CHAPTER 3
KEY ISSUES
3.1
This chapter discusses the key issues raised in the submissions to the
inquiry. The issues covered are generally those areas or amendments in the Bill
that attracted comments from multiple submitters, or which relate to issues of policy,
namely:
Corporations Act 1990 (Corporations
Act)
- alignment of terms used in the Corporations Act and the Personal
Property Securities Act 2009 (PPS Act);
- issues relating to the PPS Act's retention of title property;
- proposed section 441EA (Sale of property subject to a possessory
security interest); and
- proposed section 588FL (Vesting of PPS Act security interests if
collateral is not registered within a specified period of time).
PPS Act
- definitions;
-
potential issues for future review; and
- Senate Standing Committee for the Scrutiny of Bills comments.
3.2
Most of the comments received in submissions were responded to in the
submission received from the Attorney-General's Department (the Department).
Many of these issues were of a relatively minor technical nature, and were specifically
addressed and clarified by the Department. The Department's submission is
reproduced at Appendix 1.
Corporations Act amendments
Alignment of terms used in the
Corporations Act and PPS Act
3.3
As noted in Chapter 2, the Bill will align a number of terms used in the
Corporations Act and the PPS Act.
3.4
In its submission, Piper Alderman noted that the approach taken in the
Bill means that existing references to charges, liens or pledges
in the Corporations Act will be replaced with the broader term security
interest. This approach was questioned on the grounds that:
...it is not appropriate that all interests in personal
property that are security interests for the purposes of the PPS Act are treated,
under the Corporations Act, in the same way as charges, liens or pledges.[1]
3.5
However, the Department defended this approach as being consistent with
the PPS Act scheme:
Section 440B, Corporations Act currently prevents the
enforcement of a charge on property of the company (except in certain
circumstances). This would include a charge on a book debt (or an account for
the purposes of the PPS Act). Consistently with the functional approach to
security interest implemented by s 440B, [the] PPS Act provides equivalent
treatment for a charge on a book debt and a transfer of the same book debt.[2]
PPS Act retention of title property
3.6
As noted in Chapter 2, the Corporations Act will be amended to align it
with the PPS Act concept of security interests. This will be done by
including property defined as security interests in the PPS Act in the
Corporations Act as PPSA retention of title property.[3]
3.7
The submissions to the inquiry raised a number of issues going to the
concept of PPSA retention of title property.
Inconsistent approach to PPS Act
retention of title property
3.8
DLA Phillips Fox (DLAPF) submitted that 'there appears to be a
difference in relation to whether or not property includes [PPSA retention
of title property] in various chapters of the [Corporations Act]'.[4]
3.9
The DLAPF submission noted that the general definition of PPSA retention
of title property provides that, unless otherwise specified, a reference to
property of a corporation does not include PPSA retention of title property.
However, PPSA retention of title property would be included under the
administration provisions. It would also be included under the voluntary
winding up, deed of company arrangement and court ordered winding up provisions,
if the security interest created by the retention of title arrangements has not
been perfected.[5]
3.10
DLAPF argued that a more consistent approach should be employed:
...a consistent approach (being that PPSA retention of title
property only be included in the administration, winding up, deed of
company arrangement and receivership provisions if the security interest
created by the retention of title arrangements has not been perfected) would
make it easier for people to understand the operation of the Bill and its
impact on the Corporations Act.[6]
3.11
The Department's submission provided a number of responses outlining the
particular reasoning which governs the interaction of PPSA retention of
title property with various parts of the Bill. Together, these responses indicate
that the Department considers the Bill to suitably reflect the policy and
legislative intent of the Government in this area (a number of these responses
are set out below).[7]
3.12
The EM to the Bill also sets out a number of examples which justify the
differential approach to the approach to PPSA retention of title property
in certain circumstances. For example, where it would not prejudice existing
rights, property of the company for the purposes of the Corporations Act will
include PPS Act retention of title property, so that PPSA retention of title
secured parties could enforce their security interests. However:
...there would be circumstances where it would be important to
preserve existing rights by not including PPSA retention of title property
within the definition of company property. Where a company is insolvent
and the property of the company is insufficient to meet the payment of
unsecured creditors, employee entitlements would have preference over floating
charges...If PPSA retention of title property were included as company
property, it would be subordinate to employee preferences and PPSA
retention of title property holders would lose their property. Therefore, property
of the company would exclude PPSA retention of title property in
this context.[8]
Proposed section 124 – secured
party who has perfected a security interest in collateral by possession or
control
3.13
Piper Alderman submitted that proposed section 124, which will allow a company
to grant a circulating security interest over the company's property, should
refer to a 'security interest' rather that a 'circulating security interest, as
is proposed in the Bill.[9]
Further, it felt that the company's property in this context should include PPSA
retention of title property.
