Review of the Personal Property Securities Act 2009

Consultation Paper 2

Response of the Hire & Rental Industry Association and Elevating Work Platform Association
Name:Phil Newby / Oliver Shtein
Organisation:Hire & Rental Industry Association / Elevating Work Platform Association (the Associations)
Background/Expertise/Interest in PPSA Review:Concern about the adverse impact of PPSA on the hire industry due to members losing assets and incurring compliance costs, wasted time and significant uncertainty and stress.
Contact Details:
c/- Bartier Perry – Attention Oliver Shtein D. 02 8281 7868E.
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:
2.2 Rights in the collateral
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:
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? / Yes/No
Comments:
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:
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? / Yes/No
Comments:
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? / Yes/No
Comments:
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/No
Comments:
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? / Yes/ No
Comments:
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/No
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:
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:
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:
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? / Yes/No
Comments:
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/No
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? / Yes/No
Comments:
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:
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:
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/No
Comments:
4.3.5.1 Is the definition too narrow?
Is the term "ADI account" too narrow in some contexts?
Comments:
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:
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:
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? / Yes/No
Comments:
4.3.7 Letters of credit
Should ss 21(2)(c)(v) and 28 be deleted?
Comments:
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? / Yes/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:
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/No
Comments:
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/No
Comments:
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/No
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:
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/No
Comments:
4.6.2 Re-perfection
Should a version of Sask PPSA s35(7) be included in the Act?
Comments:
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.
Do you agree with the proposed recommendation? / Yes/No
Comments:
5.2.1 The effect of a lease on a security interest over the leased goods - Policy issues
What should the implications be for a security interest if the collateral is dealt with in different ways, including by lease? What is the conceptual basis for this, and how does it impact on other aspects of the Act?
Comments:
The primary submission of the Associations remains that hires that are not in substance security ought not to fall within the PPSA at all.
In separate submissions it was explained that cross hire or sub-hire between hire businesses is a substantial part of the hire industry and important to the ready availability of equipment to its clients and their projects. Equipment of various hire companies in effect forms a larger pool of available equipment.
The ready availability of sub-hired/cross-hired equipment between hire businesses is doubtless attributable to the comfort that hire businesses felt (pre-PPSA) that no matter what befell their industry colleague or its customer they would be able to retrieve and retain their equipment.
The PPSA was a major disruption to this important sector of the industry and, as submitted elsewhere, the policy justification for it (at least in relation to non in substance security) has not been laid out.
Other submissions (from lease financiers) have demonstrated that:
  • There is concern about the possibility under the current Act of loss of equipment when it is sub-hired under a hire that is an imperfect security interest or where the sub-hirer grants security
  • The issue is affecting the attitude of financiers to extending credit to hire businesses and having the opposite effect to one of the stated aims of personal property securities reform. (The Associations believe that notwithstanding that PPSA has been in force for nearly three years, many financiers are still not alive to these issues and this credit tightening effect may yet worsen.)
The concerns of those financiers that are alive to the issue are valid. But the concerns of the hire industry are arguably greater. Unlike financiers, hire businesses are not equipped to assess the financial stability of other hire businesses, with whom they compete. They do not have credit assessment infrastructure or expertise in taking other forms of supporting security such as mortgages and guarantees. The present legislation appears to put hire businesses in the position where they can be exposed to loss of equipment that their customers sub-hire and that this can occur for reasons completely beyond their practical control.
The Associations therefore remain strongly opposed to any provisions that provide that any interest (let alone one that can defeat ownership) can be ‘carved out of’or reduce the rights of a hire business, no matter how many times its equipment has been sub-hired.
The last paragraph of paragraph 5.2.1 of the consultation paper seems to suggest that it is appropriate for ‘any .. lease that is a security interest’- presumably therefore including a hire of as little as 367 days(assuming abolition of the 90 day PPS lease threshold and abolition of indefinite hire as a deemed security interest) to be treated as equivalent to a sale. We cannot see how a one year hire of piece of equipment that has a useful life of 10 years or more should ever be treated as equivalent to a sale.
The paragraph also seems to say (in effect) that the ‘head lessor’/owner business is in a better position to manage risk of lessee default. As explained elsewhere and above,hire businesses are not financiers and do not have credit assessment skills or infrastructure to manage the risk of default.
In para 5.2.3 the consultation paper argues that lessors should not be treated differently to other secured parties when it comes to dealings with leased goods, because this would re-introduce artificial or form-based distinctions. That may well be so when comparing a finance lease to a hire purchase to a chattel mortgage (all in substance security interests). But a 367 day hire is not in substance an equivalent to any of those things.
The real ‘artificiality’ is that the PPSA has chosen to treat hire as a security interest in the first place when it is functionally completely different to security.
The Associations are concerned that the reasoning in this part of the consultation paper might tend to lump hire in with in substance interests just because they are now deemed to be security interests by the legislation. This would seem to be putting the cart before the horse.
The real policy question, the Associations submit, is to what degree should hire businesses be exposed to risk when on-hiring where the risk can be as high as the value of its capital assets which have been on-hired.
Submissions to the Review have proposed highly technical changes to the law to try and alleviate these concerns at least in part. These changes may assist to a degree but will also build further complexity into the law from the hire industry’s perspective.
