Review of the Personal Property Securities Act 2009
Submission of Hal Bolitho 24 June 2014
1. Introduction
I am a commercial lawyer with over 20 years experience in banking and
finance.
I am making this submission as a purely personal submission. It does not
reflect the views of my employer law firm, or any of my clients or
professional colleagues.
2. Summary of Submission
Australia would be better served by ending the PPSA, and returning to a
more traditional security interest register. However, before, any such change
is implemented, there should be industry and consumer consultation to
determine whether there is the appetite for further change of this scale.
The proposed model discussed at the end of this submission is a register
based on the old ASIC register of company charges, but extended to include
security granted by natural persons, and updated to provide full online
capability.
3. The need to change the PPSA
The submissions that the Review has already received indicated a wide range
of concerns with the PPSA. The submissions from small business operators
are, in my view, particularly reflective of how the non-legal community sees
the PPSA. On the basis of the submissions, there is a real desire for the PPSA
regime to be changed.
If change is to be made within the basic framework of the current PPSA
model, then the submissions the Review has already received contain good
proposals for this.
However, the purpose of this submission is to ask the Review to consider
ending the current PPSA model, and replacing it with a more traditional
security interest register. This approach would reduce complexity and
confusion, promote consistency, and provide a legal framework for security
interests that more closely reflects traditional legal thinking and community
expectations.
4. Problems with the current PPSA model
The current PPSA model is based on two key principles.
The first of these is the use of a “substance over form” test to define
security interests.
The second of these is the idea of a “notice board” register that
deliberately provides searchers with only limited and, in many cases,
general information about the security interest and the secured property.
These two principles combine to create a system that is confusing,
inconsistent, non-transparent and difficult and expensive to work with.
5. Problems with the “substance over form” test
5.1. The “substance over form” test is confusing and unclear
Despite the PPSA s.12(2) list of examples, there is widespread uncertainty
over what a “security interest” under the PPSA actually is.
The key problem is that under s.12(1), whether an arrangement is a
security interest or not depends on whether it “secures” an obligation.
The PPSA does not define what “secures” means. The PPSA is in fact silent
on what it means to “in substance, secure” performance of an obligation.
This means it is very difficult to distinguish between security interests
and arrangements that improve the position of the party to whom
performance is owed without amounting to a security interest.
The various Australian and Canadian textbooks, and the submissions the
Review has already received give many examples of this uncertainty, and
I shall not repeat these here.
The practical problems that arise from this are:
(a)
(b)
parties who can afford the advice of legal or financial experts tend
to “over register” arrangements, to ensure that every possible
security interest is covered.
parties who cannot afford advice are left to deal as best they can
with extremely difficult legal concepts, and often fail to register
when they should.
5.2. The “substance over form” concept is undermined by an inconsistent
“form over substance” approach to deemed security interests
PPSA s.12(3) deems certain leases, sales of receivables and consignment
arrangements to be “security interests” even when they do not in
substance secure performance.
So, inconsistently with its “substance over form” ethos, the PPSA is really
applying a “form over substance” test as well. Certain extremely common
forms of arrangements are simply treated as security interests with no
regard to their commercial substance.
A common theme of the submissions that the Review has already received
is that these deemed security interests are a significant source of
confusion. This is because it is impossible to meaningfully apply the PPSA
concepts of securing performance of an obligation to arrangements that
fundamentally do not secure performance.
For example, how long should a PPSA registration for a transfer of
accounts be maintained? Since there is in fact no secured obligation to be
performed, there is no applicable test for determining when the security
interest is no longer relevant. It therefore seems that this registration is
intended to exist in perpetuity.
Applying both a “substance over form” test and a “form over substance”
test at the same time increases the complexity and confusion under the
PPSA.
5.3. The “substance over form” test is inconsistent with the rest of
Australian law
The use of a “substance over form” test is limited to the PPSA. The rest of
Australian law continues to look to form as an important indication of
how an arrangement should be treated.
