Review of the Personal Property Securities Act 2009
Consultation Response Template
Consultation Paper 2
Instructions:
Please use the form below to provide feedback withrespect tothe 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 2. 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: David C TurnerOrganisation: Barrister, Victorian Bar; Senior Fellow, Faculty of law, Monash University
Background/Expertise/Interest in PPSA Review:
I am Barrister and Nationally Accreditor Mediator at the Victorian Bar. My practice is in commercial law with specialist interests in banking and finance, insolvency and personal property securities law. I am a Senior Fellow in the Monash University Facility of Law, where I have taught personal property securities law in the graduate programme, since 2011. I have published articles on aspects of the PPSA and regularly give seminars to various groups of lawyers throughout Australia, including the Judicial College of Victoria and the Federal Circuit Court in Melbourne. Prior to coming to the Bar, I had significant experience as a solicitor in private practice and in corporate financing and insolvency at a major bank.
Contact Details:
2.2Rights in the collateral
Should bare possession constitute sufficient rights in collateral to support attachment of a security interest and, if so, on what basis?
Comments:
Bare possession is a personal right not a proprietary right.
The Consultation Paper proceeds on a misunderstanding of rights in collateral. Also, the reason for s 19(5).
Under the general law, a person has rights in a thing they own as beneficial owner. The laws refers to these ownership rights as real rights.
The second category is real security not based on ownership or possession. These rights come with the incidence of being a chargee under an equitable charge or a non-possessory lien. The right enjoyed by a pledgee is a real right.
The third and more controversial category is possession for a limited time as a bailee, whether directly or through a third party ie shared or constructive possession. The House of Lords in On Demand v Gerson [2002] UKHL finally put to rest the idea that a bailee in possession under the lease agreement did not enjoy a proprietary right. The Lords said that a right under an agreement is simply a personal right but once the bailee gained possession that personal right is a real right.
In the most prominent discussion of the nature of property rights in National Provincial Bank Ltd v Ainsworth [1965] AC 1175 at 1247-8 Lord Wilberforce inserted that:
“Before a right or an interest can be admitted into the category of property, or of a right affecting property, it must be definable, identifiable by third parties, capable of in its nature of assumption by third parties, and have some degree or permanence or stability”.
The better view is that the interest of a hirer of goods is proprietary in character.
Blackstone said a transfer under a lease was a proprietary interest right ie qualified property.
In Bristol Airport PLC v Powdrill [1990] Ch 744 Vice Chancellor Brown-Wilkinson said they were property under the Insolvency Act in UK. “Although a chattel lease is a contract it does not follow that no property interest is created in the chattel”.
Brennan CJ in Commonwealth of Australia v WMC Resources (1998) 194 CLR 1, 13-14 endorsed the judicial emphasis on the incident of transferability of property rights.
The proprietary character of the possessory entitlement of a lessee under a finance lease was confirmed by the courts through to the House of Lords in On-Demand Information Plc v Michael Gerson (Finance) Plc [2003] 1 AC 368. Interestingly, Fidelis Oditah (Legal Aspects of Receivables Financing) and Sir Roy Goode were counsel for opposing parties in the House of Lords.
Walker LJ in the Court of Appeal said:
“Contractual rights which entitle the hirer to indefinite possession of chattels so long as hire payments are duly made, and which qualify and limit the owner’s general property in the chattels cannot aptly be described as purely contractual rights.”
House of Lords said the jurisdiction to grant relief was engaged that required a proprietary or possessory interest in the relevant assets. The House of Lords was unanimous on this.
Lord Millet said Walker LJ’s statement was in accordance with principle.
The lessee must in fact take possession for the proprietary right to be perfected.
A mere agreement to take a lease is purely contractual.
The interest of a bailor for a term is termed a reversionary interest.
A finance lease is a bailment for a term.
The option to purchase is the proprietary element.
This is the common law analysis.
