Review of the Personal Property Securities Act 2009
Consultation Response TemplateConsultation Paper 4
Instructions:
Please use the form below to provide feedback with respect to the 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 4. 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: Anthony DugganOrganisation: Faculty of Law, University of Toronto
Background/Expertise/Interest in PPSA Review:Background/Expertise/Interest in PPSA Review: I have published widely on secured transactions law in Canada, Australia and New Zealand; I am the principal author of Duggan and Brown, Australian Personal Property Securities Law (LexisNexis, Sydney 2012) and Duggan and Ziegel, Secured Transactions in Personal Property: Cases, Text and Materials (6th ed., Emond Montgomery, Toronto, 2013). I have taught Secured Transactions at the University of Toronto for the past 15 years and I have taught Secured Transactions courses at the University of Melbourne, the University of Auckland and the National University of Singapore. I have been a member of the Ontario Bar Association’s Personal Property Security Law Committee for the past 15 years.
Contact Details:
2.2.2 How the terms affect the registration of a financing statement
Proposed recommendation 4.1: That the Act be amended as described in Section 2.2.2.Do you agree with the proposed recommendation? / Yes/No
Comments:
I agree that it should not be necessary to indicate in a registration whether the collateral is consumer property or commercial property.
I don’t agree that all registrations against individuals should have a maximum term of seven years. My concern is that a provision like this might affect the cost and availability of credit to sole traders, putting them at a competitive disadvantage relative to companies and other forms of business entity. I prefer the alternative view floated in the text that there is no need for any limitation at all. I agree that the amendment demand mechanisms in Part 5.6 are sufficient protection against the risk of stale registrations. In Ontario, registrations are limited to 5 years if the collateral is consumer goods. There is no corresponding provision in the other provinces, but in all the provinces (including Ontario) there is a provision stating that if the collateral is consumer goods, the secured party must discharge the registration within 30 days after the obligation secured by the security interest has been performed. Cuming, Walsh and Wood argue that this provision gives consumers sufficient protection and that there is no need also to limit the duration of the registration: Personal Property Security Law (2nd ed., Irwin Toronto 2012) at 353-354.There is a corresponding provision in s.167 of the Australian PPSA (discussed further below) and, likewise, it arguably gives consumers sufficient protection without the need also to limit the duration of the registration.
I don’t agree with the proposal that “a registration against serial-numbered property may not identify the grantor if the grantor is an individual.” In Canada, if the collateral is serial-numbered consumer goods, the financing statement must include the serial number, whereas if the collateral is serial-numbered equipment or inventory, inclusion of the serial number is not mandatory. It is common for a business debtor to give a security interest in its present and after-acquired equipment or inventory and obviously it would not be possible for the secured party to include in the financing statement serial numbers for equipment or inventory that the debtor has not acquired at the date of registration. By contrast, as a general rule, a secured party is not permitted to take a security interest in after-acquired consumer goods. Hence the different registration requirements for consumer goods on the hand and equipment and inventory on the other.
The Australian PPSA, as currently drafted, adopts more or less the same approach. The change proposed in the Consultation Paper would prejudice sole traders by making it difficult, if not impossible, to offer after-acquired equipment or inventory as collateral if the equipment or inventory is serial-numbered property. The proposed change would prejudice sole traders in the further sense that, if the collateral includes serial-numbered property and non-serial numbered property, the secured party would have to register separate financing statements, one for the serial-numbered property (which would include the serial-number but not the grantor’s name) and another for the non-serial-numbered property (which would include the grantor’s name). Likewise, if the collateral includes multiple items of serial-numbered property, the secured party would presumably have to register a separate financing statement for each item. The objective should be to avoid the need for multiple registrations as far as possible (see Consultation Paper, para.2.6.3). The proposed rule change would perpetuate the need for multiple registrations where the debtor is an individual(i.e., a sole trader, as opposed to a company or other business entity) and this may affect the cost and availability of credit to sole traders.