A good example of this is ownership. Consider an outright assignment for
the purposes of security, a legal mortgage with an equity of redemption,
and an equitable charge. The PPSA treats these as all examples of the
same thing. But the remainder of Australian law would regard the first as
an example of true ownership, the second as an example of limited
ownership, and the third as creating no ownership. These distinctions
then inform the way principles of tax law, tort law, contract law, property
law, sale of goods law, and numerous other areas of law apply to these
arrangements.
Another example is stamp duty. Where PPSA treats a mortgage and a
retention of title arrangement as the same, NSW stamp duty law will only
levy stamp duty on the mortgage.
A final, particularly egregious, example of this is the case of corporate
insolvency. PPSA goes out of its way to treat long term lease
arrangements as security interests equivalent to mortgages. And yet the
Corporations Act administration regime treats ongoing rent payments for
leases that are not disclaimed by the administrator as priority payments
of the administration. This means that lessors are paid when mortgagees
are not, in recognition that leases and mortgages are fundamentally
different arrangements. So even in the area of insolvency, one of the
prime concerns of the PPSA, it is inconsistent with other aspects of
Australian law.
In any legal system there will always be inconsistencies and special
treatment for particular cases. But the starting point should always be
that general uniformity of treatment is an important quality in a legal
system, and should not be lightly discarded.
5.4. The “substance over form” test creates difficulties for consumers
PPSA regimes are often described as being consumer protection
legislation. In fact, they create a number of difficulties for consumers.
Instead of consolidating consumer rights in this are, the PPSA has added
another layer of complexity. If no security interest is involved, a
consumer’s rights are determined by the same regime that previously
applied. If a security interest is involved, the new PPSA regime applies. Of
course, at the time a consumer may buy or lease an asset, the consumer
cannot tell what which regime applies. The consumer can not know what
sort of interest is involved, as this depends on facts that the consumer can
have no knowledge of.
Even if a consumer is aware of the facts, it is unreasonable to expect
consumers to understand how the PPSA works. The PPSA is extremely
complex technical legislation, and only legal or finance specialists are
likely to have the time or training to fully appreciate its full effect.
Arguably, the PPSA in fact undermines consumer rights, by making them
so complex that they are effectively unenforceable by consumers.
Finally, the PPSA undermines consumer rights because it defeats normal
expectations about the way interests in property work. Most Australians
would understand the basic legal distinctions between owning an asset,
borrowing an asset, and mortgaging an asset to a bank. Most Australians
would also understand the different consequences of these three
arrangements. The PPSA discards the benefits of this widespread
understanding and expectation as to how security interests work.
5.5. The “substance over form” test has no clear benefits that outweigh
these disadvantages
There are no clear benefits of the “substance over form “ test that
outweigh these disadvantages. The PPSA makes the academic point that
there are other arrangements that can mimic the effects of mortgages and
charges in particular situations, but does not provide evidence of any real
harm caused by these arrangements under the previous system.
In particular, there appears to be no evidence that there was any
significant disadvantage to consumers or the Australian economy when
these arrangements were not required to be registered.
It is sometimes said that PPSA is driven by “false wealth” concerns. In
fact, the PPSA vesting rule actively creates new “false wealth” problems
by depriving people of assets that they own for no substantive reason but
for a mere failure to register.
6. Problems with the “notice board” register
6.1. The register contains too much unhelpful information
The breadth of the “security interest” concept, combined with its inherent
uncertainty, leads to a large number of registrations. This is exacerbated
by the fact that the PPSA encourages, and in some cases requires, multiple
registrations of the same interest, to deal with serial numbers, PMSI’s and
control registrations.
This has led to truly staggering numbers of registrations. Below is a list of
search results for a number of well-known Australian companies, of
different sizes and in different sectors. I have not identified the
companies by name, or given exact figures, as the companies concerned
may not wish to be identified with this submission. I would urge the
Review to ask the Registrar to provide the Review with similar
information on a more systematic basis and a larger scale, to give a clear
indication of how much registration has increased under the PPSA.