Reduced to the basics, those proposed changes are aimed at preserving the sanctity of ownership of the head lessor/owner even though down the sub-hire chain someone else is in possession (said to be apparent ownership) of the goods. In the hire industry, given that sub-hire is so widespread and necessary to the functioning of the industry and the projects it services,the so called evil of apparent wealth or ownership will therefore be tolerated by the legislation. But it still won’t be tolerated in hires that are not sub-hires. This appears to be an arbitrary outcome in terms of its effect on hire businesses.It shows what the Associations see as the futility (which the Review has already noted) of trying to prevent the evil of apparent ownership arising everywhere that it does arise. The Associations have submitted elsewhere that in the industries serviced by the hire industry there is no presumption of ownership of hired equipment.
The extreme complexity of the issues also demonstrates that it is inappropriate to expect hire businesses to deal with the PPSA or its effects where they are not providing anything equivalent to finance.
5.2.2 Fact pattern 3 – effect of s 267
As a subset of the question in Section 5.2.1, whatshould happen to a security interest over leased goods if s267 applies to the lease?
Comments:
As noted above the Associations do not believe that ordinary hire ought to be within the reach of PPSA at all or that sub-hires ought to be able to give rise to interests superior to the interest of the head hire business.
Removing the vesting rule is not the answer per se
The Associations are concerned by an inference that vesting rules are the only threat to hire businesses. The Associations submit that PPSA priority rules in particular are just as much a threat. This is raised below. [We note that in consultation paper 3 there is a recommendation proposed to exclude PPS leases from section 267 and the Associations query how that will avoid the dangers of lost priority or extinguishment.]
Negating the effect of section 267 will not always (or even usually) solve the problem posed by PPSA in the case where an industry colleague fails to perfect a sub-hire.
The Associations’ understanding of the PPSA is there are several distinct and separate threats to ownership of hired equipment, namely:
  • Section 267 (vesting in the grantor) and the separate vesting rule found not in the PPSA but in section 588FL of the Corporations Act
  • Loss of priority – the hire businesses’loss of their horse in the NZ Bloodstock case and the Portacom case in New Zealand were cases of loss of priority not vesting
  • Extinguishment under the taking free rules
Addressing the effect of section 267 on an unperfected sub-hire would seem to offer no solution to the other two dangers mentioned above. In particular if a hire business has an incorrect or late registered interest (e.g without PMSI priority) it could be loss of priority not vesting that will see it deprived of its interest in its own equipment in any case where there is a prior registered interest over the sub-lessee.
For example:
HireCo hires equipment to its industry colleague Careless Hire. Careless Hire tells HireCo it ‘knows all about PPSA’ but as Careless Hire and HireCo are competitors it is impracticable for HireCo to check this or monitor Careless’s compliance.
Careless Hire on-hires the equipment to Dodgy Builder. Careless Hire fails to make a valid registration over Dodgy Builder. Dodgy Builder has granted a general security interest over all its property in favour of Opportunist Bank.
Dodgy Builder defaults (but there is no administration or liquidation) and there is a priority competition between Careless Hire and Opportunist Bank. Because of the invalid registration, Opportunist Bank claims priority over Careless Hire and claims a priority extending to the ‘derivative’ interest of HireCo.
It is held that Opportunist Bank may apply the equipment to the debt of Dodgy Builder.
Careless Hire becomes insolvent because Dodgy Builder was its biggest customer. HireCo loses its equipment with no avenue of compensation.
NB - If you consider that this is not a correct reflection of the current legislation (or at least an arguable interpretation of it) please contact us to discuss.
5.3.2 The meaning of "continues in the collateral"
Should "continues in" in s 32(1)(a) be replaced with "remains attached to"?
Comments:
5.3.5 A possible alternative
Proposed recommendation 2.28: That s32(1) be amended along the lines described above.
Do you agree with the proposed recommendation? / Yes/No
Comments:
5.3.6.2 Is the limitation appropriate?
Is the limitation in s 32(2) appropriate?
Comments:
5.3.7 Section 32(5) - priority in relation to proceeds
Is the rule in s 32(5) too narrow?
Comments:
5.4.1.2.3 Rationale for the variations in usage
(a) Should the references to "value" or "new value" in the taking free rules be made more consistent?
(b) Should any "new value" be required to be more than nominal?
Comments:
5.4.1.3 The "knowledge qualifier"
Should the knowledge qualifiers in the taking free rules be made more consistent?
Comments:
5.4.1.4 Meaning of "buyer" and "lessee"
Should the meaning of "buyer" derive from the general law, or be specific to the Act?
Comments:
5.4.2.1.2 Non-application to inventory
Proposed Recommendation 2.34: That s 44(2)(a) be deleted.
Do you agree with the proposed recommendation? / Yes/No
Comments:
5.4.2.1.3 What types of serial-numbered property should s 44 apply to?
Should s 44 be limited to motor vehicles?
Comments:’
Currently hire businesses make serial number registrations in order to avoid the application of the taking free rule applying to general registrations where no serial number is specified.
The breadth of the definition of ‘motor vehicle’ in the PPSA (especially as that definition was originally prescribed) was a source of many problems and much expense. For example a business hiring scissor lifts to a construction company was forced to incur time and registration expense.
Many hire businesses choose to make a general registration as well as a serial number one as a fallback in case there is a problem with the serial number identification. Some businesses who do not take this precaution and make only serial number specific registrations may find that an incorrect serial number not only does not avoid the taking free rules but (far more critically) it will be challenged as wholly invalid if there were to be grantor insolvency. Insolvency has been submitted by the Associations elsewhere to be far more common in practice than wrongful sale or lease.