Chapter 12Secured assets and creditors and the PPS Act
Introduction
12.1Chapter 11 set out four types of assets available to the liquidator. This chaptercovers secured assets and creditors and personal property securities.
12.2Asecured creditor has a security interest (such as a mortgage) over some or all of a company’s assets. Secured assets can be physical land and buildings secured by a mortgage or personal property securities.
12.3Secured creditors have rights, if a company fails to meet its obligations under a security interest and can:
Appoint an independent and suitably qualified person (a receiver) to take control of and realise some or all of the secured assets in order to repay the secured creditor’s debt. This right continues after the company goes into liquidation.
Ask the liquidator to deal with the secured assets for them and account to them for the proceeds and costs of collecting and selling those assets.
12.4A secured creditor is entitled to vote at creditors’ meetings for the amount the company owes them less the amount they are likely to receive from realisation of the secured assets (i.e. their shortfall). The secured creditor can participate in any dividend to unsecured creditors for their shortfall.
12.5If the secured creditor wants to ensure their security interest over personal property other than land is enforceable and given priority in an insolvency, they should register the security on the Personal Property Securities Register (PPSR)
12.6The Personal Property Securities Act 2009 (PPS Act) established a single, national set of rules for secured credit using personal property. The PPS Act also provides the legislative basis for the PPS Register. This chapter covers the following:
background on the PPS Act and PPS Register;
the Whittaker Review of the PPS Act; and
other contemporary issues raised by submitters and witnesses that have direct implications for corporate insolvency, including:
- awareness, ease of use, and accuracy of the PPS Register; and
- vesting of security interests.
Background on personal property securities
12.7The PPS Act, as the Whittaker Review put it, ’revolutionised the law and practice of secured transactions in Australia,’ establishing ‘an entirely new regime for the creation, legal effect, and enforcement of security interests in personal property.’ The approach was based on principles developed and implemented in several overseas jurisdictions, such as the United States, Canada, and New Zealand. The approach ‘largely ignores the form parties choose for their transaction or who has title to the property, and instead focuses on the transaction’s commercial substance to determine whether it should be treated as a security interest.’
12.8The PPS Act replaced several complex and fragmented sets of rules with a single set of rules. Previously rules were scattered across more than 70 Commonwealth, state and territory statutes and the general law. The PPS Act was intended to reduce borrowing costs and increase the range of property available to secure finance, especially for smaller businesses. The new rules apply consistently and predictably to all types of security interest and all types of personal property, regardless of the location or nature of the personal property or the grantor. The PPS Act objectives are to ‘provide greater certainty for Australian businesses, credit providers and consumers and so to reduce of secured finance and to make it easier for businesses and consumers to use their assets as security’.
12.9The PPS Act applies to security agreements covering personal property regardless of the form of the transaction or the grantor's identity (that is, a corporation, an individual or another entity). It uses a consistent set of rules to determine the priority of secured creditors. Under the PPS Act, there is little difference between corporate or personal insolvency or between corporate and non-corporate grantors of security interests. However, there are aspects of the PPS Act, such as the priority rules, vesting and circulating asset provisions contained within the PPS Act and Corporations Act 2001 (Corporations Act), which have direct implications for corporate insolvency.
12.10The PPS Act uses the terminology of ‘grantor’ and ‘secured party’. The grantor is the person or entity with an interest in the personal property (for example, the owner, purchaser, or lessee of the property). The grantor then grants an interest over this to the secured party (for example, a lender such as a bank). While a secured party is not compelled to register its security interest on the PPS Register, it should do so to avail itself of additional protections afforded by the PPS Act.
12.11Perfection of a security interest requires a secured party to take some step to publicise the existence of its security interest or run the risk that the security interest may not be fully effective. The PPS Act allows a secured party to take steps to publicise the existence of its security interest. This concept is known as ‘perfection’. Perfection places third parties and the world at large on notice that a security interest exists and allows outsiders to determine whether an item of personal property might be subject to an encumbrance. Failure to ‘perfect’ risks the security interest not being fully effective and may prevent a creditor from attaining the highest possible creditor priority under the PPS Act’s priority rules. The PPS Act recognises three methods of perfection: possession, control, or registration on the PPS Register. Perfection by registration is the most common form of perfection.
