Chapter 3
Specific issues
Introduction
3.1
The committee has been able to briefly examine some of the key issues
that emerged as a result of the inquiry. Fortunately, the committee was
familiar with most of the background to them from its previous consideration of
the proposed PPS reform.
3.2
Once again it has been relevant to the inquiry process that this reform is
underpinned by a referral of powers from participating states and territories.
This has had an impact on the committee's approach to considering the content
of this Bill: the committee supports the passage of this Bill and the primary
legislation (the PPS Bill 2009), but recommends that the government continues to
identify further amendments to the reform in response to the matters raised
with the committee and the Department.
3.3
Because of the nature and process of the PPS reform, the committee has
not limited itself to only considering matters directly arising from the
Consequential Amendments Bill currently before it. Issues that are not the
subject of amendment in the Consequential Amendments Bill were raised with the
committee as part of this inquiry because of their omission from this bill. It
is on this basis that the committee has considered them.
3.4
If the process did not involve a referral of powers and consultation
with the states and territories the committee might have taken the more usual
course of recommending changes to this Bill to amend the primary legislation or
amendments directly to the primary legislation.
3.5
As discussed in the previous chapter, it seems to the committee that there are likely to be several opportunities to make further amendments to the PPS legislation before the scheme commences in May 2011 and these could include matters relating to both the PPS Bill 2009 and the Consequential Amendments Bill 2009.
Outstanding issues raised with the committee
Purchase Money Security Interest
(PMSI)
Registration of a PMSI – proposed section
62 of the PPS Bill 2009
3.6
The Australian Finance Conference (AFC), with its related associations,
the Australian Equipment Lessors Association and Australian Fleet Lessors
Association, represents more than 100 financial institutions operating in
Australia, which finance all types of plant and equipment in Australia and have
a total portfolio 'of about 100 billion'.[1]
3.7
The AFC totally supports the concept of a purchase money security
interest (PMSI – pronounced pimsey), which will be a new concept in
Australian personal property securities. However, the AFC has a major concern
about the detail of the registration requirements for a PMSI contained in the
Personal Property Securities Law Bill 2009.[2]
Put concisely, the problem as explained by the AFC is:
For goods that are not inventory, a...PMSI must be registered
within 10 days after the grantor acquires possession of the goods.
But...to enable PMSIs to fulfil their purpose this should be changed to within
10 days after attachment.[3]
3.8
The concern arises because of the AFC's view that:
Attachment is the time the financier provides the funds. The
financier always knows when this occurs, but does not know when possession
occurs. Manufacturers/sellers will sometimes give possession prior to funding
if the finance has been conditionally approved, but the financier will not know
in which cases. Financiers also provide corporate customers with a finance
facility under which the grantor is authorised to draw upon to acquire
equipment as required; the financier will not be aware of the transaction or
the equipment until the relevant documents arrive from the grantor.[4]
3.9
It is the AFC's submission that there is much support from its members for
the PMSI concept if the problem about whether the 10 day timeframe starts from
the time of possession or the time of attachment can be resolved:
Financiers really want to utilise the PMSI mechanism because
of the super‑priority it promises, but if the trigger date is possession
they cannot be absolutely sure they will validly register, in which case they
will have no priority let alone a super‑priority.[5]
3.10
Mr Patch outlined to the committee why he believes there would be
'unintended practical consequences' for the consumer if this approach were adopted:
Perhaps it would help to outline
the factual scenario that this works on. We have someone looking to buy a piece
of equipment—just say it is a car from a motor vehicle dealer. Under the bill,
the finance company has 10 days to make their registration on the register
after the purchaser of the car takes possession. So, after the car goes out of
the yard and the paperwork goes to the finance company, they have 10 days to
make their registration. They could make their registration before it goes out
of the yard. That is open to them. What the AFC are asking for is that the 10
days start when the finance company approves the loan. So the car goes out of
the yard and the paperwork is sent to the finance company, and sometime later
the finance company approves the loan and then has 10 days to make the
registration. What that means is that there would be, in a practical sense, an
unlimited period of time during which the register would not disclose that the
finance company will have an interest in this car. Someone else may acquire an
interest in this car in the meantime, yet the later registration by the finance
company will trump the interest of someone who has quite properly searched the
register and discovered nothing.[6]
3.11
While the committee appreciates the government's reasoning behind its
policy approach, the AFC is not persuaded that it is fully justifiable. It
particularly troubles the AFC that the 'consequence of incorrect PMSI
registration is extreme, ie the financier is unsecured.'[7]
The AFC has noted that members will 'not be confident in utilising the PMSI
mechanism'[8]
and that in New Zealand a similar provision is undermined because financiers 'do
not rely on PMSIs, but instead use subordination agreements, a costly and much
less efficient mechanism.'[9]
The AFC believes that the Australian market will also 'rely heavily on
subordination agreements.'[10]
3.12
The Department does not share the view that the provision will be
avoided in Australia. Mr Patch explained that:
...we doubt that we would end up with
an approach where Australian financiers were taking subordination agreements.
