The Final Report is Out – Where to Now?

The Personal Property Securities Act… 3 years on

Unless you have been living under a rock, every person in business has probably heard of the Personal Property Securities Act 2009 (Cth) (“PPS Act”) and has an opinion about the implementation and use of the national register. It was one of the biggest and most complex changes regarding legal entitlement to ownership of personal property.

The PPS Act, which was first passed in 2009, was finally implemented in January 2012, with the introduction of the Personal Property Securities Register (“Register”).  The PPS Act was used to reform over 70 different Commonwealth and state statutes regarding personal property and the Register replaced over 40 different Commonwealth and state registers, with the policy line being that it would become a “one stop shop”.

But how successful has it been?

On 4 April 2014, the Attorney-General announced a review of the act would be undertaken by Mr Bruce Whittaker as required by section 343 of the PPS Act.  Mr Whittaker’s brief included undertaking consultation with stakeholders, considering the operation and effect of the PPS Act with a particular emphasis on the impact on and experience of small businesses.

After an interim report on 15 August 2014, the final report was released to the public on 18 March 2015 (“Final Report”).  Although the Final Report found that the PPS Act had provided improved consistency for transactions dealing with personal property in Australia, it also recommended 394 amendments to the Act and highlighted the need for a renewed focus on educating the public about the PPS Act.

While the Final Report stopped short of requiring a full redraft, it proposed the removal of the following concepts which would in turn lead to the removal of a significant number of the sections, including:

  1. the removal of all references to “chattel paper” and “bailments”;
  2. the deletion of the references to fixture, land and interest in section 10, the Dictionary of the PPS Act; and
  3. the limitation of collateral classes to only six, these being:
    1. serial numbered property;
    2. other goods;
    3. accounts;
    4. other tangible property;
    5. all present and after acquired property; and
    6. all present and after acquired property with exception(s).

The Final Report found that consideration needs to be given as to whether fixtures to land should be brought within the scope of the PPS Act.

Complexity

Given that the PPS Act constituted a significant shift in the law with respect to ownership and rights of priority, it is curious that the public has not embraced the change and ensured compliance.

While the business community is aware of the existence of the PPS Act, the complex concepts it contains have made it difficult for the vast majority of users to positively engage with the Act and the Register to ensure that they are appropriately (and legally) protected.

As set out in paragraph 3.2.3 of the Final Report:

the lack of awareness and understanding of the Act among users is also the primary reason why businesses are failing to comply with it.

A person who is not aware of the existence of the Act, or of the fact that it could apply to them, is most unlikely to be operating in a manner that is consistent with the rules set out in the Act, particularly as those rules are very different in some critical respects to the law that preceded them.

Similarly, even people who are aware of the Act and of the fact that it affects them are often failing to comply with its rules because they do not understand those rules properly”.

An example of the complexity inherent in the PPS Act is the provision in section 153 which, together with the Personal Property Securities Regulations 2010 (“Regulations”), prescribes a scheme that requires a grantor to be identified by a single identifier at any time in a financing statement.

Section 153 of the PPS Act in conjunction with Regulation Schedule 1, 1.3 prescribes that, for a body corporate that has an ACN, the prescribed details are “the ACN from the National Names Index maintained by ASIC”. Specifically, at section 153 of the Act states:

“(a) if the collateral is consumer property, and is required by the regulations to be described by serial number—no grantor’s details;

(b) if the collateral is consumer property, and is not required by the regulations to be described by serial number—the grantor’s name and date of birth, as evidenced in accordance with the regulations, and no other details;

(c) in any other case—the grantor’s details as prescribed by the regulations.”

Schedule 1, Regulation 2.2 provides that:

 (a) the following classes of collateral, when described as consumer property, must be described by serial number:

(iii)       motor vehicles; .. and …

 (c) the following classes of collateral, when described as commercial property, may be described by serial number:

(i)       motor vehicles;”

A further layer of complexity is added when one considers the definitions contained in the PPS Act for consumer and commercial property.  Commercial property is defined by exclusion as “personal property other than consumer property”.  Consumer property is defined for the purposes of the PPS Act as, “personal property held by an individual, other than personal property held in the course or furtherance, to any degree, of carrying on an enterprise to which an ABN has been allocated”.