12.12Data from the Australian Financial Security Authority (AFSA) shows the usage of the PPS Register. On 30 September 2022, the total registrations on the PPSRegister were 10,104,944, with the entire current registrations with the collateral type ‘commercial property’ being 7,949,775.
The Whittaker Review
12.13The section summarises the establishment, conduct, findings, recommendations, and implementation of the Whittaker Review of the PPS Act.
12.14Section 343 of the PPS Act required the Minister to cause a review of the operation of the PPS Act to be undertaken and completed within three years after the registration commencement time. The PPS Act came into full operation on 30 January 2012. Mr Bruce Whittaker conducted a statutory review of the PPS Act in 2014, and the final report (the Whittaker Review) was tabled in Parliament on 18 March 2015.
12.15The Whittaker Review received 171 submissions and responses from a wide range of stakeholders and conducted extensive consultation on:
the effect of the reforms introduced by the PPS Act;
the level of awareness and understanding of the PPS Act;
the incidence and causes of non-compliance with the PPS Act;
opportunities for minimising regulatory and administrative burdens, including cost;
opportunities for further efficiencies;
the scope and definitions of personal property;
the desirability of introducing thresholds for the operation of the PPS Act regime in respect of particular types of personal property; and
the interaction of the PPS Act with other legislation.
Summary of Whitaker Review submissions, findings, and recommendations
12.16The Whittaker Review described the general tenor of submissions to the review as suggesting that much can be done to simplify the content of the PPS Act to make it more accessible to users and easier to work with. Simplifying the PPSAct would, help it to achieve its objectives, as simpler and clearer rules could lead to more predictable outcomes. More predictable outcomes would also give financiers greater confidence in the PPS Act and their ability to take effective security interests under it. That, in turn, would assist borrowers in using their assets as collateral and enhance their ability to raise cost-effective finance.
12.17Appearing before the committee, Mr Whittaker summarised the two overarching themes of his recommendations:
The first of the two, and by far the more important, was the need to simplify the legislation. We're not the first country to have adopted legislation of this type, but our act is at least twice as long as the corresponding legislation in the other jurisdictions and contains a very substantial amount of complexity that many commentators thought—and I also believed—wasn't necessary and, if anything, made the act much more difficult to work with, which in turn was preventing the act from achieving its desired objectives. So, many of my recommendations went to finding ways to simplify the operation of the act and, in particular, to simplify the operation of the register that is set up under the act. The second of the two overarching themes was to have the act better reflect the way things actually work in real life in Australia in the financial marketplace. The legislation that we adopted was based fairly heavily on legislation from other jurisdictions, where commercial practices are, at times, very different, but those differences weren't reflected in the way the act was drafted, so many of my recommendations go to reshaping the act so that it better reflects the way life works on the ground here in Australia.
12.18Overall, the Whittaker Review made 394 recommendations addressing the following topics:
the reach of the PPS Act;
creating an effective security interest;
perfection of a security interest by registration;
dealings in collateral;
enforcement of security interests;
insolvency of grantors;
interaction with other laws;
other matters relating to the content of the PPS Act; and
next steps.
Government action and implementation of the Whittaker review
12.19No formal government response to the Whittaker Review had been issued at the time of drafting this report. This section summarises the government actions to date, and a small number of the 394 recommendations that have been addressed.
12.20The Attorney-General's Department (AGD) indicated that since the Whittaker Review was completed, it had:
provided advice to the previous government on a proposed approach to responding to the review;
examined each of its 394 recommendations;
conducted several consultations on the review;
conducted ongoing engagement with stakeholders regarding the operation of the PPS Act;
undertook targeted consultations with:
sections of the finance industry in October 2020;
agribusiness and agribusiness financiers in December 2020; and
states and territories at officer level in February 2021; and
briefed the current government on the review.
12.21AFSA and AGD summarised actions taken to date to implement the Whittaker Review recommendations as follows:
2015 and 2017 legislative amendments to the definition of a PPS Lease (recommendations 19, 21, 22, and 23);
reducing the complexity of the PPS Register website through a review and redesign (recommendations 85); and
several initiatives to increase awareness of the PPS Register (addressing recommendations 85, 150, 166, 391, and 392).