3.14
The Department rejected this suggested approach. It stated:
This proposal involves a policy change not related to PPS
reform that would extend the ambit of s124(1)(f). Proposed s124(1)(f) allows a
company to 'grant a circulating security interest over the company's property'
and replaces existing s124(1)(f) which allows a company to 'grant a floating
charge over the company's property'. By referring to 'a circulating security
interest', and not applying to PPSA retention of title property, proposed
s124(1)(f) maintains the effect of existing s124(1)(f).[10]
Proposed section 441A – secured party
acts before or during decision period
3.15
DLAPF submitted that the inclusion of PPSA retention of title
property in proposed section 441A of the Corporations Act:
...may prevent the holders of security interests in the whole
or substantially the whole of the assets of a corporation from enforcing their
security interest during the decision period, where a large part of the assets
of the corporation are subject to PPSA retention of title arrangements.[11]
3.16
DLAPF observed that, because PPSA retention of title property was
to be included in the definition of property for the purposes of the
Corporations Act administration provisions, the holders of PPSA retention of
title property security interests would have priority over the holders of
security interests in the whole or substantially the whole of the assets of the
corporation. This is because PPSA retention of title property is a
purchase money security interest.[12]
3.17
Accordingly, DLAPF called for PPSA retention of title property to
be expressly excluded from proposed subsections 441A(1)(b) and 441(2)(b).[13]
3.18
The Australian Finance Conference (AFC) and the Australian Equipment
Lessors Association (AELA), who were also concerned about this issue, called
for 'further consideration of the amendments against the underlying policy of
the [Corporations Act] external administration provisions and the [PPS Act]
objectives'.[14]
3.19
In response to these submissions, the Department stated that it:
...considers that the Bill has the intended effect that the
references to property of the company in s441A would not, after the
registration commencement time, in relation to a transitional security interest
that is a charge, refer to retention of title property.[15]
Proposed section 441EA – sale of
property subject to a possessory security interest
3.20
A number of submitters raised concerns in relation to proposed section
441EA of the Corporations Act, which will govern the sale of security interest
property in the possession of a secured party.
3.21
DLAPF noted generally that the proposed section is 'inconsistent with
the distribution rules in [section] 140 and [is] not subject to the [PPS Act]
priority rules or control arrangements'.[16]
3.22
Clayton Utz observed that proposed section 441EA replaces existing
section 441JA of the Corporations Act. However it noted that it appears 'there
has been a deliberate decision to change the rights of parties under the
existing law [in relation to]...proposed new section 441EA'.[17]
The Clayton Utz submission stated:
The proposed new section 441EA will replace the existing
section 44IJA...The existing section 44lJA only applies if there is no higher
ranking security interest. This requirement is not included in the new section
441JA. The proposed new section 441EA is not consistent with the PPS Act.