For these reasons, a better solution to the problem the Consultation Paper identifies might be a rule to the effect that in all cases where the collateral is, or includes, serial-numbered property, the secured party must include the serial number in the financing statement provided that the serial number is available to the secured party at the date of registration. There should be an exception if the collateral is inventory: the grantor may hold numerous items of inventory and it may be onerous to list all the serial numbers in the financing statement; besides, the information would be of passing usefulness only because the items in question will eventually be traded and replaced by other items of inventory with different serial numbers. To be clear, if the collateral is inventory, the secured party should be free to include the serial numbers in the financing statement if it wants to, but there should be no legal consequences if it chooses not to do so.
How would this proposal affect the application of ss.44 and 164 and 165? If the collateral is serial-numbered consumer property, the serial-number must be disclosed in the registration and if it is not disclosed at the relevant time, ss 164 and 165 apply and the registration is defective. If the collateral is serial-numbered presently held equipment, the serial-number must be disclosed in the registration and if it is not disclosed at the relevant time, again ss 164 and 165 apply. If the collateral is serial-numbered after-acquired equipment, the serial number “may” (not “must”) be disclosed in the registration and if it is not disclosed at the relevant time, s.44 applies with the result that the buyer or lessee takes free. (This rule gives the secured party a choice between registering a financing change statement when the grantor acquires new equipment, adding the new serial number to its registration, or taking the risk of a sale or lease to which s.44 applies). If the collateral is serial-numbered inventory, the serial number “may” (not “must”) be disclosed in the registration. However non-disclosure attracts no legal consequences because s.44 does not apply if the collateral is inventory.
2.2.3 Other uses of the terms "consumer property" and "commercial property"
Proposed recommendation 4.2: That the definitions of "consumer property" and "commercial property" in s 10 of the Act be deleted.Do you agree with the proposed recommendation? / Yes
Comments:
Subject to the points raised in 2.2.2, above.
2.3 The "inventory" question
Proposed recommendation 4.3: That item 1 of the table in item 4.1 of Schedule 1 to the Regulations be deleted.Do you agree with the proposed recommendation? / Yes
Comments:
2.4 The "control" question
Proposed recommendation 4.4: That item 2 of the table in item 4.1 of Schedule 1 to the Regulations be deleted.Do you agree with the proposed recommendation? / Yes
Comments:
2.5 The "subordinate" question
Proposed recommendation 4.5: That item 6 of the table in s 153(1) be deleted.Do you agree with the proposed recommendation? / Yes
Comments:
The thinking behind the corresponding provision in the Canadian PPSAs is that the junior secured creditor may want to have the senior secured creditor substituted as the party of record to avoid having to field searchers’ follow-up inquiries. But if there is little demand for this facility in Australia, I see no reason for retaining the provision.
2.6 The collateral classes
Should a new collateral class be added to the Register, of "all present and after-acquired property relating to"?Comments:
Perhaps the most serious shortcoming of the Australian registration provisions is the requirement in PPSA, s.153 (1) for a separate registration in relation to each collateral class. There is no corresponding limitation in any of the other PPSAs. In Australia, as in the other PPSA jurisdictions, it should be possible to register a single financing statement covering multiple collateral classes without having to fall back on over-reaching collateral descriptions, such as “all present and after-acquired property”. I note that this point is addressed in recommendation 4.54 of the Consultation Paper. In my view, this reform is much more important than the question posed above.
The question posed above prejudges the issue raised in paras.2.6.4 and 2.6.5, namely whether Australia should retain the current approach of designating collateral classes and not move to a system of describing collateral by item or kind (as to which, see below). Assuming Australia does retain the current approach, the answer to the question should probably be, “yes”.
2.6 The collateral classes
Do you agree that the collateral classes should be changed as suggested in Section 2.6.5? Do you have any alternative suggestions?Comments:
If the slate were clean, I would recommend moving to the approach of describing collateral by item or kind, both because this system is tried and tested and also because it strikes a reasonable balance between the interest of the registering party in not being required to provide too much detail and the interest of the searcher in wanting a reasonable sense of the collateral covered by the registration. As the Consultation Paper notes, Ontario has decided to adopt this model for precisely these reasons, though the change has not yet been implemented. The current Ontario collateral description requirements have been criticized as substantially diminishing the usefulness of the register: Cuming, Walsh and Wood, Personal Property Security Law (2nd ed., Irwin 2012), at 348).
