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Personal Property Securities Amendment (Deregulatory Measures) Bill 2014



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ISSN 1328-8091

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BILLS DIGEST NO. 104, 2014-15 13 MAY 2015

Personal Property Securities Amendment (Deregulatory Measures) Bill 2014 Tyler Fox and Jonathan Chowns Law and Bills Digest Section

Contents

Operation of the Personal Properties Securities Act 2009 ...... 2

Purpose of the Bill ............................................................... 2

Background ......................................................................... 2

Security Interests ..................................................................... 3

The problem of leases ............................................................. 3

PPS leases ................................................................................ 3

Rationale for the Bill ................................................................ 4

Statutory review of the PPS Act .............................................. 4

Committee consideration .................................................... 5

Senate Standing Committee for the Selection of Bills ............. 5

Senate Standing Committee for the Scrutiny of Bills .............. 5

Parliamentary Joint Committee on Human Rights .................. 5

Statement of Compatibility with Human Rights .................... 5

Policy position of non-government parties/independents ..... 5

Position of major interest groups ......................................... 5

Financial implications .......................................................... 7

Key issues and provisions..................................................... 7

Concluding comments ......................................................... 7

Date introduced: 19 March 2014

House: House of Representatives

Portfolio: Attorney-General

Commencement: The earlier of a single day to be fixed by Proclamation or six months after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the ComLaw website.

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Operation of the Personal Properties Securities Act 2009 Personal property includes tangible and intangible property, other than real property. Examples are motor vehicles, household goods, business inventory, intellectual property and company shares. Personal property over which security is taken is commonly called collateral.

A security interest is an interest in personal property that secures payment or the performance of an obligation. Examples include motor vehicle finance arrangements, where the lender takes an interest in the vehicle to secure repayment of the loan; or a consignment of a painting to be sold at an auction house.

The Personal Properties Securities Act 2009 (the PPS Act)1 established the Personal Property Securities Register, an authoritative public register of securities held over personal property (the register).2 The register provides a way for a person to establish whether there are pre-existing interests in particular personal property over which they are considering taking an interest to secure a loan or other obligation.

The status of some types of leases under the general statutory definition of security interests is uncertain. To remove the uncertainty, the PPS Act currently deems certain leases to be security interests. These are called PPS leases.

Purpose of the Bill The Personal Properties Securities Amendment (Deregulatory Measures) Bill 2014 (the Bill) makes a minor amendment to the PPS Act to remove one kind of PPS lease from the coverage of the Act. They are leases of serial numbered goods of 90 days or more. Leases of this kind are generally for motor vehicles and equipment.

The removal of these kinds of leases from the coverage of the PPS Act is to reduce the compliance burden on small and medium sized equipment and vehicle leasing businesses. This comes at the expense of the protection afforded by registration under the PPS Act. Affected leasing businesses will, if necessary, have to establish ownership of their goods by other means, including by reliance on lease agreements. This rebalancing has been sought by affected businesses.

Leases of more than one year—including for serial numbered goods—will remain covered by the PPS Act.

Background Justice Davies of the Federal Court gave a broad conceptual overview of the PPS Act:

Under the legislative framework of the PPSA, there is now a set of common rules for the regulation of all security interests in personal property, and a centralised registration system. Conceptually, the new regime under the PPSA model is relatively straightforward, at least in relation to the rules for creating security interests and the priority rules for competing security interests. At the core of the PPSA is a statutory concept called the "security interest" which does not need to be a security instrument in legal form provided that it is "in substance". A person who holds a "security interest" in "personal property" may "perfect" the security to preserve a position of priority should a dispute between competing security interests arise. A security interest is "perfected" if it has "attached" to "collateral", it is enforceable against third parties and it has been registered or the secured party has control or possession of the collateral. Registration, I think, is intended to be the main form of "perfection", serving as the means by which third parties can be put on notice of secured interests and providing a measure of protection for third parties who will be able to search the register before taking security interests. Under the priority rules, generally speaking, a security interest that is perfected takes priority over another security interest that is unperfected when the security interest comes to be enforced, irrespective of whether the perfecting party had notice of any earlier unperfected interest; priority between perfected interests is determined by order of registration or time of first perfection by control or possession; and priority between unperfected interests is determined on a first-in-time basis.