Although sections 123 and 124 of the PPS Act allow a secured party to seize the
secured property, section 127 provides rights in those circumstances to higher
ranked secured parties. There is no corresponding provision to section 127 of
the PPS Act in the new section 441EA.[18]
3.23
The Clayton Utz submission also observed that the PPS Act does not
generally require physical possession of a possessory security interest in
order to have control of that property for perfection purposes. However,
proposed section 441EA would require that the secured party actually be in
possession of a possessory security interest before the secured party could
rely on the proposed section. Clayton Utz concluded:
The dual requirement that property be subject to a possessory
security interest and also be in the possession of the secured party should be
removed from all relevant sections of the Bill. It should be sufficient that
the relevant security interest does in fact fall within the definition of
possessory security interest.[19]
3.24
In response to the concerns outlined, the Department submitted:
Currently, a holder of a pledge or lien against a company may
enforce their lien or pledge by selling the secured property, applying the
proceeds towards the amount owed under the lien or pledge, and paying the
balance to the company (see Corporations Act 2001, section 441JA).
However, the holder of the pledge or lien may only exercise
this power if the pledge or lien is not subordinate to another security. Item
40 of the Bill proposes the substantial re-enactment of section 441JA as
section 441EA of the Corporations Act, with adjustments made to reflect the
enactment of the PPS Act (for example, the references to lien or pledge are
replaced by the term possessory security interest). Proposed section
[441EA] does not retain the requirement that the lien or pledge not be
subordinate to another security. This is consistent with the approach taken in
the PPS Act that any secured party with an interest in the collateral may
enforce their security interest.[20]
3.25
The Piper Alderman submission also commented on proposed section 441EA:
Proposed new section 441EA(1)(c) (Schedule 1, Part 3, Item
40) should refer to property being in the possession or control of the secured
party to be consistent with the definition of 'possessory security interest'
(new section 51D).[21]
3.26
However, the Department observed that this approach would effectively
extend the ambit of section 441EA beyond its intended limits:
Proposed s 441EA(1)(c) refers to 'the property is in the
possession of the secured party' and replaces existing s 440BA(c) which refers
to 'the property is in the lawful possession of the holder of the lien or
pledge'. The new concept of possessory security interest was premised on the
assumption that its only substantive effect (apart from bundling the existing
concepts of liens and pledges) would be to add in a reference to PPSA security
interests perfected by possession or control. This proposal involves a policy
change not related to PPS reform that would extend the ambit of s 441EA
beyond that currently provided for by s 440BA.[22]
Proposed section 588FL – vesting of
PPS Act security interests if collateral is not registered within time
Vesting of security interests
granted by a company
3.27
The EM explains that most charges currently subject to the registration
requirements of Chapter 2K of the Corporations Act will be covered by the PPS
Act. These charges will be migrated to the PPS Register to be established by
the PPS Act, and in future such charges will be registered on the PPS Register.[23]
3.28
To achieve this, the Bill will repeal Chapter 2K, and consequential
amendments will be made throughout the Corporations Act with effect from the
time the PPS Act commences (expected to be May 2011).[24]
Proposed new section 588FL will be inserted into the Corporations Act. This
section will replicate, with some changes, section 266 of the Corporations Act,
which prevents security interests being granted fraudulently with knowledge of
an imminent administration, liquidation or deed of company arrangement and to
avoid property falling into the trustee's or administrator's estate or being
claimed by unsecured creditors. For security interests entered into after the
commencement time, proposed section 588FL will replace section 266.[25]
3.29
Proposed new section 588FL will also largely replicate existing section
267 of the PPS Act.[26]
Existing section 267 of the PPS Act and associated provisions provide that:
...most security interests granted by a company which arc
regulated by the PPS Act will vest in the grantor if not perfected on the date
that the winding up of that company commences or the 'section 513C day'
(defined in the Corporations Act as, essentially, the date of commencement of
administration of a company) in respect of that company...[27]
3.30
The Clayton Utz submission drew attention to a 'key difference' between
proposed new section 588FL and section 267 of the PPS Act. While section 267
would provide that most [relevant] security interests granted by a company will
vest in the grantor if not perfected on the commencement of the winding up (or
administration) of that company, proposed section 588FL will provide that
security interests granted by a company and perfected only by registration will
vest in the grantor if registered after the later of:
- 20 business days after the relevant security agreement came into
force; and
- six months before the date that the winding up (or
administration) of the company commences.[28]
3.31
The effect of this would be that:
...in the case of certain security interests granted by
companies, these will vest in the grantor company under the amended
Corporations Act even though, under section 267 of the PPS Act, this would not
occur.[29]
3.32
Clayton Utz argued that there were 'no compelling policy reasons for [section
588FL] to apply where the regime in section 267 of the PPS act should apply'.