The purpose behind s 19(5) is to clarify that rights in non-owned personal property are proprietary once the bailee or buyer obtains possession. In other words, attachment occurs on possession but not before this.
The position under PPSA is probably analysed slightly differently because of the definition of security interest in s 12(1).
It is to be recalled that in Bloodstock the New Zealand Court of Appeal Baragwanth J for the majoritysaid the security interest was proprietary in nature because the legislature determined that this was so.
In the minority William Young J in effect based his decision on the pre-On-Demand heresy espoused by William Swalding in his chapter ‘The Proprietary Effect of a Hire of Goods’ in Interest in Goods 2ed 1998 that the interest was a contractual right only.
S 19(5) in effect clarifies the position in relation to deemed security interests but this is unnecessary because of the above analysis. The confusion no doubt arises because of the inclusion of a conditional sale agreement (Lee v Butler type hire purchase) which is an ‘insubstance’ security interest because of the obligation to complete the purchase.
The position could be clarified by deleting s 19(5) as presently cast and replacing it with a provision that provides that person has rights in relation to reservation of title security interests when they obtain possession of the personal property.
Proposed recommendation 2.1: That s19(5) be amended to clarify that it applies to all security interests in favour of a secured party that owns the collateral, where the security interest is founded on the grantor's possession of the collateral.
Do you agree with the proposed recommendation? / Yes/No
Comments:
See comments above.
2.3 The power to transfer rights in the collateral to the secured party
Proposed recommendation 2.2: That s19(2)(a) be amended to read:
"(a)the grantor has rights in the collateral; and"
Do you agree with the proposed recommendation? / No
Comments:
Power to transfer rights deals with the position where grantor has already given away rights such as a conveyance subject to the equity of redemption. The mortgagor can still deal with his equity of redemption.
But because the real rights are effectively given away there is a need to provide for the grantor to deal with the collateral.
The additional wording limits the effect of nemo dat.
This is explained by Harris and Mooney in Statutory Puzzles in Receivables Financing
46 Gonz. L. Rev. 297 2010-2011, viz:
All the priority rules in Article 9 constitute exceptions to nemo dat to the extent they awardpriority to a later-in-time interest over a pre-existing interest. One cannot understand and properly apply Article 9's priority rules, including FTFOP [first to file or perfect], without recognizing that those rules can create the power to transfer rights in collateral.
2.4 The need for a security agreement
Should s 19 make explicit that a security interest can only attach if there is a security agreement?
Comments:
This proposed amendment is unnecessary. It is implicit that an agreement is required absent possession because all transactions,except excluded ones s 8, are consensual in nature. See s 20(1)(iii).
3.1 Section 18 - general rules about security agreements
Proposed recommendation 2.4: That ss18(2) and (4), and the definition of "future advance" in s10, be deleted.
Do you agree with the proposed recommendation? / No
Comments:
The first to perfect rule makes it clear that the first in time hogs the register and therefore can make further advances which all have the same priority s 18(2) and 55 and 58. A single registration can perfect more than one security agreement s 21(4).
The purpose of the rule is to ensure that the rule in Hopkinson v Rolt does not create problems.
The only carve out is the psmi. The after-acquired property clause and the new money theory are the two justifications for this. Also, notice does not matter anymore so why should we return to the old tacking days where there was considerable uncertainty about who had priority.
The ability for a security agreement to provide for further advances s 18(4) and s 10 and the after-acquired property clause in s 18(4) make for certainty and predictability.
S 58 should be amended to remove any reference to the agreement. It is the security interest that determines priority time not the agreement.
3.5 Proposed recommendation - Sections 3.2 to 3.4
Proposed recommendation 2.5: That s20(2) be recast along the lines set out above, and that ss20(4) and (5) be deleted.
Do you agree with the proposed recommendation? / No
Comments:
SS 20(4) and (5) are simply unhelpful as the PPSA does not classify personal property by use.