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1. Personal Property Securities Act 2009, accessed 12 May 2015. 2. The Bills Digest for the Personal Properties Securities Act 2009 explored the inquiries and Commonwealth-state co-operation that led to the Personal Property Securities Act 2009 being drafted, agreed to and implemented. See P Pyburne and D Spooner, Personal Property Securities Bill 2009, Bills digest, 36, 2009-10, Parliamentary Library, Canberra, 2009, pp. 6-10, accessed 7 May 2015.

3. Justice Davies, ‘Personal Properties Securities Act 2009 (Cth): objectives and emerging issues’, Federal Judicial Scholarship, 7, 2014, paragraph [5], accessed 7 May 2015.

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Security Interests The guide to the definitions section of the PPS Act says of security interests:

A security interest is an interest in personal property provided for by a transaction that secures payment or the performance of an obligation. The form of the transaction and the identity of the person who has title to the property do not affect whether an interest is a security interest. Certain transactions that do not secure payment or the performance of an obligation may also give rise to a security interest: transfers of accounts, consignments and certain long-term leases and bailments (called PPS leases).

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This is consistent with the formal definition in section 12 of the PPS Act:

A security interest means an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property).

An example of a transaction that clearly satisfies the definition is that of financing a motor vehicle by way of personal loan. In those circumstances the person who borrows money to purchase the motor vehicle has possession of the vehicle but gives the lender a security interest in it to secure repayment of the loan. The security taken by the lender enables it to recover possession of the motor vehicle in the event of default. The registration of the lender’s interest operates as notice to all others that a security interest exists over the motor vehicle, a fact that the buyer’s possession of it might otherwise conceal.

The problem of leases The descriptive nature of the definition means that some kinds of transactions are not clearly caught. Short term leases are an example.

The Explanatory Memorandum illustrates the point with this example:

Business A requires a particular item of equipment and enters into a transaction with Business B who buys the equipment and leases it to Business A for an extended period. For Business A, the making of lease payments represents an alternative to the making of loan payments had it obtained finance and purchased the equipment. Business B’s interest in its equipment would be treated as a security interest granted by Business A.

Whether other lease arrangements meet the definition of a security interest can be more difficult to determine. Generally, short term leases of personal property will be unlikely to meet the definition, but as lease terms become longer, especially as they begin to approximate the useful life of the leased property, they become increasingly likely to be a security interest.

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To create certainty in relation to short term leases, the PPS Act deems certain of them to be covered by the Act. These are known as PPS leases. The Explanatory Memorandum says that this is consistent with the approach in other common law countries, like New Zealand and Canada.6

PPS leases Section 13 of the PPS Act defines PPS leases to include a lease or bailment7 of goods of more than one year (or for less than one year if it is renewable in a way that could make the term greater than a year).8 Section 13 also includes the following kind of short term lease that is proposed to be excluded from the operation of the PPS Act by this Bill:

4. Personal Property Securities Act 2009 (Cth), section 9, accessed 12 May 2015. 5. Explanatory Memorandum, Personal Property Securities Amendment (Deregulatory Measures) Bill 2014, p. 3, accessed 8 May 2015. 6. Ibid., p. 3.

7. Bailment is defined as the delivery of personal chattels by the owner of the chattels (the bailor) into the possession of another person (the bailee) upon an express or implied promise that they will be redelivered to the bailor, or dealt with in a stipulated way. Source: Butterworths concise Australian legal dictionary, 3rd edition, LexisNexis Butterworths, Australia, 2004, p. 41.

8. Personal Property Securities Act 2009 (Cth), section 13, accessed 12 May 2015.

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13 Meaning of PPS lease

A PPS lease means a lease or bailment of goods:

(a)… for a term of more than one year; or

(b)…

(c)…

(d)…

(e) for goods that may or must be described by serial number in accordance with the regulations, if the lease or bailment is:

(i) for a term of 90 days or more; or

(ii) for a term of less than 90 days, but is automatically renewable, or is renewable at the option of one of the parties, for one or more terms if the total of all the terms might be 90 days or more; or

(iii) for a term of less than 90 days, in a case in which the lessee or bailee, with the consent of the lessor or bailor, retains uninterrupted (or substantially uninterrupted) possession of the leased or bailed property for a period of 90 days or more after the day the lessee or bailee first acquired possession of the property, (but not until the lessee’s or bailee’s possession extends for 90 days or more).

