Chapter 2 - Overview of the exposure draft bill
This chapter provides background to the proposal and outlines key
concepts and key components of the proposed bill.
Purpose and objectives of the exposure draft bill
In a legal sense personal property is any form of property that
is not land or buildings (which is known as real property or less
formally as real estate). Personal property includes tangible property
such as motor vehicles, machinery, office furniture, currency, artworks and
stock-in-trade. It also includes intangible property such as contract rights,
uncertificated shares and intellectual property rights (for example, trademarks
A personal property security is created when a financier takes a legal
interest in personal property as security for a loan or other obligation, or
enters into a transaction that in substance involves the provision of secured
Lending secured by personal security is a multi-billion dollar industry in Australia.
The overall purpose of the draft bill is to rationalise the current
arrangements which include more than 70 pieces of Commonwealth, State and
Territory legislation and more than 40 different registers of security
interests in personal property. The proposed scheme would be supported by a referral
of legislative power by the States to the Commonwealth. The two Australian
territories are also involved in developing the reform, but there is no
constitutional requirement for them to refer any power to the Commonwealth in
order to participate fully.
The exposure draft bill would establish rules for creating valid
security interests as well as rules governing the priority of competing
security interests. The draft bill also proposes an enforcement regime to
supplement contractual arrangements and the establishment of a modern,
technologically advanced register that would provide advance notice to the
world of any prospective or actual security interests taken in personal
One purpose of the draft bill is to nationally codify some aspects of the
existing law. To achieve harmonisation of the laws in all jurisdictions in
these areas of the law there will necessarily be some changes, but
philosophically the purpose of the reform in these areas is to capture the
existing law and to devise a nationally consistent approach. In other areas a different
purpose of the bill is to take the opportunity to substantively amend the
existing law that is intended to apply nationally.
The scope and significance of the reform cannot easily be overstated. As
a witness with extensive experience in the area explained:
It is a very significant commercial law reform. It is
different from some of the other reforms that the financial sector has seen in
the last 10 or 15 years, which have been more regulatory focused – for example,
consumer credit legislation and the FSR legislation. This is more focusing on
fundamental property and security rights and is intended to facilitate the
transacting of business relating to those rights.
And similarly that:
It is the most substantial reform in the area of law that I
practise in, which is commercial banking...It will impact on almost every single
transaction that I work on on a day-to-day basis.
The Department has described the objectives underpinning the development
of the content of the proposed bill as "the four c's". The "four
c's" are illustrated in this discussion of the merit of the reform in
which the Department argues in favour of the exposure draft bill because it:
...would create a PPS regime that would benefit individuals and
consumers by delivering more certain, consistent, less complex
and cheaper arrangements applying in relation to personal property
securities [emphasis added].
The extent to which these objectives have been met is considered further
in this report.
Support for the reform
In its Revised Commentary, the Attorney-General's Department
outlines the case for personal property securities reform as follows:
Current finance law is characterised by a complex network of
regulation developed over time by Commonwealth, State and Territory parliaments
and courts. It is built on artificial distinctions around the legal form of the
security taken, the legal personality of the grantor and the nature and
location of the collateral. There is now widespread recognition that such
considerations are immaterial to the substance of secured transactions.
To meet the demands of a competitive economy, Australian
finance law must be reorientated around the rights of parties to enforce their
interests in personal property in the event of a debtor default. The essential
concern should be about who gains priority where competing interests exist. The
law should not be seized by concerns about whether a grantor is an individual
or a company, whether the property is wool, contract rights or a motor vehicle,
or the location of that property.
Australian finance law imposes unnecessary red tape on
consumers and businesses. In some cases, a security interest must be registered
in more than one jurisdiction and on multiple registers to be fully effective.
Some registers are electronic, while others are paper-based. In other cases,
there is no registration scheme to provide notice of personal property
interests to prospective buyers and lenders. This situation is confusing and
inefficient. It results in unnecessary compliance and transaction costs for all
On the other hand, there are some submitters who are not convinced that the
types of amendments proposed in the reform are justified and argued strenuously
for the scope of the changes to personal property securities law to be
reconsidered. One such view was expressed in the combined submission of Allens Arthur Robinson, Blake Dawson, Freehills and Mallesons Stephen Jacques:
...we do not think an approach akin to article 9 of the US
Uniform Commercial Code (the basis of the Bill) is necessary to achieve [a
single national register and uniform national law], and has considerable
disadvantages, including rigidity and complexity. We think that Australia would have been better served if it had followed the UK example and rejected that
approach, for all the reasons that persuaded the relevant authorities in the UK...
