Chapter 3 - What reform is needed?
Many submissions to the committee commented on not only the content of
the exposure draft provisions, but also addressed the threshold question of
whether the reform should continue, and if so, in what form. Chapter 3 examines
the threshold question of what reform is needed.
As noted above, the proposed reform is of considerable magnitude. It has
been described as 'important microeconomic reform'
and some submitters regard it as the most substantial reform in a decade that is
not only ambitious in its scope, but will affect many difficult and complex areas
of law. For example, Mr Colin Love representing the Australian
Financial Markets Association observed that:
In its scale this is one of the most significant substantive
reforms to Australian law in many years. In my previous roles in government
over many years I have been involved in working on financial services reform,
and I was also involved in putting in place the anti-money-laundering
legislation. In its scale I would consider this to be a far more complex and
difficult technical and legal drafting task that the drafters of this
legislation are attempting. There are numerous complex issues flowing there and
there are unresolved consequences that are really not understood or have not
been worked through. 
As noted in chapter 2 in the Support for the reform section, the
committee has been presented with widely differing and strongly held views in
relation to the detail of the reform. It was apparent to the committee that
these views were developed after considerable thought and their merits were
vigorously argued by their proponents. Ultimately, though, it is not possible
for the committee to reconcile all of the positions put before it. Described
broadly the most divergent positions were, on the one hand, that except for the
national register, a case has not been made for the reform and that in the main
the status quo should be retained. The
other position was that both codifying and substantively amending the law is
appropriate and that the exposure bill is well drafted to achieve the intended
Many views falling somewhere between these positions were also expressed to the
As noted in chapter 2, the combined four law firms argue that a move to
the proposed style of reform is not justified and that '...there are still a
considerable number of concerns that need to be carefully considered and
addressed, and we have some overall concerns as to the approach.'
Mr David C. Turner offers guarded support:
...for this radical change which I regard as hasty and
ill-conceived. The choice to move to an Article 9 regime simply because New Zealand has followed Article 9 and the Canadian variants of it, using the Saskatchewan model, is of particular concern.
However, other authoritative witnesses hold an alternative view and
sought to explain the difficulty in understanding and appreciating the type of
reform proposed in the exposure draft bill. In this regard noteworthy evidence was
given by Ms Angela Flannery, representing Clayton Utz, and Mr Craig Wappett of the law firm Piper Alderman. Ms Flannery is a lawyer who
described her area of legal practice as 'commercial banking'.
Ms Flannery said:
Initially – two years ago or so – I thought the legislation was
terrible; I thought it was a very bad thing. I thought that personal property
security law as it stood in Australia was fine. When we saw the first
discussion papers we talked to our clients and our colleagues in New Zealand about what they thought of the legislation and how it had been implemented in New Zealand, for example. We were surprised at how generally positive those people were...in
New Zealand every time we spoke to either a financier or a lawyer and we put
the question to them , 'If you could get rid of the legislation there, would
you get rid of it?' everyone said that, no, they would not. That made us look
at the legislation with different eyes.'
Mr Wappett has worked in banking and finance law for more than 20 years
and is co-author of a book titled Securities over Personal Property.
Similarly, he explained:
...I think it is fair to acknowledge that the proposed PPS reforms do involve a significant shift in people's thinking. Lawyers, in particular, who have
been brought up with many of the common-law and equitable principles that
underpin our existing law, have considerable difficulty making the conceptual
shift in thinking that is involved in adopting the PPS‑style reforms. But
I have been through that process myself and I know a number of other
practitioners, in Canada and New Zealand, who have been through that process
and, whilst it does involve some initial difficulties and some conceptual
rethinking, my own experience and certainly the experience of the vast majority
of practitioners that I have spoken to in those other jurisdictions over the
years suggests that you would be hard-pressed to find too many experienced
practitioners who would prefer to revert to the pre‑PPS reform situation in jurisdictions which have already adopted a similar reform process.
