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PPSA Gets its First Report – ‘Shows Potential But Could Do Better’

Background

On 30 January 2012, the Personal Property Securities Act 2009 (Cth) came into effect. It prescribed a review within three years.  The review report, by Bruce Whittaker,  Ashursts, was recently submitted to the Attorney-General. (see www.afsa.gov.au). It is a thorough and scholarly analysis, covering almost every section of the PPSA. It can’t be done justice in a blog, but some key points can be highlighted

An Early Stocktake

Notwithstanding its 530 pages and 394 recommendations, the Review supports the continuation of the PPSA.  It concludes that the Act has yet to deliver fully on its economic promise, primarily because of its design and the lack of awareness, particularly among SMEs of its existence and impact.

The Report states the fundamentals of the PPSA are sound, but that many small improvements would assist the PPSA’s goals. Thus many of the recommendations are of the type that a particular provision be ‘retained’ or ‘not be amended’.

One noticeable feature of the PPSA is its length. It runs to 343 sections. The drafters did not just import the New Zealand provisions. There was minimal consultation with key stakeholders. Whilst the PPSA was accompanied by an Explanatory Memorandum, there are many provisions, the derivation or justification of which, is not apparent.  The reviewer suggests that a more consultative process should take place for any future amendments following from the Review.

Design of the Register

The reviewer has made a number of sensible recommendations to ‘unclutter’ the data fields on the PPS Register. An example of a frustrating aspect of registration, which it recommended be changed, is that for registrations against specific collateral classes (as opposed to a blanket registration against all present and after-acquired property) the Regulations require separate filings. Further, the Reviewer recommended that a number of unnecessary fields should be removed from the ‘financing statement’, the online registration form which constitutes filing of the notice. These include whether or not (a) the collateral was commercial or consumer property; (b) was inventory; (c) the security interest is subject of a subordination agreement, and (d)  the collateral was subject to ‘control’. In all of these cases, these fields were apt to confuse most registrants and searchers.  These simple improvements will have the largest impact of any changes recommended in the Review.

Secondly, it is currently required to stipulate on the financing statement whether or not a ‘purchase money security interest’ is claimed. The consequences of getting it wrong are potentially drastic. A PMSI, if also registered within the prescribed period, will have ‘superpriority’ over financiers with an earlier registered all-embracing security interest over the debtor, but they do not in practice re-check the register, so this field would not yield much useful information to them or other searchers,  and no other country has this requirement.

Legal Transplant

A general theme in submissions was that the PPSA is unnecessary complex. The reviewer recommends that some of the unnecessary provisions, that do not reflect Australian financing practice, should be removed. For example, the PPSA refers to ‘chattel paper’ as a collateral category, whereas it was concluded that there is no significant use of chattel paper as a financing device in Australia.

The Review also recommended removing the reference to ‘bailment’, which was taken from the NZ statute. But it has caused much confusion. Not much will be lost by removing the reference, as leases really cover the field.

In relation to perfection, one of the notable features of the PPSA is the ‘super-priority’ which is given through ‘control’ of certain defined property, including accounts. Automatic priority is given to banks where they perfect by control over customers’ accounts at that bank-(the PPSA confirms that it is possible for the bank to take security over its own obligation). The Report re-affirmed this automatic priority, consistent with commercial practice, as it is known that banks have set-off and similar rights, so registration to notify people of this would be superfluous.

Raising Awareness

Whilst the commencement of the PPSA was accompanied by a media campaign, and the Government website (www.ppsr.gov.au) contains useful information, it is clear that there is still a lack of awareness of the existence of the PPSA, and how it impacts on users, especially among small businesses. The review recommends that further amendments  should coincide with a further, targeted, round of education, especially for purchasers of second hand motor vehicles and boats, which represent in volume terms one of the major forms of affected transaction.

Scope of the PPSA

Some of the key policy issues to tackle were ones ‘parked’  in the lead-up to the Bill. In order to negotiate a National system, the goverments agreed that, initially, the following three matters should fall outside the scope of the PPSA: water rights,  Licences, and Fixtures.

The current inability to offer government licences and water rights as security, is particularly harsh on small businesses and the agricultural sector. It may be the major, or only, collateral such business has to offer. Therefore the Review recommends that the governments should revisit these matters, and makes further recommendations to widen the scope of collateral.

In relation to fixtures, Canadian provinces have managed to incorporate a system of notices on the land titles registers as well as filing on the PPSA Register. The Reviewer urges the Governments to consider such an approach.

In relation to water rights, at the time the PPSA was enacted, there was discussion of a national water register. Further work has been done since then, so the reviewer recommended that only those which were not capable of registration on the proposed Water Register should be within the scope of the PPSA.

Insolvency

Whilst the PPSA already provides (s267) that failure to register by the time of formal insolvency will render the security interest ineffective, the Government confusingly amended the Corporations Act to provide a parallel set of provisions for corporate security interests, with time limits for registration, and similar consequences if these were not met. The Review rightly recommends that this parallel Corporations Act system should be removed, as it only serves to catch out registrants.

Another confusing area is that the PPSA enforcement provisions in the PPSA do not extend to corporate receivership, though they do for receivership of individuals’ property and for other ‘controllers’ for corporate property, eg where a secured party enters into direct possession. The Review questions whether receivers need to be subject to different rules for enforcement, but leaves it for further consultation.

Lastly, the PPSA contains complex definitions of ‘circulating asset’ and ‘control’. The purpose of these, though they are in the PPSA, is largely to preserve Corporations Act insolvency priorities to what they were with the floating charge. The Review recommends that to be simpler,  ‘circulating assets’ should cover inventory (in its ordinary meaning) and proceeds, other than where subject to a PMSI. The Review implied that whether or not accounts should be included alongside inventory was a policy matter- however clearly the current provisions include some accounts, also currency and negotiable instruments. Although well-intentioned in light of the existing confusing provisions, the proposed definition seems too narrow and will not be policy-neutral in insolvency law.

Future Review?

Mr Whittaker recommended that the Government should consider a further review in five years. Interestingly, New Zealand has not had any review since commencement of its PPSA in 2002. Arguably, this prescribed review was too much too soon anyway. Frequent major review detracts from the ‘bedding down’ process for complex and radical legislation like this. Perhaps a future alternative would be a standing advisory committee that could make technical amendment suggestions.

Conclusion

The Review leaves few stones unturned. It concludes that the fundamentals are sound, but that in order to deliver expected economic benefits, many detailed amendments should be made. These, particularly the simplification of the Register, added to a further education initiative, would alleviate much of the confusion. Some insolvency, agricultural and other issues were left for further consultation, so watch this space.

Contributed by David Brown.

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