Because these leases are also security interests they are afforded the protections of the PPS Act as explained by Justice Davies in the earlier passage.

The removal of this kind of lease from the ambit of the PPS Act does not, however, deprive leasing businesses of protection. A lessor of, for example, hire cars could rely on lease agreements or similar documents to prove ownership rather than registration of a security interest.

For small and medium sized leasing businesses which are less likely to have systems to effect registration easily, the reduction in the administrative burden of registration is seen as outweighing the removal of the protections of the PPS Act.

Rationale for the Bill The Government introduced the Bill as part of its deregulation exercise on 19 March 2014.9 The Attorney-General’s Department (AGD), in its 2013-14 Annual Report, stated that the short-term lease changes would reduce regulatory burden.10 The Explanatory Memorandum is consistent with this, adding that it would make compliance costs lower for small to medium businesses as well as bring Australian law in line with Canada and New Zealand in this area.11

Statutory review of the PPS Act Section 343 of the PPS Act required the Minister to cause a review of the operation of the Act to be undertaken within a specified timeframe. On 4 April 2014 the Attorney-General, Senator Brandis, announced that Mr Bruce Whittaker, a partner with the law firm Ashurst, had been appointed to lead the review.12

As part of the review process, extensive consultation with stakeholders was conducted. Importantly, that consultation commenced after the introduction of this Bill into the House of Representatives. That being the case, some of the stakeholders commented on the Bill and its proposed operation as part of the much broader statutory review. An interim report on priority issues raised by small business in the review was delivered to the Attorney-General and Parliamentary Secretary to the Prime Minister on 31 July 2014.13 That report identified that the lack of clarity in the definition of PPS lease was ‘generating significant uncertainty for a number of

9. D Spooner and J Chowns, Omnibus Repeal Day (Autumn 2014) Bill 2014, Bills digest, 67, 2013-14, Parliamentary Library, Canberra, 2014, p. 2, accessed 28 January 2015. 10. Attorney-General’s Department, Annual report 2013-14, pp. 2, 21, accessed 27 January 2015. 11. Explanatory Memorandum, Personal Property Securities Amendment (Deregulatory Measures) Bill 2014, p. 2, accessed 28 January 2015. 12. G Brandis (Attorney-General), Statutory review of the Personal Property Securities Act, media release, 4 April 2014, accessed 12 May 2015. 13. Attorney-General’s Department (AGD), ‘Statutory review of the Personal Property Securities Act 2009’, AGD website, accessed 7 May 2015.

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industries. Foremost among these is the hiring industry, but the uncertainties affect any business whose goods are in the possession of another (eg storage or courier companies)’.14

The final report of the review was released on 18 March 2015.15 It recommended that paragraph 13(1)(e) be removed from the definition of PPS lease (this is the change made by this Bill).16 Both the interim and final reports are addressed more fully in the section headed ‘Position of major interest groups’ below.

Committee consideration Senate Standing Committee for the Selection of Bills At its meeting of 27 March 2014, the Standing Committee for the Selection of Bills determined that the Bill not be referred to Committee for inquiry and report.17

Senate Standing Committee for the Scrutiny of Bills The Scrutiny of Bills Committee considered the Bill but had no comment to make about it.18

Parliamentary Joint Committee on Human Rights The Bill was considered by the Parliamentary Joint Committee on Human Rights which noted the contents of the statement of compatibility. The Committee concluded that the Bill ‘does not appear to give rise to human rights concerns’.19

Statement of Compatibility with Human Rights As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011, the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act.20 The Government considers that the Bill is compatible.

Policy position of non-government parties/independents At the time of writing this Bills Digest no policy position on the Bill has been announced by the Australian Labor Party (Labor), other non-government parties or the independents.

