PPS Review Consultation - Paper 2 - Ron Hardaker - AFC - CP#2 Response

AustralianFinance Conference Level8, 39 MartinPlace,Sydney,2000.GPOBox1595,Sydney2001

ABN13 000493907Telephone:(02)9231-5877Facsimile:(02)9232-5647e-mail:

14 November2014

PPSA ReviewSecretariat

Commercial and AdministrativeLawBranch

Attorney-General’s Department

3-5National Circuit BARTONACT2600Byemailto

Attention: Mr BruceWhittaker

Dear MrWhittaker,

REVIEWOFTHEPERSONALPROPERTIESSECURITIESACT- RESPONSETO CONSULTATIONPAPER2- CREATION AND PERFECTIONOFSECURITY INTERESTS;TAKING FREE RULES;PRIORITY RULES;AND OTHERDEALINGS IN COLLATERAL

WeattachtheresponseoftheAustralianFinanceConference,theAustralianEquipment

LessorsAssociationandthe AustralianFleetLessorsAssociationto ConsultationPaper - 2.

If youwould like to discussour response, pleasecontact meor Catherine Shand on

(02) 92315877orby emailto .

KindRegards, Yours truly,

RonHardaker

ExecutiveDirector

AUSTRALIANFINANCECONFERENCE,AUSTRALIANEQUIPMENTLESSORSASSOCIATION ANDAUSTRALIANFLEETLESSORSASSOCIATION

RESPONSETOPERSONALPROPERTYSECURITIESACTCONSULTATIONPAPER2

14 NOVEMBER2014

REVIEWOFTHEPERSONALPROPERTYSECURITIESACT2009

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: Ron Hardaker
Organisation:AustralianFinanceConference
AustralianEquipmentLessorsAssociation
AustralianFleetLessorsAssociation
Background/Expertise/Interest in PPSA Review:FinanceIndustryAssociation
Contact Details:029231 5877

GeneralComment

Theconceptof“inventory”isreferred toinvariousplacesin thisPaper. Wesubmitthatspecial rules forthetreatmentof inventoryinthetaking freeprovision should beremoved unlessaclearcaseis madeforretaining them.