S 18(1) provides that a security agreement is enforceable in accordance with its terms. This means that the agreement must satisfy general law requirements of contractual intention, certainty, contain the essential terms, etc. Apart from this the agreement must contain a description of the collateral itself. This description needs to be sufficient so that the collateral is readily identifiable.
A security agreement is therefore not simply one that identifies the terms.
Any trading terms as such must be incorporated by reference or be contained in the security agreement itself.
The espoused better view in the consultation paper in3.2 is untenable. See s 20(2)(a) which refers to the ‘security agreement is evidenced in writing’ etc ‘signed by the grantor’ or adopted. There must be contractual certainty by authentication in a manner that satisfies the general law, electronic transaction requirements, etc.
3.6 Situation where collateral is transferred
Proposed recommendation 2.6: That s20 be amended to make it clear that only the original grantor of a security interest over collateral needs to comply with s20(2), not a person who becomes the grantor as the result of the collateral being transferred to it.
Do you agree with the proposed recommendation? / Yes
Comments:
Note that the definition of grantor includes a transferee.
4.2.1 Seizure or repossession
Proposed recommendation 2.7: That the language "(other than possession as a result of seizure or repossession)" be deleted from s21(2)(b).
Do you agree with the proposed recommendation? / No
Comments:
This is the Ontario view which is clearly difficult in practice because of uncertainty issues. The Saskatchewan approach is preferable.
There are too many evidential issues if this were to be amended. Also, it will have a direct impact on the integrity of the Register.
4.2.2 Bearer investment instruments
Proposed recommendation 2.8: That s24(6) be amended to clarify that it only applies to a security interest over registrable investment instruments.
Do you agree with the proposed recommendation? / Yes
Comments:
4.3.2.2 Have we jumped the gun?
Should the Act make specific provision for intermediated securities despite the issues identified in the discussion?
Comments:
The common law position in Hunter v Moss and Re Harvard Securities is reasonably clear. There would need to be a major push from the industry to justify any changes.
4.3.2.3 Are the options for perfecting by control appropriate?
Should the options for perfecting by control over an intermediated security be tightened, as identified in the discussion?
Comments:
Perfection by control is the only effective method of perfection for intermediated securities as they are not bearer securities and are usually part of a pool controlled by a trustee/intermediary.
The proposals in the consultation paper are generally along the right lines.
4.3.2.4 Can the concept of an intermediated security be simplified?
Are there suggestions for simplifying the concept of an intermediated security?
Comments:
There is a need to consult with the industry players.
See discussion in Intermediated Securities Legal Problems and Practical Issues edited by Louise Gullifer and Jennifer Payne Hart 2010. See also Chapter 6 in Goode on Legal problems of Credit and Security 5ed.
4.3.2.5What if the intermediary is itself the secured party?
Proposed recommendation 2.11: That it be made clear, if the concept of perfection by control over intermediated securities is retained, that the intermediary itself can also perfect a security interest by control over intermediated securities held with it.
Do you agree with the proposed recommendation? / Yee
Comments:
See comments above.
4.3.2.6 CHESS securities
Proposed recommendation 2.12: That the Act be amended so that shares or other securities listed on the Australian Stock Exchange and held through the CHESS system are investment instruments, rather than intermediated securities.
Do you agree with the proposed recommendation? / Yes
Comments:
4.3.2.7 Cash
Proposed recommendation 2.13: If the concept of perfection by control over intermediated securities is retained, that the Act be amended to allow a secured party to perfect by control over cash that is held via a custodian in the same way as it can perfect by control over other financial assets.
Do you agree with the proposed recommendation? / No
Comments:
This is probematic.
Cash unless held in notes ends up as currency and thereby untraceable.
If lodged in a bank account then it is exchanged for a chose in action.
4.3.3.1 Scope of the concept
Should the definition of "investment instrument" be simplified, and if so, how? Should perfection by control be available in all such cases?
Comments:
The concept is complex at present and its simplification would be helpful.
4.3.3.2 The options for perfecting by control over an investment instrument
Should the options for perfecting by control over an investment instrument be simplified?
