PPS Review Consultation - Paper 2 - Linda Widdup - Jackson Mcdonald Lawyers - CP#2 Response
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: Linda WiddupOrganisation: Jackson McDonald
Background/Expertise/Interest in PPSA Review: I have extensive experience advising in private practice on a wide range of PPSA matters in Canada, New Zealand and Australia, and I am admitted in all three jurisdictions. I have written several publications on the PPSA including authoring the LexisNexis New Zealand practitioner’s text, Personal Property Securities Act a conceptual approach. I have also given many presentations on and am often invited to speak at conferences on topics involving the PPSA.
Contact Details: Linda Widdup, Senior Consultant
Jackson McDonald
Level 17, 225 St Georges Terrace
Perth, Western Australia 6000
D +61 8 9426 6805
M =61 451 511 774
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 possessiondoes constitute sufficient rights in the collateral to support attachment of a security interest in favour of a third party (non-owner secured party) and not just back to the owner. (See Cuming, Walsh & Wood, pg 165 1st ed.) The non-owner secured party, receives a security interest in the possessory rights only because these are the only proprietary rights that the grantor has. Therefore, the non-owner secured party takes its security interest subject to the greater ownership rights of the owner. If the owner is also a secured party (retention of title or PPS lease) and fails to register in accordance with the PPSA, then the priority rules operate to give the non-owner secured party priority. The priority rules do not have the effect of giving the grantor greater rights in the collateral, but operate toconvey more rights to the perfected non-owner secured party than the grantor ever had.
Similarly if the owner granted a security interest in the collateral to another secured party after the owner leased or sold under ROT to the grantor, then that secured party would take subject to the rights of the grantor under the lease or the ROT.
A simple application of nemo dat. Nemo dat continues to apply except to the extent it is inconsistent with the provisions of the PPSA. There is nothing inconsistent.
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? / No
Comments: The equivalent provision in some of the Canadian PPSAs, for example, the Saskatchewan Act states:
For the purposes of clause (1)(b) and without limiting other rights, if any, that
the debtor may have in the collateral, a lessee pursuant to a lease for a term of more
than one year or a consignee pursuant to a commercial consignment has rights in
the goods when the lessee or consignee obtains possession of them pursuant to the
lease or consignment.
It is fairly clear that the drafters of the Sask Act were of the view (and I agree) that a s 19(5) type section is only needed to confirm that the grantor of a deemed security interest (ie a lease for a term of more than one year and a commercial consignment) has rights in the collateral. In other “ownership” situations which create in substance security interests (ie finance leases and ROTs), the PPSA treats these grantors as the owners and, therefore, assumes they have sufficient rights in the collateral. A s 19(5) clause is not necessary for in-substance security interests.
The Giffen case also seems to suggest this.
Section 19(5) is confusing because it fails to distinguish between deemed security interests and in substance security interests and purports to include all “ownership” based security interests. The commentary in the Consultation Paper and, in fact, the wording of the Proposed Recommendation 2.1 assume that title still matters under the PPSA and this leads to more confusion over the purpose of s 19(5).
Section 19(5) should be amended to reflect the distinction between in-substance and deemed security interests. The Act inherently reflects that grantors of in-substance "ownership" based security interests have rights in the collateral. I suppose similar to an equity of redemption under the general law.
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:
The reasons given in the Consultation Paper to support this amendment aren't convincing enough to warrant the change.
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:
No. I think this is abundantly clear since the definition of security interest requires a transaction to create a security interest. Further the PPSA otherwise assumes (see s 8 for example) that a security interest for PPSA purposes arises only a consensual basis.
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:
In my view these provisions are needed to clarify the position under the PPSA in light of the position at general law.
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? / Somewhat
Comments:
I agree that 20(4) and 20(5) can be deleted since these are throw-backs from the distinctions made in Canadian and NZ PPSAs between consumer goods, inventory and equipment which are not used under the Australian PPSA.
My concern is with proposed s 20(2)(b)(i). The only “term” of a security interest that matters for purposes of the PPSA is that the language of the security agreement creates a security interest. This proposed provision is confusing and could lead to interpretations that other terms are necessary before a security interest will be enforceable against third parties. The writing need only confirm the existence of the security agreement. Section 18(1) confirms that the parties are free to contract the terms of a security agreement as they may. The definition of security agreement merely requires an agreement (or act??) that creates a security interest.
The Act still needs to clarify that “all present and after-acquired property” and “all present and after-acquired property except..." are sufficient descriptions.