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:Webelievethatitwould be usefulforexplanatorymaterialto bedeveloped toassist with interpretationof Section 19of thePPSA butdonotnecessarilyseeaneed fortheActto be amended.
Onememberhascommented asfollows:
Whilebarepossession asthebasisof attachmentofsecurityinterestsseemscounter-intuitive(other than in thecaseof leasesand licencesthatconstitutesecurityinterests), nevertheless,ithasto be admitted thattheconcept drawssupportfrom anumber ofsourcesand arguments:
(a)From theperspectivepurelyoftheostensible ownership problem and afunctional approach tosecurities,itisdifficulttoseewhybarepossessionshould not be enough for thesecurity interesttoattach tothewholecollateral itself (notjusttothe possessoryrights)in favourof thecollateral ownerorathird party. Thisreceivesvarying supportfrom GrayvRBC, Portacom and Maiden Civil. If thisiscorrect,thenitisup tothePPSA priorityrulesto dothe ‘heavylifting’in termsof reaching afairresult(alongwith tortiousand contractual remedies outsidethePPSA).
(b)Asapracticalmatterof duediligence,asecured party(such asafinancier)isoften unableto efficientlyascertain thecircumstanceswhich haveledtoacustomerorproviderof security appearing tolawfully own itspossessed collateral.Thesecured partywill beseeking forthe securityinteresttoattach totheactualcollateral,ratherthanmerelytherighttopossessthe collateral.
(c)If,undercurrents32orPart 2.5,athird partyispotentiallyableto “takefree”asaresultof dealings with abarepossessor,then itisalsodifficulttoarguethatthesamethirdparty could notalsopotentiallybecomeasecured party(which isanarrowerrightthantaking the collateral free).
(d)PPSAs79seemstopreservethevalidityof transfersof collateralthatare(knowinglyor negligently)donein breachof asecurityagreement. Similarly,itcould beaskedwhy possessionwould need to be “lawful”or“consentedtobytheowner”in orderforasecurity interesttoattach upon possession.
(e)Itisasimpleconcept,compared totheotherproposed models.
Generally,wedon’tfind PPSA 19(5)particularly helpful in forming aviewonthis“policy”question, because:
(f) on onereading,itspurposeseemsto betoclarifythemomentof attachment,ratherthan to clarifythegeneralbasisonwhich amerepossessormightbeempowered tograntasecurity interest;
(g)itrelatestoonlycertain types ofsecurityinterest(thereason forselectionof whichisnot particularlyclear- ie,whywould it notextend toall securityinterestswherethesecured partyowns,orislessororlicensorof,thegoods?);and
(h)itdoesnotfocuson the possessorvis-à-visthird parties,onlythepossessorvis-à-visthe owner/vendor.
Despitethis, potential restrictionson bare possessionsupporting attachmentof securityinterests should still beconsidered,in ordertoachievethe optimal balancebetween theinterestofexisting ownersorsecured parties.Theprosand consof thedifferent modelsof restriction (qualified bare possession; modifiedtitle;etc)arediscussed in theliterature. Analogousor consequential changes mayalso needto bemadetos32,s34,Part2.5and s79,forconsistencywith theposition ultimatelyreached.
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
Comments:Weagreethatthiswould beuseful.However,such an amendment doesnotdeal with thequestion astowhetherthepurposeof s19(5)isonlytoclarifytimingofattachment,orto confirmthatabare possessoriscapableof granting asecurityinteresttotheowner.
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?
Comments:Thereare different viewsontheproposed recommendation.Onememberhas commentedasfollows:
On afunctional approach tosecurity,thekeyquestionsarewhetherthereisa sourceof“value”and whether,onenforcement,that“value”can betransferred tothesecured party oratitsdirection. Strictlyspeaking,noneof theforegoing requires thegrantortohaveanyrightsinthecollateral exceptfortherighttohavethe“value” transferred.On thatbasis,itisuseful toretain thecurrent s 19(2)(a),asweare notconvinced thattheActputsbeyond doubtwhetheraperson with amere righttotransfercollateral can grantasecurity overthewholecollateral.
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 would not beappropriateforthereasonsgiven in ConsultationPaperNo. 2.Thisis relatedtoourcommentsin paragraph 3.6below. Also,fromanoperational/registration perspective and in considering theneed fortheexistenceof asecurityagreementatthetime ofattachment, unlikethepreviousRegister of CompanyCharges,thelodgementof asecurityagreementisnot required onthePPSregister(if timing isan issue).
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
Comments:Weagree withthisproposed recommendationon the basisthatrecommendation 2.72is adopted,asreferredtoinparagraph 6.5.
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
Comments:Weagreeforthereasonsgiven in ConsultationPaper2
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:AttachmentAdetailsascenariowherecollateralwastransferred inbreach ofasecurity