The size of the market in New Zealand and the number of participants make it
practicably convenient for them to have subordination agreements with each
other as a matter of course, but when the market and the volume of transactions
become large it becomes more difficult to have that sort of arrangement
routinely establishing subordination agreements.[11]
3.13
Mr Glenn confirmed the Department's analysis of this issue and his
confidence that the PPS register will be utilised:
Ultimately, with the size of the New Zealand economy they seem to have reached a position where they have a moderately
efficient workaround to the problem. In Australia that opportunity is not going
to arise, and a more efficient way would be to use a register.[12]
3.14
The Department has also articulated a number of ways in which a
financier can ensure that its PMSI interest is effective under the proposed
arrangement even if it is not aware of the exact date of possession. For
example:
-
the financier can register the PMSI in anticipation of the
arrangement being finalised; or
-
the merchant (such as a car dealer) can register its interest in
the goods and can then transfer it to the financier.
Committee view
3.15
The committee notes the Department's view that there could be
'unintended practical consequences' for consumers if the AFC's approach is
adopted and agrees that a policy balance in favour of the accuracy of the
register is appropriate.
3.16
The committee also notes that although it may involve some 'double
handling' for financiers, it appears that there are ways in which the AFC's
members (and others seeking to rely on this provision) can, relatively easily,
avoid the extreme consequences of missing the 10-day timeframe.
3.17
However, given that ineffective registration can arise because of circumstances beyond the immediate knowledge of the financier (for example, that the grantor has obtained early possession of the goods) the committee is concerned that the consequences are potentially extreme: in these circumstances the financier can lose its security entitlement and become an unsecured creditor. The committee suggests that the government considers mitigating the severity of this situation. Failure to do so could give rise to the risk that industry will seek alternatives to the PMSI system, which could be to the detriment of those requiring finance and could undermine the usefulness of the PPS register.
Recommendation 3
3.18
That the government considers mitigating the severity of the consequence
of a defective PMSI registration in goods.
3.19
That this issue is the subject of consideration during the (proposed)
statutory review of the PPS legislation.
