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

RESPONSE TO PERSONAL PROPERTY SECURITIES ACT CONSULTATION PAPER 1

31 October2014 v2

REVIEW OF THE PERSONAL PROPERTY SECURITIES ACT 2009

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: 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

General Comment

In Consultation Paper 1, the Reviewer notes that his final report might be extrinsic material that could be considered when interpreting the Act. If this approach is adopted, we submit that the report should set out the basis for the decisions made where there might be any uncertainty. For example, if section 12(2)(l) is deleted, there should be clarification that this does not mean that such an arrangement is incapable of creating a security interest.

2.1.2 The ostensible ownership concern

In my view, the concept of perfection and the existence of the Register are integral components of the Act, and the publicity function that they are designed to serve, by providing outsiders with an opportunity to determine whether an item of personal property might be subject to an encumbrance, is a central function of the regime established by the Act and should be preserved. I would however be interested to hear whether others share this view.
Comments: We agree.

2.2 Should the Act be repealed?

Proposed recommendation 1.1: That the Act not be repealed, but rather that it be amended, to enable it to better achieve its potential.
Do you agree with the proposed recommendation? / Yes
Comments: As advocated in our previous submissions to the review, we support retention of the Act with appropriate amendment.
The Act is not fundamentally flawed to the extent where repeal is a viable proposal. Since the introduction of the PPSA, most businesses have unwound the policies, procedures and systems that were used pre-PPSA and have spent large amounts of money putting in place new policies, procedures and systems in order to protect their interests under the PPSA. Reverting to the pre-PPSA law would involve further large expenditure for the industry and put it back where it started, without resolving issues present under the old law which prompted the implementation of the PPSA.

3.2 Does a security interest need to be a proprietary interest?

Proposed recommendation 1.2: That the definition of "interest" in s 10 of the Act be deleted.
Do you agree with the proposed recommendation? / Yes
Comments: We see little advantage in retaining the definition, although there are different views on whether the in rem / in personam distinction is useful in analysing whether something is property and therefore capable of being a security interest, particularly in the context of a functional approach to security.

3.3.1 Interpretation of s 12(2)

[T]he correct approach to the interpretation of s 12(2) is that the list of transactions does not expand the meaning of the term "security interest", but only provides examples of transactions that can give rise to a security interest if they otherwise fall within the definition of the term.
Comments: We agree with this interpretation (which seems clear from the wording of the section) and with the proposed amendments to this section (discussed at paragraphs 3.3.2 - 3.3.6). However, if an alternative interpretation of s12(2) is preferred, this may change our views below in relation to these amendments.

3.3.2 Conditional sale agreements – s 12(2)(d)

Proposed recommendation 1.3: That s 12(2)(d) be amended to read:
(d)an agreement to sell subject to retention of title;
Do you agree with the proposed recommendation? / Yes
Comments:

3.3.3 Trust receipts – s 12(2)(g)

Proposed recommendation 1.4: That s 12(2)(g) be deleted.
Do you agree with the proposed recommendation? / Yes
Comments: “Trust receipt” arrangements continue to be used, and there may be some benefit in continuing to list them as an example of a potential security interest. However s12(2)(g) should not refer to “trusts” generally.

3.3.4 Interests that might also be deemed security interests – ss 12(2)(h) and (i)

Proposed recommendation 1.5: If a transfer of an account or chattel paper continues to be a transaction that is deemed by s 12(3) to give rise to a security interest whether or not the transaction in substance secures payment or performance of an obligation, that a new paragraph be inserted in s 12(2), in substitution for current s 12(2)(g) (as to which, see Proposed recommendation 1.4 above):
(g)a transfer of the benefit of a monetary obligation (whether or not an [account] or [chattel paper]);
Do you agree with the proposed recommendation? / Yes
Comments:

3.3.5 Assignments, and transfers of title – ss 12(2)(j) and (k)

Proposed recommendation 1.6: None at this stage, pending further consideration.
Comments: We agree with the view expressed in the concluding paragraph of 3.3.5. Section 12(2)(k) should be deleted and it should be made clear that a transaction is not a security interest if it is an outright transfer of title that does not leave the transferor with any indicia of ownership that could enable it to deceive outsiders into believing that it had clear title to the asset. This is consistent with the policy rationale expressed at 4.1 about ostensible ownership.
It seems that paragraph (k) is aimed at situations where a person transfers title to a financier by way of security and then retains possession of the relevant property (together with an equity of redemption against the financier). This should clearly give rise to an in substance security interest. However, given on the basis of the view that s12(2) does not expand the meaning of the term “security interest”, we are comfortable removing this example if the general consensus is that this would simplify the Act and avoid confusion.
The consultation paper also suggests that it should be made clear that a transaction is not a security interest for the purposes of s12(1) if it is an outright transfer that does not leave the transferor with any indicia of ownership. We agree with this, provided it is made clear that a transfer where the transferor retains an equity of redemption is not an “outright transfer” for the purposes of this carve-out.
The point has been raised as to how the “outright transfer” analysis would be applied to circumstances where, despite the transfer, the transferor retains a licence or contractual right to possess, use or operate the collateral, whether as principal, agent or consignee (as may occur under some mining services agreements), and hence the transferor is still positioned to misrepresent the nature of their interest in the property.