Others also expressed views to a similar effect, including DLA Phillips Fox, the Australian Financial Markets Association and Mr David C. Turner, a Victorian barrister who has practiced extensively in relevant areas of law both in Australia and New Zealand.
However, the committee also received evidence from a wide range of
stakeholders that significant personal property securities reform along the
lines proposed in the exposure draft bill is appropriate. An example of this is
the evidence from the Consumer Action Law Centre that although in the Centre's
view some improvements could be made:
...we are not opposed to the reforms being proposed by the
bill. We actually support the idea of national personal property security laws
and a register that makes that work more efficiently and laws that again create
certainty and efficiency in that system.
Support for the reform was also articulated by the Australian Bankers'
The association's view is quite a simple one: they are very
supportive of the two-pronged PPS reform proposals –register and substantive
law reform – and they are keen to see that delivered [on the basis] that there
is reasonable time to ensure that we can implement it.
Although there is considerable support for some reform of the personal
property securities laws across Australia, perhaps unsurprisingly there is a
range of views about what the exact content of the reform should be. There are
some supporters of the draft bill as proposed;
some supporters of the general approach that is being taken but who believe
that there is still considerable work required to get the content right;
and some submitters who agree with the idea of reform in this area but who
contend that the approach being taken is incorrect.
More detail about, and the implications of, these divergent views are
considered in more detail in chapter three below.
The reform process
The legal framework and the
To be nationally effective a PPS bill requires support from all
Australian jurisdictions. This includes legal support such as a statutory
referral of powers, as well as practical support such as the transfer of data
from existing State and Territory registers. Commitment to the process has been
obtained in principle – initially through the Standing Committee of Attorneys-General
and most recently through the Council of Australian Government (COAG) when its Ministers
signed an inter-governmental agreement on PPS reform.
The planned implementation date for the commencement of the register is
based on the COAG's commitment to implementing the scheme by May 2010.
Because the scheme will be underpinned by a statutory referral of power from
the States, at least one State needs to have referred power for the scheme to
the Commonwealth through the passage of legislation in the relevant State
parliament. The Department has advised the committee that once the text of the PPS bill has been finalised it is likely that New South Wales will be the lead State to introduce
the referral legislation. To meet an implementation date of May 2010 the State
legislation will need to be introduced in April and passed by September this
year and the Commonwealth would then introduce and pass its legislation.
Although it will be possible for the register to proceed with
participation by only one State, obviously it will only be a national scheme
with the benefit of a single register if all jurisdictions are involved. The
view of some submitters is that even a referral of powers by all jurisdictions
will not instil total confidence in the scheme because some State and Territory
legislation could still operate in the area and because a jurisdiction can exclude
matters from the operation of the scheme.
Since the project commenced in 2006 the Commonwealth Attorney-General's
Department has undertaken considerable consultation and communication with
affected stakeholders. An options paper was first released in April 2006 and
national consultation took place. The Department has since issued three further
discussion papers in November 2006, March 2007 and April 2007. The first
exposure draft of the bill was released in May 2008.
After significant amendments the draft of the bill referred to the committee
for inquiry was released in November 2008.
The Department also convened a PPS Consultative Group 'to guide the reform
process". The PPS Consultative Group, which meets quarterly, comprises
experts invited from industry, governments, consumer groups, legal
practitioners and academia.'
Different views about the content of the bill and the proposed timing of
the project notwithstanding, there has been considerable stakeholder acknowledgement
of the process and the Department's level of engagement with stakeholders,
including by those who are highly critical of the content of the reform itself.
For example, the four law firms in their combined submission noted:
We appreciate the level of work and consultation that has so
far gone into providing the draft legislation, and the readiness of
representatives of the Attorney-General's Department to make themselves
available and allow us to participate in the consultation process.
Although departmental staff are viewed by stakeholders as accessible and
willing to consult, there remains considerable disquiet expressed by some
submitters that - given the magnitude of the proposed reform - the process is
being unnecessarily 'rushed through'
and that although "in the broad context there has been significant
consultation, the complexity of the reform proposals is such that...sufficient
stakeholder input has been obtained in relation to many...key issues."