Meaning of purchase money security
interest - Section 14(2) of the PPS Bill 2009
3.20
The current proposal in the PPS Bill 2009 is to exclude PMSIs for a
security interest in collateral that 'the grantor intends to use predominantly
for personal, domestic or household purposes'.[13]
Piper Alderman has proposed that PMSIs should be able to be obtained for
finance for consumer goods:
The effect of paragraph (c) in sub-clause 14(2) is that it
will not be possible to have a purchase money security interest in collateral
that the grantor intends to use for personal, domestic or household purposes
except as now proposed under sub-clause 14(2A). One consistent approach for
purchase money security interests for both commercial and consumer finance
would make the legislation less complex.[14]
3.21
The AFC and the combined law firms also support this approach.[15]
3.22
The Department explained that the proposed approach is the result of a
policy decision taken after careful thought:
There is no doubt that it does add
complexity and that in doing that it is not something that is done lightly,
because the bill does give a very high emphasis on consistency of approach. To
depart from that was something taken by the government in a very measured
decision to favour the commercial financier over the consumer financier in the
very restricted circumstances of that subparagraph.[16]
Committee view
3.23
The committee appreciates the argument that consistency is desirable and
that this provision is an exception to the usual PMSI rule and the government's
usual 'high emphasis on consistency of approach.'[17]
The committee also notes the Department's comment that:
Clause 14(2)(c) represents a policy choice preferring
all-assets security granted to secure commercial finance over consumer purchase
money security interest (which the Department understands are rarely enforced).[18]
3.24
The Explanatory Memorandum describes the policy intention behind this
approach:
Section 14(2)(c) is intended to promote [the] availability of
finance to small business, be ensuring that general [PPS Act] security interests
are not eroded by later PMSIs granted to acquire personal use assets.[19]
3.25
It seems to the committee that although the government's approach is one
that may appear to favour a commercial financier's interest, the policy
actually takes into account the interests of the consumer and is intended to
support them. The committee therefore supports the approach taken in proposed
paragraph 14(2)(c) of the PPS Bill 2009 and the proposed inclusion of sub‑clause
14(2A) of this Consequential Amendments Bill.
3.26
If industry or its advisers have a different understanding of the
enforcement of consumer PMSIs (which form part of the basis for the
government's approach) or has evidence that a contrary outcome is likely for
consumers, the committee requests that this is brought to the Department's
attention for possible future reform.
Recommendation 4
3.27
The committee recommends that the operation of section 14(2)(c) is the
subject of particular consideration during the (proposed) statutory review of
the PPS legislation.
Competition between agricultural
PMSIs - proposed sections 85 and 86 of the PPS Bill 2009
3.28
A concern raised with the committee was that the legislation provides for agricultural PMSIs but does not indicate which interest takes priority and these sections appear to allocate priority equally.[20]
3.29
During evidence to the committee, Mr Patch identified that it is likely
that there is a mechanism already in the PPS Bill 2009 that will resolve this
concern:
The structure of the bill is that
we have the default priority rules, which provide the priority rules if another
provision in the bill does not give someone an outcome. You will go to clauses
85 and 86. If they do not give you an outcome then you go back to the default
priority rules and they give the first people who were claiming the
agricultural PMSI to register the priority.[21]
3.30
It appears to the committee that this potential problem has been
addressed. The combined law firms have also confirmed to the committee that
they 'accept that no further amendment is necessary to address this point.'[22]
Vesting provisions in section 267
3.31
Clause 267 of the PPS Bill 2009 provides that: 'An unperfected security interest will vest in the grantor of
that interest if the grantor subsequently becomes insolvent.’ The problem with
this as explained by Mr Whittaker representing the combined law firms is that:
While the amending bill goes some
way towards dealing with the structural issues that we saw in those provisions
it still does not deal with the fact that the clause could make it impossible
for an all-assets security to attach to assets after a grantor becomes
insolvent, because they will not have attached until after insolvency which
means that they cannot be perfected. That means that, under clause 267, that they
would disappear into the hands of the liquidator. We believe that this is
probably an unintended consequence of the drafting but it is a very important
consequence and could have very serious ramifications for not just the taking
of security but also the orderly conduct of liquidation processes. We would
urge the committee to consider whether this provision could be finetuned in the
amending bill.[23]
3.32
During this inquiry the Department advised the committee that:
In relation to 267 we are happy to acknowledge that there is
room for improving 267 to address an issue raised by the law firms and by Piper
Alderman. Where we think further work needs to be done is in identifying how
the problem should be fixed. We have had some discussions with, I think it is the
group of four, and they have suggested one way of resolving it. We are not sure
that that is the way so we need to think further about how the problem should
be fixed.[24]
3.33
The committee commends the government for continuing to respond to this
issue, and notes that it intends to involve relevant stakeholders in this
process as much as possible.