The changes proposed in para.2.6.5 of the Consultation Paper would move the Australian approach very close to the current Ontario model which, as noted above, Ontario itself wants to step away from. The proposed Ontario changes are based on a submission to the provincial government by the Ontario Bar Association’s Personal Property Security Law Committee. The PPSL Committee’s membership includes experienced practitioners and industry representatives and the committee agreed unanimously both that the current Ontario model is unsatisfactory and that the system the other provinces employ is preferable. In summary, the Consultation Paper appears to be swimming against the tide on this issue.
As the Consultation Paper notes in para.1.1, “any change to the operating specifications of the Register will impose a cost burden on both Government and the private sector in the short term”. I am not in a position to assess the costs of moving from the collateral description requirements currently in place to an entirely new model. If the costs turn out to be prohibitive, it would be worth considering the New Zealand model as a compromise solution. New Zealand, like Australia and Ontario, has adopted the description by collateral class approach, but the collateral classes are less Delphic than the current Australian ones and they are more detailed than both the current Ontario collateral classes and the collateral classes proposed in Consultation Paper, para.2.6.5. As such, they arguably strike a better balance between the interests of registering parties and searchers.
2.6 The collateral classes
Do you have any practical experience of working with the Canadian and New Zealand systems for identifying collateral in a registration?Comments:
I have been a member of the Ontario Personal Property Security Law Committee for the past 15 years, and I participated in the deliberations which led to the submission referred to above. The leader of the project was David Denomme, who has had many years’ experience working with both the Ontario register and the registers in the other provinces. He is also the co-author of a leading text on the Ontario PPSA (Ziegel and Denomme, The Ontario Personal Property Security Act: Commentary and Analysis (2nd ed., Butterworths 2000)). I would strongly recommend soliciting his views on this question. I can provide contact details if required.
2.7.2 The legal effect of the free text field
Should the Act be amended to clarify the legal effect of the free text field?Comments:
I agree with the analysis in the Consultation Paper. There is an Ontario case dealing with this issue: Adelaide Capital Corporation v. Integrated Transportation Finance Inc. (1994) 16 OR (3d) 414, and the court’s reasoning is consistent with the analysis in the Consultation Paper. However, a provision confirming the position may be helpful. Section 46(2.1) of the Ontario PPSA provides as follows:
“Except with respect to rights to proceeds, where a financing statement or financing change statement sets out a classification of collateral and also contains words that appear to limit the scope of the classification, then, unless otherwise indicated in the financing statement or financing change statement, the secured party may claim a security interest perfected by registration only in the class as limited”.
2.7.3 Should the free text field be compulsory?
Proposed recommendation 4.8: That the Act not be amended to oblige a registrant to include details of collateral in the free text field as a condition to making it an effective registration.Do you agree with the proposed recommendation? / Yes
Comments:
I agree with the arguments in the Consultation Paper.
2.7.4 What type of information should be allowed in the free text field?
Proposed recommendation 4.9: That the Act not be amended to prohibit the practice described in Section2.7.4.Do you agree with the proposed recommendation? / Yes
Comments:
Yes, the Act should not be amended as indicated. It is arguable that the formulation in question does not comply with the Act and if that is the case, sooner or later parties taking this approach will suffer the consequences: see Duggan and Brown, Australian Personal Property Securities Law (LexisNexis, 2012) at para.6.46. More importantly, the main reason for resorting to this formulation is to avoid the limitation in s.153(1) that a registration may cover only one collateral class. If this limitation is removed, as it should be (see 2.6, above), there should no longer be any need for the type of collateral description in question. In other words, one way or another, the problem should take care of itself and there is no need for a statutory response.
2.7.5 Should the free text field be available for the "allpap" class?
Proposed recommendation 4.10: That the Register functionality not be amended to activate the free text field for a registration against the collateral class "allpap".Do you agree with the proposed recommendation? / No
Comments:
If a secured party wants to use the free-text field in this type of case, why should it not be permitted to do so? The Consultation Paper may be right in suggesting that it’s hard to see what adding free text in this type of case would achieve, but it’s hard to predict future contingencies and there may turn out to be cases where such a facility would be useful. And even if not, what harm is there in making the facility available?