Position of major interest groups As stated above, some stakeholders made comments about the Bill as part of the review process. The interim report stated that some parties were supportive of the Bill.21 These parties included:

• the Law Council of Australia22

• the law firms, Allens Linklaters, Ashurst, Herbert Smith Freehills, King & Wood Mallesons, Norton Rose Fulbright Australia which made a joint submission to the review. Regarding this Bill they suggested that:

The reference to the 90 day rule in s 588FN(1)(b) of the Corporations Act 2001 should therefore be removed in line with this amendment. The example provided in s 588FN(1) in relation to the 90 day rule should also be removed. 23

14. B Whittaker, Review of the Personal Property Securities Act 2009, Interim report, Commonwealth of Australia, 2014, p. 21, accessed 12 May 2015. 15. G Brandis (Attorney-General) and C Porter (Parliamentary Secretary to the Prime Minister), Report on Personal Property Securities Act released, joint media release, 18 March 2015, accessed 12 May 2015. 16. B Whittaker, Review of the Personal Property Securities Act 2009, Final report, Commonwealth of Australia, 2015, recommendation 19, p. 78,

accessed 7 May 2015. 17. Senate Standing Committee for the Selection of Bills, Report No. 4 of 2014, The Senate, Canberra, 27 March 2014, accessed 12 May 2015. 18. Senate Standing Committee for the Scrutiny of Bills, Alert Digest No. 4 of 2014, The Senate, Canberra, 26 March 2014, p. 21, accessed 12 May

2015.

19. Parliamentary Joint Committee on Human Rights, Fifth report of the 44th Parliament, The Senate, Canberra, 25 March 2014, p. 39, accessed 12 May 2015. 20. The Statement of Compatibility with Human Rights can be found at page 22 of the Explanatory Memorandum to the Bill. 21. B Whittaker, Review of the Personal Property Securities Act 2009, Interim report, op. cit., p. 28. 22. Law Council of Australia, Submission to the Attorney-General’s Department, Review of the Personal Property Securities Act 2009, 6 June 2014,

p. 5, accessed 8 May 2015; Law Council of Australia, Submission to the Attorney-General’s Department, Review of the Personal Property Securities Act 2009, 28 July 2014, paragraph [3.3], accessed 8 May 2015.

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• Craig Wappett from Johnson Winter & Slattery Lawyers. 24

Other stakeholders gave qualified support for the Bill. For instance:

• ChalkWest stated that the Bill does not go far enough because ‘it does not solve [the] fundamental issue involved and genuine loss of title can still occur’.25 Its concern is that the PPS Act may operate to extinguish the genuine title of a property owner to that property if the owner has not registered their interest (or has registered it incorrectly). Specifically the current laws do not adequately address the situation where a rental or hire company leases out its vehicles to a party—and that party becomes insolvent whilst the relevant vehicles are in its possession. In that case a liquidator who seizes the vehicles may be determined to have a security interest which is greater than that of the actual owner.

• Business South Australia was also concerned about the loss of title with respect to the assets of hire businesses should an asset be hired for more than 90 days without being registered and the customer goes into receivership. It supported the Bill with caveats:

[We] see the Amendment Bill’s proposal to shift out the 90 day limit to 12 months is a positive step, but only on the basis that the compliance associated with the online Register is streamlined and that there is a reasonable grace period for small hire businesses to prove ownership in the event of a customer going into receivership. 26

• AVIS, a rental car company, stated of the changes proposed by the Bill:

For a fixed term hiring, the risks for Avis will be considerably reduced when the definition of ‘PPS Lease’ in section 13 of the PPSA is amended … Under those amendments, a PPS lease will arise in relation to serial number property only if the hiring arrangement functions for 12 months or more. However, a hiring arrangement may still be a PPS lease if it is for an indefinite term. In practice, hiring arrangements by Avis are frequently for an indefinite term and will depend on the choice of a customer concerning the timing of return of the vehicle.

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The Australian Hire and Rental Industry Association had no comment on the Bill but did remark critically upon some of the background material in the Explanatory Memorandum as well as discussing the financial and other impacts of the serial number registration requirements.28

The final report of the statutory review of the PPS Act said of the changes proposed by this Bill:

A small number of respondents expressed some reservations about the practical effects of deleting paragraph (1)(e) from the definition of PPS lease. All other respondents approved of the amendments contemplated by the Bill.

Some respondents suggested that it might then be appropriate to replace the term “PPS lease” throughout the Act with the expression “lease for more than one year”. The responses suggested that this could increase transparency.