The table shows the number of current PPSR registrations, and also the
number of migrated registrations, which is indicative of the number of
registrations against that company under the old system.
Company description
Private sportswear
company
Specialist retail company
Textiles company
Chemicals company
Transportation company
Banking and Finance
Company
General Retail Company
Technology Company
Current PPSA
registrations
Over 55
Migrated
registrations
Fewer than 5
Over 3335
Over 7555
0
0
Over 85
Over 130
Over 610
Over 1580
Over 1750
0
Fewer than 5
0
Fewer than 45
0
This demonstrates that the PPSA register system simply provides too
much information for anyone to meaningfully absorb. Even the numbers
at the lower end represent a significant amount of work for anyone who
wants to fully understand the implications of the registrations.
Admittedly many of these examples involve companies which are quite
large, but the results still show that in many cases the register is just
unworkable. For example, the previously common practice of a last
minute check search to confirm no new or changed arrangements before
concluding a transaction is clearly fanciful in most of the above cases.
This also means that important information is lost in the noise. You might
have no interest in ROT arrangements and leases, but be very concerned
to identify mortgages and charges – the register offers you no help at all
in this.
6.2. The register contains too little helpful information
On the other hand, because the register is just a “notice board”, it contains
little really useful information. Many registrations are simply by general
collateral descriptions – “Other goods”, “intangible property”, “ALLPAAP
except” followed by a general description.
So a search of the register will not identify which specific property is
secured. You can ask the grantor, but the grantor may intentionally or
unintentionally give you the wrong information, which may leave you
unprotected.
To be sure, you need to ask each secured party. In the case of the
examples above, this could require making inquiries to secured parties
for thousand of separate registrations.
But priority is based on registration time, rather than the time the
security interest comes into existence, so an enquiry of each secured
party does not provide any protection in relation to future arrangements.
Suppose you are interested in taking security over a particular item of
equipment. A register search discloses an “Other goods” registration that
may apply. You contact the secured party, who confirms they have no
security interest over that particular item. You then take your security
interest. The next day, the secured party and the grantor can enter into a
new security agreement which does grant security over that item, and
which has priority to your security interest because it has the priority of
the pre-existing registration. The only way to avoid this is to enter into a
priority agreement with the other secured party, which can be
complicated and expensive.
Accordingly there are significant limits to any protection that a register
search provides.
7. Replace the PPSA with an ASIC charges style register
7.1. Benefits of an ASIC charges style register
The original goal of securities law review was to harmonize the patchwork of
state and commonwealth laws that governed security interests. This goal
does not require a “substance over form” test or a “notice board” register. It
just requires a common register and a common set of rules.
Accordingly, this goal could be met by an ASIC style register that just records
mortgages, charges, liens, pledges and security assignments, but which is
expanded to include natural person grantors as well as corporations.
Such a register would not disclose all the circumstance of a grantor. But
within the limits of traditional security interests, this register could be
expected to replicate the benefits of the ASIC charges register. These were:
(a)
(b)
(c)
ASIC registrations were typically limited in number, and so ASIC
searches were relatively easy to analyse;
ASIC registrations included a copy of the actual security
agreement, so the exact secured property could be clearly
identified, and the scope of the registration could not be altered by
further actions of the grantor and secured party;
The ASIC priority and insolvency consequences largely reflected
public expectations as to how security interests work.
Such a register could use the online functionality of the PPSA register. This
system could also introduce consumer protection measures such as statutory
taking free rules.
7.2. Seek opinions from stakeholders
While, in my opinion, such a system would serve Australia better, it would
represent more upheaval in this area. Accordingly, the first step would be a
proper round of consultation with relevant participants to see if there is
appetite for more change.
Hal Bolitho
24 July 2014