The issue of the timing for implementation is considered in more detail in chapter 4
International approaches to PPS
Over the years several international jurisdictions have undertaken
significant legislative PPS reform. The United States of America introduced
personal property securities reform in 1951 when the National Conference of
Commissioners on Uniform State Laws and the American Law Institute promulgated
the Uniform Commercial Code. The code was substantially amended in 1972 and
1998, and Article 9 of the Code is law in every US state.
Article 9 of the code relates to secured transactions.
Provinces in Canada started introducing their PPS reform based on Article 9 in
1967, in every province and territory with the exception of Quebec. The first
province to introduce the reform was Ontario. On the whole, differences in PPS between the provinces is minimal, although the system used in Ontario is an exception.
The philosophies, concepts and structure of the Canadian PPS reforms were very similar to those in Article 9, although there were significant differences
in terms of drafting, policy on particular issues, and the design of the
registration systems. The amendments to Article 9 which took place in 1998
served to accentuate the differences between the Canadian and American systems.
New Zealand introduced its reform in 2003 based primarily on the
Canadian Saskatchewan legislation, but exercising a significantly different
All of these models are known as Article 9 style systems.
In the opinion of Wappett, Mayne and Duggan, in their paper on the
historical development of PPS reform,
The general concepts and principles [of the systems under
discussion are very similar but there are some significant differences in
detail and drafting. Some of the differences are deliberate policy choices made
by the respective legislatures, others have arisen for historical reasons and a
few may be inadvertent... [E]conomic and market change has also played a role.
Article 9 and the [PPS] legislation has not been static. As economies and
markets have developed the legislation has evolved in response to these
changes. Different jurisdictions have been faster than others to react to some
market developments and policy decisions have meant that different
jurisdictions have sometimes reacted in different ways.
The Department advises that all of the international models have been
considered in detail and the approach proposed in the exposure draft bill is
informed by each of them, though the Australian approach does not adhere
closely to any of them.
The differences between the draft bill and its international
counterparts are said to reflect issues raised by stakeholders, differences in
the Australian consumer and commercial environment, advances in information
technology, and drafting styles adopted to improve legal certainty and
consistency with Australian drafting practices.
However, several submitters are not persuaded that this is the case and are
concerned that the draft bill would result in significant costs and unintended
It has been noted that personal property securities law is a
particularly difficult area
and a brief outline of the key concepts underpinning the proposed bill may
assist those new to the subject:
'in substance' approach means that the proposed bill will deal
with circumstances that are in substance security interests in personal
property, regardless of the title, structure, jurisdiction, subject matter et
cetera of the transaction. This is an important concept underpinning the
proposed legislation as it is a departure (and improvement) on the existing
approaches, which have developed over time and not in a cohesive way.
A security interest is any interest in personal property which is
created by an agreement that secures the payment or performance of an
obligation, without regard to the form of the transaction. A personal property
security is created when a financier takes an interest in personal property as
security for a loan or other obligation, or enters into a transaction that in
substance involves the provision of secured finance. Well known (and relatively
simple) examples of personal property securities include car loans and company
Attachment describes the successful creation of a security
interest in personal property that can be enforced against that personal
property. Attachment is a prerequisite for creating an enforceable security
interest in personal property. A security agreement which has not attached
would create merely personal or contractual rights between the parties.
Perfection means that a security interest has attached
to collateral and any further steps needed to make the security interest
effective against third parties have been taken. Under the exposure draft bill
a security interest may be perfected by possession, control, registration or
temporary perfection (see next definition) or a combination of these methods.
If it is necessary to determine priority between competing security interests a
perfected security interest would always have priority over an unperfected
security interest. Generally the methods of perfection rank in order of, first,
possession (if possession is possible), then control (the legal
ability to deal with the security even though you do not have physical
possession. For example, the authority to transfer shares or the right to sell
grain held in a silo by another person.) If the personal property involved in
the transaction is such that possession or control is not possible, then registration
will be the third ranking method of perfection.
Temporary perfection is a proposed feature of the exposure
draft bill. The draft bill would provide automatic temporary protection to a
secured party for a limited period. It would apply in a range of circumstances,
for example, where collateral is moved to Australia, converted into proceeds,
or transferred to another party. Its purpose is to allow parties a short period
of time to update the register when circumstances in relation to the collateral
A Purchase Money Security Interest (or PMSI – pronounced 'pimsey')
is a new type of security interest which can allow a subsequent financier to
retain title to or have priority over particular collateral even though an
earlier financier may have a perfected interest in the grantor's general
collateral that would otherwise have priority. A PMSI is created if the
perfected security interest meets certain criteria outlined in the bill,
including giving notice of the later interest to the holder of the earlier
security interest (clause 32 of the exposure draft bill).