3.3.6 Flawed asset arrangements - s 12(2)(l)

Proposed recommendation 1.7: That s 12(2)(l) be deleted.
Do you agree with the proposed recommendation? / Yes
Comments: We agree that a flawed asset arrangement on its own is unlikely to give rise to a security interest and, as a result, s12(2)(l) should either be amended or deleted.
If s 12(2)(l) is removed, perhaps there should be something analogous to replace it. If there is industry consensus that the term “triple cocktail” is widely known then perhaps such term should be used as examples of a security interest under s 12(2)(l).
A “triple cocktail” has been described as follows:
Pre-PPSA, there was uncertainty as to whether a bank could take a charge over a deposit with it (there is a long line of case law on this). As a result, it was common in Australia for financiers to enter into “double cocktail” arrangements consisting of a flawed asset arrangement combined with a right of set-off. Ie, the financier would not be obliged to repay the deposit to the borrower until amounts owing to the financier had been repaid and the financier was entitled to set-off the deposit against amounts owing by the borrower. This enabled financiers to achieve a position equivalent to having security over the deposit, without actually taking a charge over it. Under pre-PPSA law, this gave rise to a contractual right only and did not constitute a security interest, or proprietary interest, in the deposit. It is unclear whether this is still the case post-PPSA.
A “triple cocktail” is a double cocktail plus a charge over the deposit. Pre-PPSA, “triple cocktails” were sometimes used in Australia on the assumption that Australian courts would eventually adopt the English law position of recognising a charge over a deposit. However, there was a concern that the charge over the deposit would destroy mutuality and, on insolvency, render insolvency set-off rights ineffective. We understand that “triple cocktails” have become more widely used post PPSA as the PPSA now expressly permits the grant of security over a deposit (s12(3A) and 12(4)(b)).
Given sections 12(3A) and 12(4)(b), it is perhaps not essential that a triple cocktail be included as an example at s12(2), particularly if the term “triple cocktail” is not widely recognised outside of banking circles. However, given how common these arrangements are, there may be some benefit in including them as a specific example.

4.1 Deemed security interests - Policy rationale

[T]he primary factor in deciding whether a particular interest should be considered for inclusion in s 12(3) are whether it engages the ostensible ownership concern and, if it does, whether it would produce significant disruption if the interest were not captured.
Comments: We agree. We also agree with the view expressed at page 15 in the context of s 151, ‘to allow a person to register if they reasonably consider that they will be entering into a transaction, but are not sure whether it will in fact give rise to a security interest’.
We also suggest that the consideration of “whether it would produce significant disruption if the interest were not captured” must look at the level of disruption that would be caused to parties who would be deemed to be secured parties if the interest were captured (not just the level of disruption to third parties).

4.2.1.1 Should the Act deem a transfer of an account (however defined) to be a security interest if it does not secure payment or performance of an obligation?

Proposed recommendation 1.8: That s 12(3)(a), which provides that a transfer of an account can be a security interest whether or not it in substance secures payment or performance of an obligation, be retained.
Do you agree with the proposed recommendation? / Yes
Comments: This is consistent with the policy rationale at 4.1 above, but our agreement is subject to the meaning of “transfer” being clarified.

4.2.1.2 The meaning of "account"

Proposed recommendation 1.9: None at this stage, pending further consideration.
Comments: We agree with the last paragraph of 4.2.1.2 ie that the balance between competing priority considerations in relation to transfers of accounts should be resolved by both tightening the definition of "account", and by providing in s 12(3)(a) that a transfer of an account is only a security interest (if it is not an in-substance security interest under s 12(1)) if the transferee of the account is "regularly engaged in the business of purchasing accounts". However, a concern has been expressed about the disapplication to financiers who purchase a participation via sell down, unless the argument is that “ostensible ownership” is less of a concern when the grantor is another financier and, from a practical perspective, the industry standard is that financiers would take the view that the assignee financier would not register a financing statement against the assignor financier.
Currently, the term ‘regularly engaged’ is only used in the Act in relation to a PPS lease (lessors and bailors being regularly engaged in the provision of lease and bailments). If recommendation 1.16 is adopted, removing references to bailments in the definition of a PPS lease, then there would be a single reference to “regularly engaged” in the Act. In the contexts they are used in the Act, “regularly engaging in a business” and “in the ordinary course of business” can be used interchangeably. In keeping with guiding principle 3 of the Review (Simplicity), where the use of two different concepts in the Act could be replaced with a single concept, the Act should be simplified by using a single concept.
As far as we are aware, “regularly engaged” does not have a clear legal meaning. For that reason it might be preferable to refer to accounts purchased “in the ordinary course of business”.

