By Mark Wenn, Partner, Alex Myers, Special Counsel, and Harrison Comrie, Law Graduate
On 22 September 2023, the Commonwealth Government released a formal response to the Final Report of the Personal Property Securities Act 2009 (Cth) (Act) statutory review, which came to be known as the Whittaker Review. Completed in 2015, the Final Report made almost 400 recommendations for statutory reform, with the overall objective of simplifying the legal framework governing personal property securities. To date, only a handful of the recommendations have been implemented.
The Government’s recent response expresses a view on each recommendation, and also includes exposure drafts of the Personal Property Securities Amendment (Framework Reform) Bill 2023 (Cth) (Bill) and the Personal Property Securities Regulations 2023 (Cth). If passed, the Bill will amend the Act, the current regulations made under the Act (Regulations), and the Corporations Act 2001 (Cth) (Corporations Act), in line with the Government’s views on the recommendations.
The Government is seeking feedback on the reform package to ensure that the proposed amendments are relevant, effective, and mindful of the needs of the Australian commercial environment. Public consultation is currently open, and will close on 17 November 2023.
Some of the key recommendations and proposed amendments to the Act are considered below. Given the number of recommendations in the Final Report, it is unsurprising that some proposed legislative amendments are minor or technical in nature. Others however are much more significant, and will if implemented considerably alter the current legislative framework, particularly in scenarios involving insolvency.
Some Final Report recommendations concerning PPS Leases have already been implemented.
The Personal Property Securities Amendment (PPS Leases) Act 2017 commenced on 20 May 2017. It extended the minimum duration of a PPS Lease from one year to two years, and altered the circumstances in which leases for an indefinite term would be considered a PPS Lease.
However, the Bill also contemplates other changes to PPS Leases, including that:
- the definition of PPS Lease in section 13 of the Act be amended to remove all references to bailments (such that a bailment will no longer constitute a PPS Lease);
- PPS Leases be added to the kinds of security interest section 268 of the Act provides are unaffected by section 267 (which provides for the vesting of unperfected security interests upon the winding up or entry into administration of a corporate grantor);
- section 109 of the Act be amended to provide that Chapter 4 of the Act (which governs the enforcement of security interests) does not apply to PPS Leases that do not secure payment or performance of an obligation; and
- section 588FL of the Corporations Act be amended so that it does not apply to deemed security interests, including PPS Leases.
Overall, the proposed amendments to PPS Leases appear intended to simplify the rules and reduce technicality for parties who are not sophisticated financiers or commercial enterprises familiar with the minutiae of the Act and the requirements of the Personal Property Securities Register (PPSR).
Section 62 and purchase money security interests
Section 62 of the Act prescribes when a Purchase Money Security Interest (PMSI) has priority over other security interests. In its current form, section 62 has different timing requirements for the perfection by registration of a financing statement claiming a PMSI, principally depending on whether or not the collateral over which the PMSI is claimed is inventory.
Recommendation 249 (which the Government has accepted) is that section 62 (and section 63) be amended to prescribe a uniform 15 business day timeframe for a registration that perfects a PMSI that is applicable to all collateral types, including inventory. The exposure draft reflects the adoption of this recommendation, such that a PMSI will have priority over a non-PMSI in the same collateral if it is perfected by registration before the end of 15 business days after:
- for goods where the PMSI does not arise under a PPS Lease, the day the grantor, or another person at the request of the grantor, obtains possession of the goods;
- for goods where the PMSI arises under a PPS lease, the later of the day the lease starts to be a PPS Lease, and the day the grantor/another person at its request obtains possession of the goods; and
- for any other property, the day the security interest attaches to the collateral.
The Government has also accepted recommendation 238, which proposes that the Act be amended to clarify that references in sections 62 and 63 of the Act (and elsewhere) to a grantor obtaining or having possession of personal property refer to the grantor obtaining or having that possession in its capacity as grantor, rather than possession simpliciter. This is consistent with the approach the Full Court of the Supreme Court of South Australia took in Samwise Holdings Pty Ltd v Allied Distribution Finance Pty Ltd & Ors  SASCFC 95, a decision concerning the proper construction of section 62.