Commingled goods – proposed
sections 101 and 102 of the PPS Bill 2009
3.34
In this inquiry the combined law firms maintained their recommendation
that the law in relation to commingled goods should be altered. The issue
relates to the provisions for valuing each party's interest in an
undifferentiated mass of goods. The view of the combined law firms is that:
...the bill would work—and work well—if it said that if
security were enforced over that undifferentiated mass then each party would be
able to participate according to the amount that they put in, whereas at the
moment it looks at participating according to the amount secured and the value
at the time they put it in. If you think about one person putting in 5,000
tonnes of wheat and another person putting in 1,000 tonnes which was subject to
their security, and there is now a parcel of 6,000 tonnes of wheat that is
sold, the easy and fair solution would be to say that they should share in the
ratio of five to one; one should get five-sixths of the whole and one should
get one-sixth of the whole. That is not the way it works at the moment, but we
think it would be a great advance if it were done that way.[25]
3.35
The Department disagrees with this alternative policy approach and
maintains that it is appropriate that when someone is being accounted to for
the value of his or her contribution to the undifferentiated mass the value
should be calculated on the basis of the terms of the contract for the supply
of the goods. As Mr Patch explained:
...the bill says that when it comes
to divvying up the goods, you are not entitled to receive more than what you
are owed...[26]
3.36
In continuing to consider this issue the law firms and the Department
provided further material to the committee, which appears at Appendix 3. Put
simply, the combined law firms' view is that a party can be disadvantaged if
his or her secured property becomes mixed with other property as compared to
identical secured property that is kept separate.[27]
The Department is not convinced that the view of the law firms is accurate and
also notes that the provisions in the PPS Bill 2009 'now reflect as closely as
possible the provisions in the New Zealand Personal Property Securities Act
1999.'[28]
Committee
view
3.37
The committee is concerned about the issues raised by the combined law
firms and would like to ensure that the policy justification for proposed
sections 101 and 102 is appropriate. However, in the time available the
committee has not been able to assess the relative merits of arguments before
it.
3.38
The committee notes the Department's point that the proposed provisions
were adopted to reflect overseas legislation (in this instance the New Zealand
provisions) in accordance with the committee's previous recommendation to this
effect.[29]
The committee acknowledges this, however, emphasises that the relevant
recommendation was to use overseas provisions 'as often as possible...'[30]
It appears that this area of the proposed law could be one in which departing
from the overseas model is warranted.
3.39
In making this observation, the committee's preference is that the
legislation is varied as little as possible and only to address any unfairness
arising from the operation of the proposed approach. For example, the
government could consider altering clauses 101 and 102 to remove the limit of
the priority in the goods to the value of the goods on the day in which they
became part of the product or mass.
Recommendation 5
3.40
The committee recommends that the government assess and respond to the
issues raised by the combined law firms in relation to proposed sections 101
and 102 of the PPS Bill 2009.
3.41
That this issue is the subject of consideration during the (proposed)
statutory review of the PPS legislation.
Corporations Act amendments
3.42
Concern about the approach to amendments to the Corporations Act related
to the PPS reform was raised with the committee. Issues brought to the
committee's attention include:
-
whether all PPS related provisions will be co-located in the PPS
legislation rather than split between the PPS legislation and the Corporations
Act; and
-
why proposed amendments to the Corporations Act are not included
in this bill or the PPS Bill 2009.[31]
3.43
As to the first point, the combined law firms expressed the view that:
The opportunity should be taken to
have all security interests, from whatever grantor, dealt with in the one spot,
in which case the Corporations Act, other than giving a nod to the PPS Act,
should remain silent on it.[32]
3.44
The Department explained that 'it would be a tidier outcome for the
Corporations Act to be amended [but] it is not strictly necessary for the new
scheme to operate.'[33]
The Corporations Act amendments are being dealt with in a separate bill because:
...there are in fact separate
consultation arrangements and governance arrangements around amendments to the
Corporations Act which arise under the corporations agreement between the
Commonwealth and the states. We have developed those amendments and they will
shortly go through the Ministerial Council on Corporations for agreement by the
states and the Commonwealth before being released for public consultation. The
amendments are with the Attorney at the moment, before being released.[34]
Committee
view
3.45
The committee is satisfied that this issue is being progressed
appropriately, but as this is part of a separate process it appears that it
would benefit stakeholders to be kept informed about the progress of this
issue. The committee suggests that the Department should give consideration to
using a PPS newsletter, a copy of which was tabled during the committee's first
inquiry, to achieve this.