It would also bring the terminology into line with the language used in the Canadian PPSAs and the NZ PPSA. On balance, however, I am not in favour of recommending this change. Users of the Act have become quite accustomed to working with the term “PPS lease”, and while the term is arguably unhelpful, in that it does not give the reader any immediate sense of what the term captures, it is also helpful, in that it forces the reader to look at the definition of the term in s 13. While the expression “lease for more than one year” does capture the essence of

23. Allens Linklaters, Ashurst, Herbert Smith Freehills, King & Wood Mallesons, Norton Rose Fulbright Australia, Submission to the Attorney-General’s Department, Review of the Personal Property Securities Act 2009, 6 June 2014, p. 44, accessed 27 January 2015; Corporations Act 2001 (Cth), subsection 588FN(1)(b), accessed 8 May 2015.

24. C Wappett, Johnson Winter and Slattery Lawyers, Submission to the Attorney-General’s Department, Review of the Personal Property Securities Act 2009, [2014], accessed 27 January 2015. 25. ChalkWest, Submission to the Attorney-General’s Department, Review of the Personal Property Securities Act 2009, [2014], accessed 27 January 2015. 26. Business South Australia, Submission to the Attorney-General’s Department, Review of the Personal Property Securities Act 2009, 6 June 2014,

accessed 8 May 2015. 27. AVIS, Submission to the Attorney-General’s Department, Review of the Personal Property Securities Act 2009, 25 July 2014, p. 3, accessed 8 May 2015. 28. Australian Hire and Rental Industry Association, Submission to the Attorney-General’s Department, Review of the Personal Property Securities

Act 2009, n.d., pp. 14, 16, and 18, accessed 27 January 2015.

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the concept of a PPS lease, it risks masking the fact that some leases can be PPS leases even if they do not run for more than one year (for example, if a lease agreement has an initial term of less than one year, but includes renewal options that do not get exercised). Using a more content-neutral expression such as PPS lease eliminates the risk that a reader might take the expression “lease for more than one year” at face value, and end up being misled.

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Financial implications The Bill has no financial implications for the Commonwealth.30

Key issues and provisions Items 3-4 of the Bill amend the definition of PPS lease in subsection 13(1) of the PPS Act to exclude leases of goods with serial number registration where the lease or bailment is more than 90 days but less than 12 months. Such leases will no longer be recognised under the PPS Act.

Items 5-6 of the Bill are consequential amendments to subsection 268(1) of the PPS Act to remove references to this type of PPS lease.31

Item 7 of the Bill insert proposed Schedule 1—Transitional provisions relating to amendment of this Act at the end of the PPS Act. Proposed Part 1 of Schedule 1 sets out transitional provisions arising from the Bill, which provide that current paragraph 13(1)(e) of the PPS Act continues to apply to leases entered into before the Bill commences.

Concluding comments The Bill makes a minor amendment to the definition of PPS lease with the effect that leases in excess of 90 days, of serial numbered goods, will not be covered by the PPS Act. This will remove administrative burdens on affected leasing businesses, particularly small and medium ones. They will, however, not have the benefit of the protections afforded by the PPS Act and will have to rely on other means to protect their interest in the event of disputes over title. This would be by way of proof of their ownership of the leased goods and the relevant lease agreement.

In making a single change to the PPS Act prior to finalising its response to the statutory review carried out by Mr Whittaker, the Government has declined to follow this suggestion, in the joint submission of several major Australian law firms:

To the extent that any reforms are implemented as a result of the review, we consider that it would be preferable if that occurred at the one time rather than in stages. It will be simpler and less expensive for businesses if they only need to consider the impact of, and implement any changes to, their systems, policies, procedures and documentation once.

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29. B Whittaker, Review of the Personal Property Securities Act 2009, Final report, op. cit., p. 78. 30. Explanatory Memorandum, op. cit., p. 2. 31. Personal Property Securities Act 2009 (Cth), subsection 268(1)(a)(ii), accessed 28 January 2015. 32. Allens Linklaters, Ashurst, Herbert Smith Freehills, King & Wood Mallesons, Norton Rose Fulbright Australia, Submission to the Attorney-

General’s Department, Review of the Personal Property Securities Act 2009, op. cit., p. 3.

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