Deemed security interests – it is proposed that some transactions
that would not usually qualify as a 'personal property security interest'
because the transaction does not secure payment or the performance of an
obligation would be deemed to be security interests. Examples of this are the
interests of a consignor under a commercial consignment, or the interests of a
transferee in a transfer of accounts or chattel paper. The Department argues
that deeming some transactions to be security interests assists with
transparency, ensures that debtors cannot structure transactions to avoid the
effect of the proposed bill and makes it possible to determine priority between
these deemed security interests and other security interests (clause 28).
The Attorney-General's Department submission includes a longer
glossary at pages 11 to 16 of its submission.
Structure of the proposed draft bill
A brief outline of the main areas of the draft bill, based on information
in the Department's Revised Commentary, follows.
Given the length and complexity of the exposure draft bill and the relatively
tight timeframe for this inquiry this outline does not refer to relevant
Constitutional application and
relationship of the draft bill with other laws (proposed Chapter 1-
The draft bill would rely on various Commonwealth constitutional powers
and the referral of power from the States. In the absence of a referral by a
State the bill would still apply except as to transactions between solvent
The draft bill deals with its interaction with other laws, particularly
conflicting State and Territory laws as well as the general law. The draft bill
specifies circumstances under which other laws would prevail over it (such as
taxation law) or limit the application of certain provisions. A State or
Territory law would be able to expressly exclude a licence, right, entitlement
or authority created by or under a State or Territory law from the application
of the bill. The bill also specifies when other laws do not prevail over it,
for example, in terms of registration requirements, formal requirements
relating to agreements, assignment and the attachment and perfection of
Scope of the application of the
bill (proposed Chapter 2- General rules relating to security interests)
The draft bill would apply to transactions involving personal property
that secure payment or the performance of an obligation, apart from some
limited exceptions. The draft bill would apply to tangible and intangible
property as well as certain writings evidencing rights (such as documents of
title, negotiable instruments and letters of credit).
At the request of the States, the draft bill would not apply to a
tradeable water right or a water access entitlement within the meaning of the Commonwealth
Water Act 2007 or tangible property that is affixed to land, nor to
fixtures. Provisions relating to statutory licences (such as licensing for taxi
plates) can be activated or subsequently 'turned off' by individual States.
A security agreement would be effective according to its terms and would
be enforceable between the parties upon attachment of a security interest in
the collateral: that is, the essential elements for creating a security
interest have been completed. The next step towards establishing priority
against anyone else who may have an interest in the security is to 'perfect'
the security interest. The methods of perfection that the draft bill proposes
to recognise are possession, control, registration or temporary perfection (see
the Key Concepts section above for information about these concepts).
The draft bill contains special perfection rules dealing with security
interests in negotiable instruments, investment instruments, returned property,
crops and bailees (put simply, in this context a bailee is a person who
holds possession of - or bails - tangible personal property for another
Where collateral is transferred or disposed of prior to enforcement, the
draft bill would provide that a security interest continues in the transferred
collateral as well as any proceeds of collateral.
Acquiring personal property free of
The draft bill proposes to establish circumstances in which a security
interest in personal property may be extinguished generally, as well as
specifically for motor vehicles. This would mean that a third party could take
personal property free of a security interest in certain circumstances,
including purchasing an item in the ordinary course of business, a consumer
item worth less than $5000, money, an investment instrument or an item that is
serial numbered and a search of the proposed register would not have disclosed
the registration (the Department says this is known as the 'day and a half rule').
The onus of proving an attachment or perfection or acquiring an interest
free of a security interest, under the draft bill, would rest with the person
asserting those facts. The draft bill would contain rebuttable presumptions
that a purchaser who acquired an interest in property and was related to the
seller, did not give value and had knowledge of the relevant security interest
or breach of the security agreement.
Priorities between security
interests in personal property
The draft bill proposes to establish general and specific rules for
determining priority among competing security interests in the same property.
The draft general rules would provide that a perfected interest has priority
over an unperfected interest, and perfection by control has priority over
perfection by other means (including registration on the proposed register). If
these rules do not resolve claims by competing security interests then priority
is basically in chronological order of perfection or the attachment of the
There are specific priority rules proposed for PMSIs which would give
'super-priority' so that the PMSI would generally prevail over other
security interests provided that it is perfected by registration and relevant
notice given to other secured parties. Priority for a later security interest
in certain circumstances is the purpose of a PMSI.