In my view, delete s 20(4) and 20(5), but the only change that should be made to s 20(2) is to amend s 20(2)(b)(i) to match the proposed language in 20(2)(b)(ii):
A description of the collateral that is sufficient to enable it to be identified.
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? / No
Comments:
The definition of grantor needs to be amended to identify the limited circumstances in which a transferee is a grantor for the purposes of the Act. Please see my comments below in 5.7.1.
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:
Perfection by possession as a result of seizure will lead to non-compliance with the writing and registration requirements of the Act and, therefore, the transparency that the Act is trying to achieve. See ss 20(1)(b)(i) – the secured party would satisfy the enforceability against third party provisions upon seizing the collateral where it wouldn't have when the collateral was actually in circulation and in possession of the grantor before the seizure. This defeats the policy of the Act which emphasises registering or taking possession or control to keep the collateral out of circulation so that third parties aren’t misled.
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
Comments:
Agree.
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
Comments:
However it is not clear what “cash” held via a custodian is exactly for the purposes of the PPSA. It is not currency. The unfortunate definitions of account and ADI account likely mean it is not an account, so this leaves it to fall within the residual category of intangible. Careful drafting required.
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:
Yes. The Article 9 approach is preferred.
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:
Yes. I agree with the factors mitigating the concern identified in the Consultation Paper.
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
Comments:
I agree with the comments in the Consultation Paper.
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
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:
If perfection by control was extended to payment intangibles (or accounts as widely defined in the Canadian PPSAs) as in the Article 9 approach, then it seems these would be covered.
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:
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:
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:
No. I agree with the comments in the Consultation Paper.
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 Sask provision is much clearer.
4.6.2 Re-perfection
Should a version of Sask PPSA s35(7) be included in the Act?
Comments:
Yes. The Act should contemplate this situation and provide a time-period in which to re-perfect. If the Act is silent, then this will lead to uncertainty. For example, the Court in SFS Project v Registrar of PPS [2014] FCA 846 found it appropriate to use s 186 to compel the Registrar to reinstate a registration discharged in error by the secured party. The Court failed to consider the appropriateness of such action in the case of intervening interests arising during the period after the lapse to the reinstatement nor the resulting uncertainty arising from not being able to rely on the register. A provision along the lines of s 35(7) of the Sask PPSA would provide direction and establish the integrity of the register which is paramount.
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
Comments:
The concept of "dealing" when used in relation to proceeds for PPSA purposes needs to be wider than transfer and assignment. Caution is required when considering that terms can be used interchangeably.
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: A finance lease should be treated as a sale.
The Act already does its best to balance the interests between Owner SP and Purchaser SP/Lessor SP and Lessee SP with rules in s 34 and ss 66-68.
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:
If the lease is a deemed security interest (or if, as discussed in 5.2.1 the lease was treated as a lease rather than a sale), then Lessor SP's security interest continues in the reversionary interest in the goods. While the lessor's unperfected security interest vests in the lessee, it vests subject to Lessor SP's perfected security interest in the reversionary interest registered against lessor. A simple application of nemo dat which isn't contradicted by the rules of the PPSA.
See my article for background and analysis. Operating leases as second-tier security interests: A continuing case for nemo dat under the Personal Property Securities Act 2009 (Cth)
(2013) 22 Australian Property Law Journal 114
If the lease is a finance lease and treated as a sale, then Lessor SP's security interest in the goods may be cut off by the operation of the taking free rules and the vesting issue doesn't arise.
If it isn't cut off, then I'd argue the Lessor's security interest vests in the lessee, but again it vests subject to the Lessor SP's perfected security interest against the Lessor, but would be subjected to the rules in s 34 and s 66-68 to determine if the Lessor SP or the Lessee SP has priority.
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:
Yes.
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
Comments:
However, it should be made clear that "extinguish the security interest" in (a) is limited to the security interest in the collateral that is dealt with and cannot be interpreted as fully extinguishing the security interest whereby it wouldn't attach to the proceeds.
5.3.6.2 Is the limitation appropriate?
Is the limitation in s 32(2) appropriate?
Comments: Yes.
Canadian courts have interpreted the Canadian PPSA definition of proceeds such that proceeds do not arise if the grantor continues to have the original collateral. Proceeds must replace the original collateral. (The exception is investment property which was added to the definition when the Securities Transfer legislation was enacted in Canadian jurisdictions, and was excepted from the limitation.) If proceeds are limited to property that replaces original collateral, then the limitation in s 32(2) is appropriate.