It stated:
Section 267 (and associated provisions) of the PPS Act should
apply in preference to the proposed section 588FL of the Corporations Act. It
is not appropriate for the 2 pieces of legislation to deal with exactly the
same issue in contradictory ways. It is also unclear why companies and
individuals should be treated differently in relation to this issue...[30]
3.33
In response to this view, the Department commented:
Section 588FL replaces existing s266 of the Corporations Act,
though modified to take account of the PPS Act. It voids a security interest
that has been perfected by registration shortly before the grantor company enters
into certain forms of external administration. This provision is part of the
preference provisions of the Corporations Act, and this is reflected in its
proposed relocation to Part 5.7B—Recovering property or compensation for the
benefit of creditors of insolvent company.[31]
Section 588FL(3) – foreign law
governing security interests
3.34
Proposed subsection 588FL(3) applies when a company enters into a form
of external administration, and a security interest granted by the company is
enforceable under the law of another jurisdiction that provides for the public
registration or notice of the security interest. This subsection will provide
that the security interest will vest in the grantor company if the security
interest has not been disclosed in accordance with the law of that other
jurisdiction.[32]
3.35
Clayton Utz argued that the purpose of this provision is 'unclear'. In
particular:
This subsection purports to invalidate security interests
which are not registered in accordance with a public registration regime under
a foreign law. The application of this section would have the effect of
invalidating certain security interests under Australian law even if those
security interests may not be required to be registered under Australian law
(or may in fact have been validly registered or otherwise perfected under
Australian law) and are perfectly valid and enforceable under the relevant
foreign law.[33]
3.36
In response, the Department submitted:
Section 588FL(3) is consistent with the policy underlying
s588FL that a security interest should be void if it is disclosed only shortly
before the company enters into external administration.[34]
Personal Property Securities Act 2009 amendments
Definitions
3.37
DLAPF submitted that the proposed amendment to the meaning of grantor
in section 10 of the PPS Act 'may create uncertainty as to who can grant a
security interest'.[35]
DLAPF observed that the word interest is 'very broadly defined and is
not limited to persons who have an equitable interest in personal property'.
Its submission argued:
Accordingly, it would be possible for multiple security
interests to be granted by multiple people, each of whom claims to have an
'interest' in the relevant asset.
This may then cause significant problems for the holders of
the security interests in relation to priority and enforcement issues.[36]
3.38
To address this issue, DLAPF suggested that:
...paragraph (a) of the definition of grantor in section 10 of
the PPSA be limited to persons having an equitable or legal ownership interest
in the relevant personal property. Alternatively, the term 'interest' could be
limited in this manner.[37]
3.39
However, the Department defended the approach taken in the Bill as being
consistent with the broad approach of the new PPS regime:
Confining the 'interest' in which a security interest may be
granted to legal or equitable interests in the property would not be consistent
with the functional approach to security interests proposed by the Bill.[38]
Potential issues for future review
3.40
In its submission, the Department's responses to a number of the issues raised
indicated that these issues may be appropriate for consideration in the review
of the PPS legislation that is required under section 343 of the PPS Act.[39]
This section requires that a review of the operation of PPS Act be undertaken
and completed within three years after the registration commencement time.[40]
3.41
The issues identified by the Department as potentially relevant to the
section 343 review are:
- whether the scope of the PPS Act should be extended to cover any
other type of security interest;[41]
- whether a guarantor should be bound by any priority agreement;[42]
- the suitability of the notice requirements in relation to the
holders of purchase money security interests;[43]
and
- the effect of section 74 of the PPS Act (Execution
creditor has priority over unperfected security interest) on the
position of secured creditors, to the extent that it weakens the position of
secured creditors.[44]
Senate Scrutiny of Bills Committee
comments
Constructive knowledge and shifting
the onus of proof
3.42
The committee notes that the Senate Standing Committee for the Scrutiny
of Bills (the scrutiny committee) considered the Bill in its Alert Digest
No. 4 of 2010.[45]
The scrutiny committee commented on a number of provisions in the Bill which will
employ the element of constructive knowledge.