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? / Yes
Comments: This will also assist in addressing an exclusion from the PPSA discussed in Consultation Paper 1 at para 6.8 (pp 45 - 46). Section 8(1)(f)(vii) seems to address the circumstances in which debt purchasers find themselves, i.e. they take the legal assignment of accounts. If the proposed recommendation 1.10 is accepted, then there is no need for s 8(1)(f)(vii).
The view has been expressed that it is not practical for a prospective financier to make enquiries of the obligor/debtor to determine if the account has already been transferred, especially due to confidentiality arrangements between the prospective financier and the prospective transferor. Notwithstanding that the prospective transferor has legally transferred the account and has no interest in it, and despite the argument regarding ostensible ownership, inclusion of an outright legal transfer would assist the prospective financier to narrow the risk that it has already been transferred.

4.2.1.3The meaning of "transfer" - novations

Proposed recommendation 1.11: That the Act not be amended to clarify that a novation is not a "transfer" for the purposes of the Act.
Do you agree with the proposed recommendation? / Yes
Comments: There has been considerable uncertainty in the market as to whether a novation falls within the meaning of “transfer” for the purposes of this section. A novation is, in our experience, often conceived of (as a commercial matter) as a “transfer” of a borrower’s obligation from one financier to another’ for example restrictions on “transfer” of obligations are commonly encountered in finance agreements. Our preference is therefore for this to be clarified.
It would have to be considered whether the exclusion of novations should expressly preserve a novation which clearly secures the payment or performance of an obligation otherwise unrelated to the novated transaction.

4.2.1.3The meaning of "transfer" – declarations of trust

Proposed recommendation 1.12: That the Act not be amended to clarify that a declaration of trust is not a "transfer" for the purposes of the Act.
Do you agree with the proposed recommendation? / Yes
Comments: There are differing views as to whether (some) declarations of trusts over accounts could constitute a “transfer” of (the equitable interest in) those accounts. However, we agree that it is not particularly useful to expressly amend the Act on this point.

4.2.2 Transfer of chattel paper

Proposed recommendation 1.13: That the definition of "chattel paper" in section 10, and all references in the Act to chattel paper (including s 71), be deleted.
Do you agree with the proposed recommendation?Yes
Comments: We understand that the US method of chattel financing (involving the transfer of chattel paper) is not frequently used by Australian banks as a means of asset finance, and it is not anticipated that this method will be widely used in the future. The preference is for the concept of chattel paper to be removed from the Act. The removal of this concept would simplify the process for doing business with leasing companies (and reduce the risk associated with dealing with such companies) as the s71 priority rule (which gives priority to a secured party that has physical possession of the lease document) would cease to apply.

4.3 Commercial consignments

Proposed recommendation 1.14: None at this stage, pending further consideration.
Comments: A number of our members provide floor plan vehicle finance. In doing so, they regard those financing arrangements as being in substance security interests, rather than deemed security interests by way of commercial consignment. We do not have information about the relevance of the concept of “commercial consignment” in the Australian market now or in the foreseeable future.
We are not aware of financiers, manufacturers or suppliers within the motor vehicle industry that currently sell significant numbers of vehicles on consignment, or structure bailment and floor plan facilities as commercial consignments (ie vehicles are not sold by the dealer as agent for the financier).
However, from time to time, a financier may take security from customers that operate a consignment business (as consignee) in other goods. There may therefore be some benefit in a consignor being treated as a secured party (so that consignors are obliged to register their interest). However, in practice, it is often the case that the consignor will be an individual or business that does not “deal in goods of that kind in the ordinary course of business” (cf the consignors in the recent Arcabi case). So the application of section 12(3)(b) is limited.
Alternatively, a financier may on occasion take security from a business that regularly disposes of, or leases, non-vehicle inventory via a consignee. In those cases, there may be some benefit in a consignor being treated as a secured party (because the consignor’s interest is then “put on record” via PPSR). However, section 12(3)(b) will not apply if the consignee is “generally known … to be selling or leasing goods of others” (cf the consignee in the recent Arcabi case) - so, again, of limited usefulness.
From a motor vehicle financier’s perspective, it is important that traditional bailment and floor plan facilities are treated as creating a security interest. This is relevant where they provide finance to a motor vehicle dealership, as they would generally rely on a search of the PPSR to establish whether the vehicles in possession of the dealer are in fact owned by the dealer or by another financier under a bailment or floor plan facility. If bailments are to be removed from the definition of “PPS lease”, there may be some benefit in retaining the current concept of commercial consignment (and perhaps making it clear that it is not limited to the more traditional “agency” model of consignment). Alternatively, it would be useful if commentary confirming that a traditional bailment or floor plan facility will generally be an in substance security interest could be included in the final report to enable it to be drawn on (under s 15AB(2)(b) of the Acts Interpretation Act 1901) to support this conclusion.
If the conclusion from further feedback is that the concept of a commercial consignment is sufficiently important that it should be retained in the Act (particularly if it will be recommended that the partly overlapping concept of “bailment” be removed), then we are comfortable with the two amendments suggested at paragraph 4.3 of the consultation paper.

4.4.2 Personal Property Securities Amendment (Deregulatory Measures) Bill 2014