12.22In response to questions on notice, Mr Whittaker indicated that he was not aware of any obstacles or barriers that would make it impossible to implement his recommendations. Mr Whittaker observed that while some recommendations are more complex and could take more time than others, this should not delay the implementation of the other recommendations. MrWhittaker further clarified that nearly all the recommendations can be implemented without fresh referrals from the States, and the government would only need to engage with the States on a small number of recommendations.
12.23Mr Whittaker also identified that two of his recommendations may no longer be necessary:
Recommendation 19: relating to the definition of a PPS lease in section 13 of the PPS Act, has already been implemented by the Personal Property Securities Amendment (Deregulatory Measures) Act 2015.
Recommendation 238: which was aimed at clarifying the meaning of the term 'grantor' in the PPS Act, has arguably been superseded by case law (see Samwise Holdings Pty Ltd v Allied Distribution Pty Ltd [2018] SASCFC95).
Stakeholder views on implementing the Whittaker Review
12.24There were mixed views expressed by inquiry participants on whether they would like to see the Whittaker Review recommendations implemented.Accordingly, this section discusses both the supporting views and issues raised by stakeholders.
12.25The Australian Credit Forum (ACF) supported the Whittaker Review recommendations being considered and implemented. The ACF noted that the PPS Act has been beneficial to creditors and is achieving its purpose, while agreeing with the Whittaker Review that there is opportunity to improve the PPS Act. The ACF suggested the PPS Act and its day-to-day operation can be simplified so that it continues to protect when utilised correctly by creditors. The ACF noted that the expectations of trade creditors achieving the protections of a priority secured creditor have not been realised by the PPS Act, specifically with respect to defending unfair preference claims.
12.26Mr Michael Murray and Professor Justin Harris supported implementing the Whittaker Review’s recommendations to simplify the PPS registration process (by reducing the collateral classes) and to reform the system of amendment demands so that asset sales in insolvency are not held up by frivolous and vexations registrations that are not based on perfected security interests.
12.27At the same time, Mr Murray and Professor Harris suggested some caution may be warranted, noting that many business users of the PPS Register will have implemented systems to work effectively with the current processes under the PPS Act. Hence, there may be significant costs of changing the PPSAct to implement the hundreds of recommendations in the report. The Business Law Section of the Law Council of Australia (BLS LCA) noted similar concerns:
Another barrier to implementation of the Whittaker Review recommendations may be that some of the recommendations relating to the functionality of the PPSR (which are the most useful from a practical perspective) may involve changes to the software and systems underpinning the PPSR. Those changes may be costly and time-consuming for government, and costly and time consuming for users of the PPSR who would have to adapt their own systems as a consequence of these changes being implemented.
12.28The BLS LCA suggested that while it may be helpful to revisit the recommendations of the Whittaker Review, a wholesale re-examination of the PPS Act may not be warranted. The BLS LCA also observed that the Whittaker Review identified several changes that could be made to both the PPS Act and the PPS Register, which would likely result in significant practical improvements.
12.29The Society of Corporate Law Academics (SCoLA) indicated that the Whittaker Review of the PPSA contains a thorough evaluation of the PPS Act and makes hundreds of recommendations. Commercial practice may have developed since the review was undertaken in 2014, so implementing some recommendations may not be necessary. However, the simplification of the PPS Register and the process to remove redundant or inappropriate registrations should be a matter of priority.
12.30The Turnaround Management Association Australia (TMA) had a slightly different view, suggesting that the Whittaker Report recommendations should be examined as part of a wider law reform process.
12.31The Australian Institute of Credit Management (AICM) members recommended implementing modest changes in order to improve the efficiency of the PPS Register would not substantially alter the system. Significant changes were not favourable amongst AICM members as they expect the cost and time to adjust would outweigh the benefits that could be achieved.
Awareness, ease of use and accuracy of the PPS Register
12.32Some of the Whittaker Review recommendations on awareness, ease of use, and accuracy of the PPS Register have been implemented. However, submitters and witnesses indicated that there are continuing concerns, which are discussed below.
12.33The Whittaker Review noted that, despite education efforts on the operation of the PPS Act, the regime was still poorly understood:
The apparent lack of awareness or interest among the small business community regarding the need to come to grips with the new regime appears to have been a harbinger of things to come. Almost all of the first-round submissions made the point that much of small business was still either entirely unaware of the existence of the Act, or did not understand the extent to which the Act can impact on their business activities.