agreementand,ultimately,transferred byamotordealertoabuyerwhohastaken thevehiclefree of thesecured party’sinterest,leaving thesecured partywithoutrecoursetothe proceedsof sale viaitssecurityinterest. Thishighlightsan apparentanomalyintheprovisionsof thePPSA and the operationof the PPS Register. Itisnotclearwhether taking freeenablesthebuyertomakean amendmentdemand in thefirstplace,becauseshouldtherebeareattachmentunders37dueto thesale notsettling orinsolvencyofthe buyer(etc),then thesecured partywillneed tomaintain the original registration.Thisisan issuethatneedsresolution.
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
Comments:Weagree,forthereasonsgiven in ConsultationPaperNo.2.
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:Weagree,forthereasonsgiven in ConsultationPaperNo.2.
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: No comment.
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: No comment.
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: No comment.
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: No comment.
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:Thecomment hasbeenmadethatsections 4.3.2.7,4.3.5.1and4.5.3.2shouldnotlimit
"control" overdepositstoonlyADIs. Somenon-ADIfinanciersareauthorised totakedepositsby virtueof anAPRAexemption asaregistered companyundertheFinancial Sector(Collectionof Data) Act2001. ItisnotonlyADIsthatarecapableoftakingand holding depositsandnon-ADIsshould be subjecttothesame protections/provisions.
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: No comment.
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: No comment.
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: No comment.
4.3.5.1 Is the definition too narrow?
Is the term "ADI account" too narrow in some contexts?
Comments:Asnoted in4.3.2.7abovetheActshouldnotlimit"control"overdepositstoonlyADIs. Thedefinitionof “ADI account”should beadaptedtocoverentitiessuch asnon-ADI deposittakers foreign banksthatarenotauthorisedtocarryonbanking businessundertheBanking Act1959.
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:Seeourcommentsunder4.3.2.7and4.3.5.1above.
Thecommenthasalso been madebyoneofourbankmembersthat“thecertaintyofanADI’s automaticperfectionoveranaccountheldwithitshouldnotbeprejudicedby otherpartiesbeing abletoperfectbycontrol(whichwouldturnonhowthatcontrolcouldbeclearlyevidenced).Also, perfectionofmoneysbycontrolbyasecuredpartyotherthananADI doesnotassistthepublicto searchtheregistertodetermineifthatADI accounthasbeenperfectedbyapersonotherthanan ADI. Itseemsmoreintuitive(aswithset-off)thatabank/ADI wouldhaverightstomoneysinan accountheldwiththatADI.”Thisdoesnotdetractfrom ourcommentsaboutnon-ADI deposit takers.
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,forthereasonsgiven in ConsultationPaperNo.2and from aprocesspointofview, perfection bycontrolshould beautomatictoreduce theadministrativeburdenon ADIsandother deposittakers.
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: No comment.
4.3.7 Letters of credit
Should ss 21(2)(c)(v) and 28 be deleted?
Comments:Weare notaware offinanciersperfecting securitiesoverlettersofcreditbycontrol. Howeverthe “ostensible ownership”problemdiscussed in ConsultationPaper1and theprincipleof transparencyaboutsecurityinterestssuggestthatboth ss21(2)(c)(v)and 28bedeleted.
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:Weare notaware ofaneed forfinancierstobeableto perfectsecuritiesover performance bondsand bankguaranteesbycontrol.As with lettersof credit,the“ostensible ownership”problemand theprincipleof transparencysuggestthatnochangeisneeded.
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: Wedo notsupportthissuggestion. Itwould beimpractical foraprospectivefinancier to make enquiriesoftheobligors/debtorstodetermine whetheraccountsorchattel paperhavebeen transferredtoathird partyand perfected by noticetotheobligors/debtors.Therationalefor deeming atransfer ofan accountorchattel papertobeasecurityinterestis toaddresstheapparent ownership riskthatsuch atransfercreatesforthird partiesdealingwiththetransferor, byallowing third partiestoeasilydetermine(byasearchoftheregister)whetheratransferhas occurred. Allowing perfection bynoticetotheobligor/debtorwould defeatthispurpose.
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:
4.6.2 Re-perfection
Should a version of Sask PPSA s35(7) be included in the Act?
Comments:Forpractical conveniencetheremaybemeritin exploring asimilarversionof Sask PPSA s35(7)on thebasisthereisnodetrimenttoany othersecured partythatregistered in the intervening period (i.e. whiletheregistration isremoved).