Recommendation 6
3.46
That the government regularly provides information to stakeholders about
the progress of the Corporations Act amendments relevant to the personal
property securities reform.
Privacy
3.47
There have been a number of concerns raised about privacy issues
relating to PPS reform, which were canvassed in the committee's PPS reports.
While protecting individual privacy was always a government priority, there
were a number of ways in which submitters, and the committee, thought the
approach should be improved.
3.48
This has already occurred to a significant degree, and in relation to
this Bill the federal Office of the Privacy Commissioner advised the committee
that:
The Office supports the amendments to the Privacy Act 1988
(Cth) made under Schedule 5 of the Consequential Amendments Bill. The Office
also welcomes the Bill's clarification that section 157 of the Personal
Property Securities Act 2009 (Cth), if enacted, will provide for interferences
with privacy in relation to individuals only, not to corporations (Schedule 4
of the Bill, item 40).[35]
3.49
Nonetheless, there are still issues of concern raised by the Office of the Victorian Privacy Commissioner. In brief, the issues raised with the committee in that submission are that:
-
the proposed clause 26 amendment is too broad: consideration should be given to including an express provision addressing the issue of credit profiling and prohibiting the use of the PPS for direct marketing;[36]
-
the proposed clause 30 amendment may inadvertently result in substantial delays for a complainant: consideration should be given to ensuring that 'individuals retain the right to seek a personal remedy under the Privacy Act for a breach of section 172(3);[37]
and
-
small businesses should not be exempt from complying with the authorised search requirements of the PPS Register: an amendment similar to that made recently Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) should be included in the PPS Bill.[38]
3.50
The committee notes the federal Office of the Privacy Commissioner supports the amendments to the Privacy Act 1988 (Cth), but recommends that the concerns of the Office of the Victorian Privacy Commissioner be considered in detail by the government before the PPS reform commences.
Recommendation 7
3.51
The committee recommends that the concerns of the Office of the Victorian Privacy Commissioner submitted to the committee be considered in detail by the government.
Other matters
3.52
Once again, the committee has received substantially more material than
it was possible to discuss in detail in this necessarily brief report. The
committee notes that even in the short timeframe available for this inquiry the
following submitters identified a number of concerns additional to those
discussed above:
-
Australian Securitisation Forum: raised a number of issues of
concern (some matters raised previously that 'remain outstanding' and some new
matters arising from this Bill);[39]
-
Clayton Utz: supports this Bill, but do not believe the
amendments 'are sufficient to address the problems raised by stakeholders.'[40]
The submission identifies a number of major issues and a table of typographical
or minor errors;[41]
and
-
the combined submission of Allens Arthur Robinson, Blake Dawson,
Freehills and Mallesons Stephen Jacques: identifies three categories of issues
– continuing concerns, matters they have recently identified and further issues
that will come to light.[42]
The law firms have consolidated the issues of concern to them into three
schedules which are attached to their submission.[43]
3.53
The committee commends all of these issues to the government for
consideration and action where appropriate. The committee also considers that
it would greatly assist businesses and their advisers if as much information as
possible about policy decisions can be made publicly available.
Recommendation 8
3.54
That the government consider and respond to all of the issues raised in the submissions made to this inquiry to which it has not already responded.
Recommendation 9
3.55
The committee recommends that the Senate
pass the Bill and urges the government to act on the other recommendations in
this report.
Senator
Trish Crossin
Chair
Navigation: Previous Page | Contents | Next Page