This lack of understanding does not appear to be limited to specific industry sectors. It was identified as an issue not only in submissions from organisations that span the economy generally, but also from organisations from a wide range of specific industries or sectors.
12.34To address the above issues, the Whittaker Review devoted Chapter 10 to the subject and concluded that:
Many of the recommendations in this report are targeted at making the Act simpler to understand. The Act deals with a complex area of commercial activity, however, and will never be an easy read. If the Act is to achieve its potential, Government will need to coordinate an effective education campaign in support of the re-launch of the Act that will hopefully follow on from this report.
12.35As a witness during this inquiry, Mr Whittaker indicated that the complexity of the PPS Register makes it very difficult, even for people with extensive legal training to sometimes understand how to make an effective registration. For small businesses that do not have the knowledge or access to legal advice, it can be even more challenging for them to make registrations in a way that can leave them confident that they have done it correctly.
12.36The WA Small Business Development Corporation submitted that the PPS Register needs to be reviewed and improved to protect small businesses' assets and prevent creditors from accessing third-party assets. The process of registering personal property, it argued, needs to be overhauled and significantly simplified to encourage more small businesses to register their assets and protect their business from unfair preference claims made in administrations under the Corporations Act.
12.37KordaMentha submitted that even though the PPS Act has been in place for a decade, some creditors are either still not aware of it or still getting registrations wrong. KordaMentha argued that the terminology used in the PPS Act is particularly bespoke and not used in the general business world, so it is not surprising that creditors have had difficulty engaging with its provisions.
12.38Subcontractors Alliance and Subbies United indicated that because of the difference in bargaining power, trade contractors could not take advantage of the PPS Act as the trade contracts require clear title to everything provided. There is also the problem that reservation of title clauses (in most cases) become inoperable as soon as the goods and materials supplied are affixed upon the land.
12.39BlueRock noted that using the PPS Register to validate security interests unfairly favours general security holders over specific security holders. The parties that tend to make mistakes or fail to register their interests are overwhelmingly smaller parties. Retention of Title holders do not tend to have possession or control over their collateral, so registration is the only way to perfect their interest, but it is unforgiving if errors are made.
12.40The Australian Banking Association (ABA) argued that the PPS Act had created complexity for secured creditors to perfect their interests. The ABA indicated that difficulty navigating the requirements under the PPS Act, meant that creditors’ interests are often impacted by minor errors, for example:
…registrations in relation to trusts are often incorrectly made against the corporate trustee and not the trust’s ABN. Additional uncertainty is caused where security is granted by a trustee of a trust without an ABN that later acquires an ABN; and
any defect in a registration may result in a registration vesting upon an insolvency appointment or a security interest being unperfected, notwithstanding the expectation of all parties that the security interest was granted. For example, registering against an ABN instead of an ACN, or missing one digit for a serial numbered good. Currently, there is limited scope to apply to court to rectify these situations.
12.41Deloitte and the Australian Small Business and Family Enterprise Ombudsman (ASBFEO) noted the important protections that the PPS Act and PPS Register could provide. Both drew attention to significant losses for creditors from inaccurate registrations exacerbated by the PPS register complexity. Hence, they encouraged simplification of the PPS Register.
12.42The recent work of the Behavioural Economics Team of the Australian Government (BETA) to improve accuracy in PPS registrations highlights the complexity of the PPS Register. BETA found that 22.3 per cent of PPS Register transactions made by users who completed the original form were incorrect, and 12.8 per cent of transactions were inaccurate even after behavioural interventions. The ASBFEO identified the following example, which highlights the potential consequences of inaccurate PPS registrations:
Forge Group Power Pty Ltd (in liq) (receivers and managers appointed) v General Electric International Inc [2016], which highlights the severe consequences of failing to register a security interest, but also the complexity of PPSA terminology and difficulties for foreign companies to engage in the PPSR process. In this case, General Electric lost assets worth US$44 million because they did not register them on the PPSR.
12.43The Association of Independent Insolvency Practitioners (AIIP) also identified continuing concerns about awareness of the PPS Register amongst SMEs. The AIIP suggested that the lack of awareness led to additional costs in liquidations where liquidators are often on a stand-still in anticipation of a claim to assets by creditors with a PPS registration who may not understand the time-pressure or process of a liquidation. The AIIP suggested reforms to require creditors to make claims for PPS registered assets with a specified period.