3.43
'Constructive knowledge' involves the imputation or deeming of knowledge
to a person or entity. In the case of the Bill, proposed sections 588FL, 588FM,
and 588FN, and proposed subsection 267A(2), will rely on provisions in the PPS
Act which detail the operation of constructive knowledge for the purposes of
that Act.[46]
3.44
The scrutiny committee's Alert Digest notes that, in relation to
these proposed sections and subsection:
...an additional burden is placed on the defendant when the onus
in relation to constructive knowledge is shifted to the defendant by requiring
him or her to prove that property was acquired without actual or
constructive knowledge.[47]
3.45
While the EM contains an explanation of the intent and effect of the
reversal of the onus of proof in relation to proposed sections 588FL, 588FM and
588FN, the scrutiny committee observed that 'there does not appear to be a
clear justification for the use of constructive knowledge [in relation to
subsections 588FP(7)(b) and 588FP(9)]'.[48]
Similarly, there is no explanation of the requirement for the constructive
knowledge element in relation to proposed paragraph 267A(2)(b).
3.46
The Alert Digest also noted that the PPS Act is 'complex
legislation' which relates to a national scheme, but 'considers that these
circumstances make it especially important that all provisions are appropriate
and that they are adequately explained'.[49]
Accordingly, the scrutiny committee called for the Attorney-General to provide
advice about 'the need and justification for each instance of constructive
knowledge in [the Bill]'.[50]
Committee view
3.47
The committee notes that the inquiry into the Bill represents the
culmination of a substantial reform to Australia's PPS regime. On the
commencement of the new PPS Act in May 2011, stakeholders in the system will
benefit greatly from the economic and administrative benefits that will flow
from a streamlined national system. A defining theme throughout the development
of the PPS Act has been the importance of simplifying and harmonising
Australia's laws in this area, and the committee is confident that the PPS Act
will achieve these outcomes.
3.48
The committee notes that the Bill is the second set of consequential
amendments to the PPS Act since its passage through the Australian Parliament in
2009. A program of extensive consultation has accompanied the development of
the PPS Act and the subsequent consequential amendments, and the committee
acknowledges the contributions of the many groups and individuals that made
submissions to, or appeared before, the committee through the course of its
inquiries. Equally, the committee commends the Department for ensuring that
consultation on the new PPS regime has been a comprehensive and worthwhile
process. The Department deserves significant credit for having ensured that the
PPS Act will commence with what appears to be broad support and understanding,
particularly from the financial and legal communities which stand to be most affected
by the introduction of the new PPS regime.
3.49
In its previous three reports in relation to the PPS Act, the committee
made numerous recommendations to improve the consultation processes and
substantive outcomes around the development and implementation of the new PPS
regime in Australia. The success of these previous processes was reflected in
the submissions to the current inquiry, which, in general, raised issues that were
of a relatively minor or technical nature. The majority of these were able to
be sufficiently addressed or clarified by the submission provided by the
Department. While some matters of policy were raised in submissions, the
committee did not regard any of these as warranting a recommendation for action
or further consideration by the government at this point, particularly in light
of the provision for a statutory review of the scheme within three years of the
commencement of the PPS Act.
3.50
Finally, the committee notes the findings of the scrutiny committee in
relation to the provisions of the Bill which rely on the element of
constructive knowledge, and the scrutiny committee's request that the
Attorney-General provide specific advice on the need and justification for each
instance of constructive knowledge in the Bill.
Recommendation 1
3.51
The committee recommends that the Senate pass the Bill.
Senator Trish Crossin
Chair
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