Comments:
This issue requires proper consultation with industry players.
4.3.4 Intermediated securities and investment instruments – greater consistency?
Proposed recommendation 2.16: That the mechanisms for perfection by control in ss26 and 27 be made more consistent.
Do you agree with the proposed recommendation? / Yes
Comments:
4.3.5.1 Is the definition too narrow?
Is the term "ADI account" too narrow in some contexts?
Comments:
An ADI is an authorised deposit taking institution under the Banking Act. This should be clarified so that it excludes non-ADI’s, unless it is intended to pick all licenced banks as well as the CBA.
4.3.5.2 Should a secured party other than the ADI itself be able to perfect by control?
Should a secured party other than the ADI itself be able to perfect over an ADI account by control, e.g. by entering into a control agreement with the ADI or by taking over the account?
Comments:
No. The ADI’s already enjoy an unjustifiable elevated priority position.
The PPSA’s main plank is notice filing not control.
4.3.5.3 Should perfection by control be automatic?
Should an ADI’s security interest over an ADI account held with it be automatically perfected by control?
Comments:
The PPSA already implies this by virtue of ss 25, 57 and 75.
4.3.6Negotiable instruments that are not evidenced by a certificate
Proposed recommendation 2.18: That ss 21(2)(c)(iv) and 29 be deleted
Do you agree with the proposed recommendation? / No
Comments:
Banks do not always raise written bills and sell them in the market but rather retain the right to do so.
Control is affected by holding the negotiable instruments or having the power to issue them.
4.3.7 Letters of credit
Should ss 21(2)(c)(v) and 28 be deleted?
Comments:
No.
See comments under 4.3.6.
4.3.8 Satellites and other space objects
Proposed recommendation 2.20: That s20(2)(c)(vi) be deleted.
Do you agree with the proposed recommendation? / No
Comments:
4.3.9 Performance bonds and bank guarantees?
Should the ability to perfect by control be extended to performance bonds and bank guarantees?
Comments:
No.
These instruments are usually physical documents.
4.4.2.1 Five business days
Proposed recommendation 2.22: That the references in ss22(2), 33(2), 34(1), 35, 36, 38, 39 and 40 to "five business days" be replaced with "10 business days".
Do you agree with the proposed recommendation? / Yes
Comments:
They should be made consistent with NZ.
4.4.2.2 56 days
Proposed recommendation 2.23: That the references in ss39 and 40 to "56days" be replaced with "60days".
Do you agree with the proposed recommendation? / Yes
Comments:
60 days or two months is better is preferred.
4.4.2.3 The effect of expiry of a period of temporary perfection
Proposed recommendation 2.24: That ss 22, 39 and 40 be amended to provide that temporary perfection simply expires at the end of the period provided for in the section.
Do you agree with the proposed recommendation? / Yes
Comments:
4.5 Other methods of perfection
Should a transfer of an account or chattel paper also be able to be perfected by notice to the obligor, or by taking control of payments?
Comments:
This is Dearle v Hall all over again. See comments in Consultation Paper 1 response. The register is sufficient notice.
4.6.1 Section 56
Proposed recommendation 2.25: That s56 be amended to reflect the language of s23(1) of the Sask PPSA.
Do you agree with the proposed recommendation? / Yes
Comments:
The Saskatchewan provision is clearer and is to be preferred.
4.6.2 Re-perfection
Should a version of Sask PPSA s35(7) be included in the Act?
Comments:
Yes. It reinforces the integrity of the Register which should be paramount.
The recent Federal Court decision in SFS Projectswas an unnecessary incursion in the PPSA. It should not be a matter for the courts rather it should be one dealt with by s 35(7) of the Sask PPSA as this provides more certainty for all parties.
5.1 Terminology
Proposed recommendation 2.26: That careful consideration be given to the ways in which the Act refers to dealings in collateral, that consistent terminology be used where appropriate, and that it be made clear, if different terms are used in different contexts, what the differences in meaning are as between those different terms.