12.44Similarly, the Australian Restructuring and Insolvency and Turnaround Association (ARITA) recommended a change to the PPS Act and insolvency law more generally to allow an external administrator to notify claimants on the PPS Register to verify their claims within a set period, failing which their claims will be treated as unsecured. ARITA noted that it had made a similar submission to the Whittaker Review and that the Whittaker Review Recommendation 365 referred the issue to the government. ARITA explained that the suggested change would help navigate situations where liquidators cannot identify which property is subject to security interests:
Whilst the PPS Act and its intention may be reasonably clear, in practice the conduct of parties and the PPS Register itself does not afford liquidators the benefit of clarity in relation to PPS claims. Insolvency practitioners can spend considerable time and cost in determining such claims from the PPS Register, in trying to obtain information from PPS claimants about their interests, and in dealing with those who claim to have interest, but whose interest cannot be readily verified.
These problems arise from the unsatisfactory state of the PPS Register, creditors’ inadequate use of it, and the fact that the register allows ‘stale’ interests to persist.
12.45Mr Whittaker noted that he did not make a recommendation on ARITA's proposal because he viewed it to be more a question of corporations law policy than personal property securities policy. However, Mr Whittaker indicated that he did not see significant impediments to the ARITA proposal, but noted there may be some practical difficulties with issues such as unquantified contingent claims.
12.46The BLS LCA commented on ARITA's proposal noting that it would solve many problems but might also be considered heavy-handed, given it involves effectively taking away people’s property rights.
12.47KordaMentha supported proposed reforms such as ARITA's recommendation above and noted difficulties in using the PPS Register to identify relevant security interests. KordaMentha submitted that:
The purpose of the PPSR was for it to act as a 'noticeboard' of security interests in a particular company so all creditors could understand what assets may have been 'pledged' by a company. Through our formal appointment processes, it is necessary for us to correspond with all PPSR registrants to determine the validity of their security interests in assets of the particular company we have been appointed to. The number of registrations we find to be no longer valid (in many cases because the registrant has just forgotten to remove them) suggests the 'noticeboard' concept is not working to give a 'true picture' of a company's pledged assets.
12.48My Whittaker provided some context to the above challenges with the PPS Register, noting that:
…it would have been even more difficult for the liquidator if the PPSA had not been in force, because pre PPSA there could have been lessors and vendors of equipment and there would have been no way for the liquidator to even know who they were, let alone ask them to provide evidence of their claim. So the PPSA had improved the liquidators' position beyond where it would have been had the PPSA not been in force, but it certainly does highlight the challenges that the liquidators are going to face even with a PPSA-style regime.
Vesting of security interests
12.49Submitters and witnesses identified the vesting of security interests in the PPS Act and Corporations Act as a contemporary issue with direct implications for corporate insolvency. This section discusses the following:
background on the move from retention of title to the PPS Act; and
Corporations Act Provisions.
The move from retention of title to the PPS Act
12.50Liquidators can access assets for which the insolvent company has a title or security interest. Historically, suppliers often included a Retention of Title (ROT) clause in their terms and conditions to protect their assets until customers paid. Such arrangements often fell outside the boundaries of secured transactions law.
12.51However, since the introduction of the PPS Act, the above ROT strategy may be ineffective, as suppliers must now comply with the registration requirements of the PPS Act. The PPS Act significantly enhanced the capacity for liquidators to access assets that have not been perfected as a security interest because those assets vest with the insolvent company. Perfection of a security interest under the PPS Act can be described by AFSA as follows:
A ‘perfected’ security interest normally has priority over an ‘unperfected’ one. In most cases a perfected security interest is one that’s registered on the PPS [Register].
This has three main benefits:
It gives your security interest priority over unperfected interests in the same property
It means you[r] security interest will continue if the grantor becomes insolvent
You will be able to enforce your security interest against third parties
If a grantor defaults on their agreement, goes out of business or becomes insolvent, you may be able to claim the property described in your registration to cover what they owe you. But if someone else has a higher priority security interest in the same collateral, they have the first right to seize it and get their money back.