2.8 The "PMSI" question
Proposed recommendation 4.11: None at this stage, pending further consideration.Comments:
The PMSI disclosure requirement was enacted as a substitute for the rule in other PPSA jurisdictions that where the collateral is inventory, the PMSI holder qualifies for super-priority only if it serves a notice on prior registered secured parties claiming a security interest in inventory (or accounts). In my view, the PMSI disclosure requirement is a poor substitute for the statutory notice requirement : see Duggan and Brown, paras 8.34-8.36. I think the Act should be amended to include the statutory notice requirement in PPSA, s.62(1). If this were done, the PMSI disclosure ins.153(1) would be redundant.
2.9 Description of proceeds
Proposed recommendation 4.12: None at this stage, pending further consideration.Comments:
The “all present and after-acquired property” default choice makes the requirement in s.33 for a proceeds collateral description meaningless. If this is the road the Australian lawmakers want to take, it would be better to amend s.33 along the lines suggested in Consultation Paper 2. This would at least make the law simpler, more comprehensible and more coherent. But the cost of this approach is to limit the usefulness of the register because a searcher will have no easy way of discovering a security interest in proceeds unless the proceeds fall within the same collateral description as the original collateral. I think that s.33, as present drafted, strikes a better balance between the interests of registering parties and searchers. It follows that I think “all present and after-acquired property” should not be permitted as a default choice.
2.10.4 How broad should the concept be?
(a) Should the categories of serial-numbered property be broadened? If so, how?(b) Should the categories of serial-numbered property be reduced? If so, how?
(c) Does any change need to be made in relation to the use of patent application numbers (if patents continue to be a category of serial-numbered property)?
Comments:
To answer these questions, we need to be clear about the benefits of registration against serial number relative to registration against grantor details. The main benefit of serial number registration is that it allows the searcher to discover security interests created by remote parties (in other words, a predecessor in title of the grantor). By contrast, registration against grantor details only allows search for security interests created by the grantor herself. In other words, a serial-number registration and search system provides an important partial response to the so-called A-B-C-D problem : see Duggan and Brown at para.6.24.
These policy considerations suggest that the categories of serial-numbered property should be as broad as possible in order to maximize the benefits of the serial number registration and search facility. As the Consultation Paper points out, in Ontario the serial-number registration and search system is limited to motor vehicles. But the Ontario statute has rightly been criticized for under-utilizing the serial-number registration and search facility. The definition of serial-numbered goods in the other provinces is broader.
I agree with the Consultation Paper’s observation that the serial number registration and search facility should only apply to property where the serial number is “sufficiently robust and unique” for the purposes of the system. Most, if not all the items currently on the Australian list of serial-numbered property meet this criterion and there may be items not on the list which meet the criterion as well.
I don’t agree with the Consultation Paper’s reason in principle for not extending the concept of serial-numbered property. The argument overlooks the policy considerations outlined above and it overstates the secured party’s costs of compliance. It may be true that a secured part might not “want to” include the serial number in its financing statement, but this is a case where individual preferences should take second place to collective interests. After all, a secured party might also not “want to” include the grantor’s details in its financing statement or, more broadly, it might not “want to” register at all. But if these considerations were allowed to hold sway, there would be no registration system. Besides, it needs to be kept in mind that today’s registering secured party is tomorrow’s searcher and so a requirement which may impose costs at the registration stage may also reap benefits at the search stage. What comes around goes around.
In my submission on Consultation Paper 2, I made no comment on the proposal to limit s.44 to motor vehicles. I would like to rectify that omission by registering my disagreement with the proposal. Section 44 plays a central part in ensuring the integrity of the serial-number registration and search facility. It performs this function in particular by giving the secured party claiming a security interest in present and after-acquired equipment an incentive to include the serial number in its original registration if the serial number is ascertainable at the time or to include the serial number later (via a financing change statement) when the information becomes available. These requirements are not onerous and, in any event, s.44 gives the secured party a choice between complying with the requirements or taking the risk of later unauthorized sales. In summary, as a matter of both policy and logic, the scope of s.44 should correspond with the scope of the serial-number registration and search facility.
2.10.5 The registration period