of collateral (see paragraph 4.5). The Consultation Paper rejects this suggestion because it would compromise the ability of the Act to give third parties with a mechanism that allows them to determine without undue difficulty whether a grantor may have encumbered its property.
We agree with the views of Consultation Paper 2. We consider that transfers of accounts should not be allowed to be perfected by the transferee giving notice to the debtor on the account and this should be the case whether or not perfection in such a manner constitutes control with control “super-priority”. We reach this view for the same reasons outlined above and the following additional reasons.
  • Allowing the giving of notice to constitute perfection by control will undermine the point of registering equitable transfers. This will particularly be the case if control “super-priority” applies. Under the PPSA as currently drafted, Simon has priority in the example above. However, if perfection by control is permitted, the priority outcome would be that until Freddy gives notice, Simon has priority because Simon has registered its transfer. However, after Freddy gives notice, Freddy has priority.
Giving Freddy priority is effectively reinstating the pre-PPSA position. At general law, Freddy would have priority under the rule in Dearle v Hall.[2] However, at general law, there is also no PPS register and no rules which determine priority between equitable transfers based on which transfer was registered first. The fact that a registered equitable transfer of an account can be defeated by a later transferee who gives notice largely undermines the point of requiring equitable transfers to be registered at all. It also places equitable transferees in the position that they will always remain exposed to the risk of loss of priority to a legal transferee but at the same time, must register to maintain priority against other equitable transferees. This gives equitable transferees the worst of both worlds because it makes them subject to two regimes.
The primacy of the PPS Register is already eroded by the fact that other collateral can be perfected by control (such as shares). However, we consider that the position in relation to accounts is not the same. In order to take control of shares, a secured party must prevent the grantor from being able to dispose of the shares without the secured party’s involvement (for example, by taking possession of share certificates and blank transfers).
  • In the case of transfers of accounts, a registration system provides a more rational and simple regime for determining priorities than the general law. The rule in Dearle v Hall has been criticised as being “wholly unsuited to modern receivables financing”.[3] It requires the transferee to engage with debtors on each receivable to establish priority. For example, in a securitisation, there may be thousands or hundreds of thousands of receivables transferred and just as many debtors which the transferee would need to contact to establish priority. By contrast, under the PPSA, the transferee can perfect its security interest in all those receivables by a single registration.
  • The suggestion that a transfer of an account should be able to be perfected by giving notice of the transfer to the debtor seems to be based on the assumption that the person who the debtor must pay to discharge the debt should also have priority over the debt. However, this conflates priority with discharge. The giving of notice establishes priority under the rule in Dearle v Hall and allows the debtor to give discharge under s12 of the Conveyancing Act 1919 (NSW) (and its equivalent in other jurisdictions). Priority and the power to obtain a discharge are different things. Further, at general law, the person whomthe debtor must pay to discharge the debt does not always have priority (for example, a later legal transfer will lose priority to an earlier equitable transfer if the legal transferee had notice of the earlier equitable transfer).
Section 12 of the Conveyancing Act and s80(7) of the PPSA
To obtain priority under the PPSA, a transferee of an account does not need to convert the equitable transfer into a legal transfer by giving notice to the debtor on the account in accordance with s12 of the Conveyancing Act 1919 (NSW) (and its equivalent in other jurisdictions). However, the transferee still needs to give such a notice to acquire legal title and the legal right to collect the debt in its name. There is overlap between s80(7) of the PPSA and s12 of the Conveyancing Act on the power of the debtor to give good discharge. The result of this overlap is that under the PPSA as currently drafted, a transferee who has not registered its security interest on the PPS Register can require the debtor to pay it by giving notice under s12 and s80(7) even though another transferee has registered its security interest and has priority. In other words, the debtor must pay Freddy rather than Simon even though Simon has priority. It is important to appreciate that this practical problem does not mean that Freddy has priority under the PPSA. Simon would be entitled to pursue Freddy to asset its priority over the amounts received by Freddy.

1

[1]See Royal Bank of Canada v Radius Credit Union Ltd [2010] 3 SCR 38.

[2](1828) 3 Russ 1

[3]See Goode on Problems of Credit and Security (5th edition) Sweet & Maxwell 2013 (edited by L Gullifer) at p179.