12.52Section 267 of the PPS Act applies to both corporate and individual grantors. It provides that if a security interest is unperfected (or not perfected correctly) at the time of the insolvency event, it is ineffective. Hence, the security interest will vest in the insolvent grantor, and the secured party with the vested security interest will not be able to benefit from recourse against the specific property. The secured party remains free to pursue its (now unsecured) claim against the grantor through the insolvency process.
12.53The above change from the previous ROT regime to the PPS Act is the underlying source of many of the concerns expressed about the PPS Act and are a recurring theme in many of the matters discussed in the main body of the Whittaker Review report:
These have not just been theoretical concerns. Two submissions from individual small businesses (one of which was submitted on a confidential basis) explained how they had lost assets in a customer’s administration because they had not appreciated that their ownership of the assets was no longer sufficient to protect them under the new rules. Both submissions expressed surprise and dismay at the fact that this could be possible.
12.54DrRichard Winter and Dr Sagi Peari described Section 267 of the PPS Act as a harsh provision, because there is no way to seek an extension of time for registration of an unregistered security interest. Dr Winter and Dr Peari argued that the PPS Act changes overturned well understood business expectations based on what was fundamental to law and commerce for centuries. They suggested the following reforms:
(a)removal of the title vesting provisions in the PPS Act and Corporations Act to the extent that they apply to secured parties that are SMEs; or
(b)allow for secured parties that are SMEs, whose title has moved in an insolvency, to be compensated by allowing their claim to be retained as a secured claim but rank in priority behind all other registered securities (and critically still rank in front of any unsecured creditors); or
(c)allow for another head of compensation to be included in the PPS Act and Corporations Act for such owners by statutorily recognising their loss as a form of unjust enrichment and giving such claims priority over unsecured creditors and equity.
12.55The Whittaker Review considered section 267 and related provisions in sections 267A, 268 and 269 on vesting security interests in the grantor in the event of insolvency. The Whittaker Review also considered whether there should be a mechanism to rectify an incorrect registration given the complexity of the Register and the occurrence of incorrect registrations causing loss of security interests in liquidations. Challenges arising from the potential to fabricate or backdate security agreements in the face of insolvency were noted. Respondents to the Whittaker Review consultations were evenly divided on a proposal to enable court orders to rectify incorrect PPS registrations. MrWhittaker noted that other recommendations to simplify the PPS Register might mitigate the problem. Hence, Recommendations 158, 328 and 329 of the Whittaker Review recommended that the Act not be amended.
Corporations Act provisions
12.56A security interest in personal property may be correctly registered on the PPS Register at the time of the insolvency event, but the security interest may still vest in an insolvent corporate grantor under section 588FL of the Corporations Act. The Whittaker Review summarised the issue arising with the Corporations Act vesting provisions:
Section 588FL of the Corporations Act provides that a security interest granted by a company can vest in the grantor if an insolvency event occurs in relation to the grantor, even if the security interest was perfected. This can happen if the security interest:
• was only perfected at the critical time by registration;
• had been granted in the previous 6 months; and
• was not perfected within 20 business days of the day on which the security agreement came into force.
Section 588FL is a successor to what had previously been s 266 of the Corporations Act. That section had provided a similar rule in relation to company charges.
12.57A related provision, section 588FM, enables a company, or any person interested, to apply to the Court for an order fixing a later time for the purposes of subparagraph 588FL(2)(b)(iv) of the Corporations Act.
12.58The Whittaker Review noted that all respondents bar one to its consultation on repealing section 588FL, supported repeal. Even though section 588FL is a successor to a previous provision in the Corporations Act, the submissions argued that the need for the provision had been overtaken by s 267 of the PPSAct and that it is unnecessary doubling up to retain section 588FL as well. Some also made the point that section 588FL is not reflective of the unifying principle that underpins the Act because it applies to only certain types of the grantor (that is, only to companies).
12.59Recommendation 362 of the Whittaker Review recommended that section 588FL be repealed based on the following findings:
First, there are other compelling reasons under the Act why a secured party will want to perfect its security interest as early as possible – in particular, to set its priority position, to reduce the risk that a buyer or lessee could take the collateral free of the security interest, and to remove the risk that the security interest could vest in the grantor under s 267. A secured party that does not register promptly is likely to do so only out of inadvertence, so imposing a further deadline under s 588FL will not result in the registration being made any earlier than might otherwise have been the case. Secondly, the deadline under the section does make it very difficult to register effectively for some types of security interests, as described above. Thirdly, the section runs contrary to the Act’s unifying principle, because it applies only to companies, not to all grantors.