The interaction of these sections and regulations means that if:

  1. a body corporate which has an ACN grants a security interest requiring registration on the Register which is not consumer property which is required by the regulations to be described by serial number; and
  2. a search of that body corporate’s ACN does not result in the registration appearing in the results,

THEN this defect renders the security interest ineffective pursuant to sections 164(1)(b) and 165 of the PPS Act.

In Future Revelation Ltd v Medica Radiology and Nuclear Medicine Pty Ltd (2013) NSWSC 1741 (“the Case”), the key issue considered was the defect in describing the secured party by ABN rather than ACN (as required by the PPS Act).

In determining the Case, Brereton J considered Canadian case law (as the PPS Act is modelled on the Canadian legislation) which suggested that the test for whether a defect is seriously misleading is “whether it will result in the registration not being disclosed on a search.”

In the circumstances, the Case turned upon whether the registration was invalid pursuant to section 164(1) of the Act by reason of it being “seriously misleading”.  While the Case provided in its judgement that an error in the ACN or name of a secured party, (where the serial number of the collateral was not required), will not be fatal as the registration will show on a search and will not be misleading.  However, the Canadian case law states that an error in the name of a grantor where the serial number of the collateral is not required, will be fatal as it is misleading; see KJM Leasing Ltd. v. Granstrand Brothers Inc., 1994 CanLII 9153 (AB QB).

Therefore, the fact that an ACN search would not and does not result in the security interest appearing in the search results in circumstances where the Regulations provide that the grantor must be identified by its ACN, renders such registration of the security interest ineffective.

This position is clearly inconsistent with the position that a grantor may register an interest in a motor vehicle, where that motor vehicle is commercial property, by serial number.

The Final Report identified the additional and unnecessary complexity added by the definitions of consumer and commercial property and recommended the removal of the distinction.   However, the Final Report did not consider the implications such removal would have on the other provisions of the PPS Act.

There are many other examples of how the interaction of the sections of the PPS Act and Regulations, as well as the interaction with other legislation, may create significant complex problems which the public struggle to deal with and instead choose not to register, or register ineffectively.

Register

While the PPS Act and its single national register were touted as being a great move for business and one which would do away with the issues created by the multiple existing registers, the Final Report clearly outlines numerous issues with the functionality of the Register and related website.

The Final Report advised that a priority should be to simplify the Register and the processes.

Unlike the old ASIC register, the Register does provide an ability to partially release security interests and experience has shown that lending entities are simply providing one page release forms on the sale of personal property subject to a security interest and not amending their interest.  The implication of this is self-explanatory – what is the use of a register which has incorrect or out of date information contained on it?

Further, the Final Report recommended the review of time frames provided for the classes of personal property,  noting that the options can include 7 years, under 25 years and indefinite periods.

What happens now?

As the Final Report was just that, a report, the 394 recommended amendments are not automatically included and implemented in the PPS Act.

For the amendments to be adopted a bill will need to be prepared and passed by  Government and as this report is being printed such completed bill has not yet been released for comment.

However, the Final Report strongly recommended a collaborative approach when drafting the bill.  Let’s hope the final outcome is a bill which addresses the current uncertainty created by the complex and often unclear use of language in the PPS Act and provides a clearer piece of legislation which is more certain, consistent and provides more effective (and cheaper) ability to register to protect a party’s interest.

DW Fox Tucker continue to monitor the progress of the PPS Act and will provide further updates as they arise.

For more information, please contact:
Mark Gowans

Mark Gowans
Director
p.  +61 8 8124 1953
e.  Email me

This communication provides general information which is current as at the time of production. The information contained in this communication does not constitute advice and should not be relied upon as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Should you wish to discuss any matter raised in this report, or what it means for you, your business or your clients' businesses, please feel free to contact us.

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