Finally, recommendation 241 has also been accepted. That recommendation is that sections 62(2)(c) and item 7 of the table in section 153(1) of the Act be deleted. The effect of these proposed amendments is that a financing statement registered to perfect a PMSI will no longer have to identify that the interest claimed is a PMSI.
ABNs and corporate trustees
Section 153 of the Act provides that a financing statement must include certain data relating to the identity of the grantor. The grantor details required are currently prescribed by Schedule 1 to the Regulations.
In circumstances where the grantor is a corporate trustee of a trust, clause 1.5 of Schedule 1 provides that the required grantor detail is the trust’s ABN (and not the ACN of the trustee). The practical effect of this requirement is that secured parties who enter the ACN of the corporate trustee as the relevant grantor detail/organisation identifier when effecting a registration on the PPSR are left with an ineffective and unperfected security interest in the event of the grantor’s insolvency, such that they lose the benefit of their security.
The operation of clause 1.5 has long been criticised for both theoretical and practical reasons. As to theory, it is an elementary principle of trusts law that a trust is not a separate legal entity. Clause 1.5 is said to be inharmonious with this classic principle because it treats a trust as a separate legal entity. Clause 1.5 also said to generate practical difficulties because:
- secured parties as prospective registrants may not know whether the grantor holds collateral in its own right or in its capacity as trustee with an ABN; and
- the grantor may, subsequently to obtaining finance from a secured party, declare a trust over the collateral that it initially held in its own right, and then obtain an ABN for the trust declared.
Recommendation 110 (which the Government has accepted) contains a proposal to amend the Regulations such that registration to perfect a security interest over trust assets can be made against the details of the corporate trustee, rather than the ABN of the trust. The practical effect of this amendment is that a security interest made against the ACN of a corporate trustee will be sufficient to perfect a security interest over assets a grantor that is a corporate trustee holds in its trustee capacity.
The Government has also accepted several recommendations for minor or technical amendments, including that:
- sections 340 to 341A of the Act (which include the important definitions of “circulating asset”, “control”, “inventory”, and prescribe the circumstances in which a secured party has control of an ADI account) be removed from the Act and relocated to the Corporations Act;
- the time periods in sections 22(4), 33(2), 34(1), 35(2), 36(2), 38(3), 39(3)(b)(ii) and 40(3)(b)(ii) be increased from 5 business days to 10 business days;
- the Act be amended so that a registration does not need to indicate whether the collateral over which a security interest is claimed is consumer property or commercial property;
- the Act be amended such that all registrations against individual grantors, or against serial-numbered property that may not identify the grantor because the grantor is an individual, must have a maximum term of 7 years; and
- item 2.2(1) of Schedule 1 to the Regulations be amended so that a registration to perfect a security interest over aircraft by reference its serial number is optional rather than mandatory.
What is not changing
The Government rejected recommendation 362, which suggested that section 588FL of the Corporations Act be repealed. The reasoning for the rejection was “Section 588FL is intended to discourage and protect against fraudulent claims prior to a company’s insolvency”.
Recommendation 365 was also rejected. That recommendation proposed that the arm of Government responsible for insolvency law reform be requested to examine whether the law ought to be amended to allow an insolvency practitioner to give notice to parties who have registered financing statements on the PPSR claiming security interests requiring them to verify their claims within a set period (such as 21 days), with the practitioner being entitled to treat unverified claims as unsecured. The Government’s response to this recommendation was that additional verification requirements would not be consistent with the policy goal of the PPS framework, being that registration provides perfection of a party’s security interest. It was also felt that secured parties would be disproportionately impacted by any such change.
Finally, the Government accepted recommendation 370, which suggested that the period within which a secured party must respond to a request for information under section 275 of the Act remain at 10 business days.
The proposed amendments to the Act and the Regulations are in many ways significant. In particular, some changes will alter the outcome in scenarios that under the current regime result in parties losing the benefit of their secured creditor status, often due to inadvertence and/or unfamiliarity with the technical requirements of registration.
Although the precise scope of the amendments is not set in stone and the time at which they will take effect is as yet unclear, there is little harm in stakeholders taking steps now to familiarise themselves with the key proposed changes. Insolvency practitioners, lenders, lessors of personal property and legal advisors are some of the main groups who may wish to consider the exposure drafts and proposed amendments.