12.60Mr Michael Murray and Professor Jason Harris suggested repealing the vesting rules in sections 588FL and 588FM of the Corporations Act and leaving vesting rules to the PPS Act. If section 588FL is not repealed, Mr Murray and Professor Harris suggested that the law be amended to ensure that security interests granted by insolvency practitioners are not automatically invalidated by section 588FL, which requires a court extension of time before executing the agreement.SCoLA also supported repealing sections 588FL and 588FM of the Corporations Act and leaving vesting rules to the PPS Act.
12.61TMA supported Whittaker Review recommendation 362 and noted that section 588FL has resulted in a significant number of court applications for extensions of time to file financing statements under section 588FM. TMA argued that section 588FL has achieved little benefit, and the provision complicates the PPSAct regime. In addition, TMA notes that section 588FL has created an additional issue where administrators of a company seek to obtain funding secured by new personal property security granted by the company after the date of the administration:
A line of cases including K J Renfrey Nominees Pty Ltd (atf Renfrey Family Trustee) v OneSteel Manufacturing Pty Ltd (subject to deed of company arrangement) [2017] FCA 325 have held or assumed that section 588FL applies to security interests granted after the “critical time”, and accordingly that such security interests would automatically vest on creation…
However, in the recent case of Antqip Hire Pty Ltd (in liq) [2021] NSWSC 1122 Brereton JA suggested that this previous understanding was incorrect.
12.62If the government does not adopt recommendation 362, TMA suggests that section 588FL is amended to make clear that Brereton JA’s interpretation of section 588FL is correct to avoid the need for further cautionary section 588FM applications to be made by administrators.
12.63The BLS LCA suggested that given the proposed reforms to section 588FL require amendments to the Corporations Act, it may be that consideration is given to the reworking of those provisions as part of broader considerations into harmonising insolvency legislation.
Committee view
Whittaker Review
12.64The committee observes that although a few recommendations of the Whittaker Review have been implemented to address awareness, ease of use and accuracy of the PPS Register, concerns remain in these areas. The committee notes words of caution from some stakeholders that changes to the PPS Register may impose one-off costs on businesses. The committee has not had access to data to compare one-off costs to ongoing costs. However, the committee considers that, on balance, over the long-term ongoing costs may be higher than one-off changeover costs in some cases. Therefore, the committee recommends that the government respond to the Whittaker Review and consider adopting its recommendations where the benefits outweigh the costs. The committee considers that these changes should proceed without waiting for the comprehensive review.
12.65The committee recommends that the government provide a formal response to the Whittaker Review which was completed in 2015.
Vesting of security interests
12.66The committee observes that the change from the retention of title regime to vesting rules under the PPS Act and the Corporations Act created a significant dislocation to long-standing business practices of many suppliers. Despite the PPS Act being in place for a decade, understanding of the implications of that change appears to be patchy.
12.67The committee notes that the Whittaker Review considered vesting rules under Section 267 of the PPS Act and whether there should be a mechanism to correct an incorrect PPS Registration to prevent unintentional vesting when insolvency occurs. The committee observes that the Whittaker Review recommended not making such a change based on the following:
an evenly divided response to a consultation process; and
an expectation that the problems may be alleviated by other recommended simplifications of the PPS Register.
12.68The committee considers that given the continuing concerns about awareness, ease of use, and accuracy of the PPS Register, it may be appropriate to reconsider whether it is reasonable to have a mechanism to rectify an incorrect PPS registration that may result in the loss of the security interest due to the security interest vesting with the grantor on a grantor’s insolvency under section 267.
12.69The committee heard that even where a security interest in personal property is correctly registered on the PPS Register during an insolvency event, the security interest may still vest in an insolvent corporate grantor under section 588FL of the Corporations Act. The Whittaker Review recommendation 362 recommended that section 588FL be repealed. Respondents to the Whittaker Review and submissions to this inquiry generally supported the Whittaker Review recommendation. The committee therefore supports the implementation of recommendation 362 of the Whittaker Review.