The draft bill also intends to recognise the special nature of
negotiable instruments, and documents of title and to introduce the legal
concept of chattel paper, which is new in Australia. The draft bill
would also deal with priority between security interests and other interests
such as those held by an authorised deposit-taking institution (also
known by the acronym ADI).
In chapter 3 the exposure draft bill proposes special rules for
crops and livestock (giving priority to the giver of value for the purpose of
growing, feeding or developing the crops or livestock)
though a pre-existing interest in real property would not be prejudiced by
these rules. Draft chapter 3 also contains priority rules for accessions
(personal property installed in or affixed to another item of personal property
such that it has lost its separate identity) and commingled goods (goods part
of a product or mass that have lost its original identity such as ingredients
in food or a consignment of grain added to a silo containing other grain).
Enforcement of security interests
in personal property (proposed Chapter 4 – Enforcement of security interests)
The draft bill proposes to set out the processes for enforcing a
security agreement following debtor default. It is intended that these would
operate in conjunction with enforcement provisions in the Consumer Credit Code
and security agreements between the parties. It would be provided that parties
would be able to contract out of a number of the enforcement provisions in the
bill (though not in relation to consumer transactions).
In all cases of attempted enforcement a secured party would be required
to observe notice requirements. A person entitled to receive notice of disposal
(including the grantor) would have an opportunity to redeem the collateral. All
remedies are subject to a duty on the enforcing party to act in a commercially
reasonable manner. Where disposal occurs by sale the secured party would have
an additional duty to obtain at least the market value of the good or the best
price reasonably obtainable in the circumstances. A secured party may only
purchase collateral at a public sale for the market price of the collateral.
Registration of security interests
(proposed Chapter 5 – Personal Property Securities Register)
A key aspect of the draft bill is the proposal to provide for an online
national Register of Personal Property Securities to be established and
maintained by a Registrar of Personal Property Securities. It is intended that
registrations would be made at the request of secured parties in anticipation
of, or to reflect, a security agreement.
It is not proposed that the register operate as a register of title or validate
a secured party's claim to a security interest. The Department describes the
intended operation of a register as a 'noticeboard' because it puts subsequent
lenders or purchasers on notice of a claim to a security interest. If a
security interest is valid the register would also provide significant
assistance in resolving competing claims of priority.
The bill is drafted on the basis that much of the detail for the
register requirements will be contained in regulations. The Department has
already made progress with this aspect of the project and has released an
exposure draft of a number of likely regulations, including those relating to
It is expected that a registration would include the following
information: the secured party's details, the grantor's details, an address for
service of notices on secured parties (usually an email address), a description
of the collateral and proceeds including if it is consumer or commercial
property, the period of registration, the existence of subordination agreements
and any amendment details. Some property such as motor vehicles, boats and
aircraft used for consumer purposes would have to be identified by a serial
A registration would be ineffective where it contains a seriously
misleading error. Where the register is amended it is proposed that the
registrar must send a verification statement to the secured party who will be
under an obligation to send a copy to the grantor.
The draft bill would provide that the register can, for a fee, be searched
for authorised purposes. The bill would prohibit searching the register or
using data from it for an unauthorised purpose. However, searchers would not be
required to establish their identity before conducting a search. It is intended
that the register would use an 'exact match' approach rather than a 'fuzzy
match' or 'wildcard' approach. The Department contends that this appropriately
balances the legitimate needs of users with the privacy needs of grantors.
However, some significant concerns have been raised about possible personal
safety issues arising from inadequate privacy protection. These are considered
in chapter 5 below.
Implementing the new scheme
(proposed Chapter 7 - Transitional provisions)
A major anticipated benefit of this project is the streamlining of
numerous pieces of legislation from all Australian jurisdictions. Implementing
it will involve significant transition from existing practices to the
requirements of the proposed scheme. In general terms the Department states
that the proposed transitional provisions would set up a legal framework to
migrate data from existing registers to the proposed new register and would
provide special priority rules for pre-existing security interests.
Under the proposed model a pre-existing security interest would need to
be registered under the new system within 24 months to protect its priority
position. This means that the register will not be fully effective until 2
years after its commencement (at which time the same requirements will apply to
new and pre-existing secured lending transactions).
The Department has issued proposed draft regulations for consideration
and welcomes feedback on their content.
It has not been possible to consider the content of the draft regulations except
generally in relation to the examination in Chapter 4 of the proposal for the
national PPS register.
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