Thecaseof SFSProjectsAustraliaPtyLtdvRegistrarofPersonalPropertySecurities([2014]FCA846) isrelevant. TheFederal Courtdecided thatthe PPS Registrarhasthepowerunders186torestore datatotheRegisterthatwasincorrectlyremoved duetoan errorbythe personwhoapplied forits removal. TheCourtheldthattheword “incorrectly”ins186isnotlimitedtoerrorsbytheRegistrar and thatthe purposeofthissection is toensurethatincorrectlyremoved registrationsmaybe restored. ItsviewwasthatthePPSA isintendedtobenefitsecurityholdersbyproviding forthe perfectionof securityintereststoestablish prioritybetween securityholders;and thatbecause section 186isaremedialorbeneficial provision,anyambiguityshould beresolved in favour ofthe intended beneficiaries(inthiscasetheassigneesof securityinterests).
ToaddressuncertaintyabouttheRegistrar’spowerstocorrecterrors,itmaybeadvisabletoamend thePPSA toclarifythis,ratherthan putting secured partiesandtheRegistrartothe expenseand inconvenienceofcourtaction. Wesuggestthatthe PPS Registrarbeconsulted aboutthisissue.
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:Westronglysupportthisproposed recommendation. In particular,consideration should
begiven astowhethertherelevantlanguage(“transfer”/”disposal”/”assignment”/”dealing”)is intended toincludeareferencetoleasing,bailing,consigning,licensing,granting agift,declaringa trust,becoming atrustee(including whereacting asagent),and transferring alegal interest without achangein beneficial interest.
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:Wereceived threedetailed responsestothesequestionsasfollows:
1. I am concerned bythediscussion around financelease(and byimplication,operating lease). Twoissuesspring tomind: (i)thereisnobrightlinetestundertheleaseaccounting standards; and (ii)thereisnorequirementforparityoftreatmentbetween alessorand lessee-e.g. alessor with aresidual valueguaranteewill treattheleaseasafinanceleasewhereasthelesseeofthe samelease whohasnoRVexposuretreatstheleaseasan operating lease. In addition,from a policyperspective,on the basisthatahead lessor hasdoneeverything practical toperfectits securityinterest,itshould notbecompromised by apartyfurtherdown thechain of security interests(even ifthisisatthecostof an unknowing purchaser/lessee).
2. From acommercial perspective,itisextremelyusefulforafinancierand itscustomerto beable torecreatetheresultof FactPattern 2(short-termleasescenario)wherethesublease(granted bythecustomer)constitutesan in-substancesecurityinterestoraPPS lease.Thisis especially thecase where thecommercial structuredoesnotpermitthesublease proceedsto bedirectly and reliablycredited intothefinancier’saccount(inwhich casethefinancier would have practical controlovertheproceedsunderaperfectedsecurityinterest,and less commercial need topreserveaprioritysecurityinterestinthephysical collateral).
Notall leasesthatarein-substancesecurityinterestsorPPS leasesarecommerciallyequivalent toanoutrightsale(FactPattern1). Financiersdo notnecessarilyfinance(ortakesecurityover) goodsthataretobesold bythecustomer,inthe same wayastheywould finance(ortake security over)goodsthataretoberentedout undermedium- orlong-term operating leasesby thecustomer.In ourview,theissuesset outin theConsultationPaperrelating totransparency of theregisterdonotapplyin all circumstances.Wenotethatthesetransparencyissuesrelate to:
(a)fairnessfortheLesseeSP (or,potentially,furtherparties “downthechain”);the issuesdo notapplytothe Lessee,whowillbeabletodiscovertheregistrationmadebythe LessorSPbysearching thePPSRforregistrationsagainsttheLessor.TheLesseeis,then,in a differentposition than anybodyelsefurther“downthechain”;and
(b)goodsforwhich thesecurityinterestisnotregistrable,ornotregistered,byserial number.Ifthesecurityinterestwerecapable ofbeing registered byserial number,and was soregistered,theLesseeSP(and furtherparties“down thechain”)wouldbeabletodiscover the existenceof theLessorSP’ssecurityinterest. (Wenotethatasimilarpointwasdiscussed brieflyon pages31to32oftheConsultationPaper.)
Also,iftheleaseisan operatingleasethatisaPPS Lease,itseemslessfairtopickan outcome thatdisadvantagestheLessorSP,than iftheleaseisan in-substancesecurityinterest, particularlyiftheleaseisregisteredbyserial number.
If PPSAs32is tobeamended along thelinessetoutin section 5.3.5ofthePaper, where detachmentwill notoccurunlessthesecuredparty agreestoextinguishment,itseemsodd that ‘takefree’will apply(in theordinarycourseof business)underPPSA s46regardless ofthat agreement. Bothsectionsneed tobereviewed together.
In respectofsection5.2.3of theConsultation Paper,ourcommentsaboveapplyequallytothe subleasechain scenariodescribed in section5.2.3.Wealsonotethatmajorfinanciersoperatein the equipmentleasing industry(both financeleasesand operating leases,and notexcluding chattelmortgages),sothe“individual problem”may berelativelywidespread.
3. Wedonotagree with thestatementthat“thefirst group [ie. theLessorSP] isin abetter position tomanagetheriskof lesseedefault”because,forexample,wheretheLessorholdsthe goodsasinventoryorotherwiseleases/sellsthe goodsin itsordinarycourseof business,the buyerorlesseewould takefreeofLessorSP’ssecurityinterest,resulting inLessorSP’ssecurity interestattaching totheproceedsonly,notwithstanding anyrestriction in thesecurity agreementbetweenLessorSPandLessorpreventing Lessorfromdealing withthe goods.In this
instance,thereisnothing thattheLessorSPcan door“manage”topreventthisfrom happening. AsforLessee SP’sinterests,in thecaseof serial numbered goods,asearch ontheRegister
should revealLessorSP’sinterestin such goods(assuming LessorSP hasregistered againstthe Serial Numberofthegoodsasprescribed bytheRegulations).
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:Wereceived threedetailed responsestothesequestionsasfollows:
1. Section5.2.2:Asaproposition,webelievethevesting provisionsshould notapplytoan unperfectedtitle based securityinterest.In thealternative,thevesting provisionsshould not applytoan unperfectedtitlebased securityinterestwhich isaPMSI. In both scenarios,the unperfectedsecurityinterests willremain subjecttothepriorityand takefreerules. Eitherof thesepositionsprotectany partythatdeals with thepersonal propertythesubject ofthe unperfectedsecurityinterest,butwill notresultin a windfall tounsecured creditorsatthecost of the ownerofthegoods.
2. I don’tthinktheReviewer’sassumption is correctandeven if so,I don’tbelieveitshould follow that opportunitiestopermitrelated entitiesto prevailin thesecircumstancesisappropriate. Removing ss267and267Amay providesomeassistancetolessorsin thesecircumstances.
3. Wewould liketopointoutaqualificationtothe“majority”viewexpressed in theConsultation Paper. In practice,asa contractualmatter,theLessee’srightsundertheleasewill typically terminate(orre-vestin theLessor)onLesseeinsolvencyorexternaladministration. If (despite the external administration)theLessorSPisabletorepossessthe physical goods(directlyor through theLessor),theLessorSP’ssecurityinterestmayreattach tothephysical goodsunders37. Ifthisoccurs,then(becauseof s267)theresultmayarguablybethattheLessee becomesa grantorof asecurityinterestdirectlyin favour oftheLessorSP.Thiscanbeconsidered analogoustoatransferof collateralunders34, exceptthathereweseeatransfertoa“new” secured party.Diagrammatically:
LessorSPLessorLessee
upon “s267collapse” becomes:
LessorSPLessorLessee/External Administrator resulting in:
LessorSPLessee/ExternalAdministrator
Of course,thepractical difficultyisthattheLessorSP may not beawareoftheLessee’s insolvency,and (unlesstheLessorSP’ssecurityinterestiscapableofbeing registered byserial numberand issoregistered)theexternal administratormay not beawareoftheLessorSP’s securityinterest.
However,thisdoesraisethequestionof whytheresultunders267mightbe different depending on whethertheLessorSPisabletorepossessthephysical goods.
Wedonotconsiderthattheproposed deletionof s 13(1)(b)will assist,becauseafinancier will typicallyassumethatan intra-group “useof collateral”arrangementisan in-substancesecurity interest, becauseitwill not be efficientforthefinanciertodeterminewhether the arrangementisashortterm operating lease.
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:Wesupportclarification/simplification of theterminologyreferred toin 5.3.2.We agreethat “remainsattached to”isthe mostlikely meaning.
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:Weagreewiththeneed torecasts32(1);however:
(a)theproposed drafting doesnotclearlydealwith thesituationwhere,eventhough the secured partyhasnotexpresslyorimpliedlyagreed toextinguishment,atakefreerule(such asin s45(3))hastheeffectof extinguishing thesecurityinterest.Wearenotsurewhether theinitialwordsofs32(“SubjecttothisAct, …”)aremeanttodealwiththatissue;and
(b)if the effectofthesecuredparty’sagreementisto“detach”thesecurityinterestfrom the collateral,does“extinguish”mean“detach”orsomething different?Should itsay“agreed that,asaresultofthe[dealing],thesecurityinterestwould beextinguished ornotremain attachedtothatcollateral”)?Thismayalsoassistin interpretationwherethesamesecurity interestattachestovariousitemsof collateral,butthe dealing (orthesecuredparty’s agreementtoextinguish)onlyappliestocertain itemsofthatcollateral;and
(c)thisissubjecttotheproposed changestothe treatment of“inventory”underthetaking free rules(asnoted in 5.4.2.1.2,5.4.2.3and5.4.3)alsoproceeding. If the proposedchangestos32(1)weremadein isolation,thenobtaining cleartitleon purchaseofproperty byalessor would become difficultandcumbersome.
5.3.6.2 Is the limitation appropriate?
Is the limitation in s 32(2) appropriate?
Comments:Unlesstherearepolicyreasonsforretaining ss32(2)and (3)then wesuggestthatthey bedeleted. If notthen thereferencesto“transfer”should beclarified.