In addition to support from some lawyers, witnesses representing
different parts of industry also presented evidence to the committee strongly
supporting the type of reform outlined in the draft bill. For example, the
Institute for Factors and Discounters, whose members constitute the main
receivables financiers in Australia with a market in 2008 of $66 billion in
argued that PPS reform needs to recognise the legitimate interests of
receivables financiers and concluded that 'subject to the suggested changes in
this submission, we believe that the Bill strikes an equitable balance in this
The Australian Finance Conference also noted that 'the AFC continues in its
support for the reform of Australia's current personal property securities
regime. The case for reform has been well made out.'
The Australian Bankers' Association also offered firm support.
Presented with this range of evidence, the committee had a difficult
task in finalising a view. Based on the evidence received, the committee
considers that there are two broad options for progressing PPS reform from this point and outlines these below.
Options for reform
The committee believes there is merit in a move to an 'Article 9 style' PPS system, but found it difficult to reconcile the two major perspectives put to it about
exactly which Article 9 style approach to take. One approach proposes an
international model incorporating a national register, while the other
essentially proceeds with the exposure draft bill. In the next sections, the
committee outlines and explores the two major options presented in submissions
Option 1: the bill as drafted
As outlined in chapter 2 the exposure draft bill has been developed over
a number of years and after considerable consultation. The Department asserts
that the bill as drafted reflects an effective combination of learning from
overseas experience and modification for Australian conditions.
Mr Robert Patch from the Department described the process for the development
of the exposure draft bill as follows:
The very first thing the Office of Parliamentary Counsel did
was to write to their counterparts in New Zealand and ask them for an
electronic copy of the New Zealand bill. That bill was the template bill where
we started drafting from. The next step [was] to listen to our stakeholders and
to make changes to the bill reflecting their desires for where the bill should
go and what should happen. We discovered that it was not just a simple matter
of making [a] minor tinker here or there, and doing that sort of process ended
up with a bill that was very complicated. You could not just graft a few
sections in the middle of the bill to try to accommodate stakeholders' needs,
or the policy outcomes sought by stakeholders.
In addition to accommodating, where possible, stakeholder requests for
the New Zealand model to be adjusted for Australian circumstances, the
Department believes that a principal goal of the legislation should be transparency,
by which it means that the bill details as much as possible any assumptions
underlying the provisions.
This approach has resulted in thorough, but very lengthy and
complicated, draft provisions and a bill that is nearly 300 pages long. A
number of submitters are not persuaded that this approach has in fact resulted
in increased certainty and transparency. The draft bill's detractors argue
- given the difficulty of the subject matter and a general lack of
expertise in Australia in the operation of PPS-style reform it is unwise to
stray far from the provisions that have proven to work overseas;
- despite the Department's intention to increase certainty of the
law, the new provisions will actually significantly increase uncertainty about
the effect of the law;
- developing a substantially new system drafted especially for Australia (albeit one that is informed by overseas experience) means that there is no
knowledge base about the law and its effect, and users of the system and their
advisers can't readily draw on international experience. There are also no
secondary resources immediately available to assist users of the system to
understand the law at the time they are most needed (that is, when the system
- the bill suffers from significant drafting issues making it
difficult to understand the proposed law;
- stakeholders have had insufficient time to consider such a large
and complex bill in detail (the exposure draft version of the bill was released
in November 2008). Because the provisions of the draft bill are substantially
different to existing PPS reform models it is possible that there are errors
and other issues that would become apparent if there had been time for
stakeholders to understand whole of bill.
However, in support of the exposure bill the committee noted the view of
Mr Craig Wappett, an experienced and persuasive practitioner, that:
As a general comment on the bill, it is quite long and it is
quite daunting and complex. The key principles underpinning the bill are quite
straightforward and once people become familiar with them I think they will
find that a lot of the perceived complexity in the bill disappears. The bill is
certainly substantially longer than some Canadian or New Zealand counterparts.
Even though the substantive approach and the context of the bill are
substantially the same, the actual drafting is a much longer style. I know some
submissions have commented on that and various people have views about whether
that is a good thing or not. I appreciate that obviously the Office of
Parliamentary Council has a particular way of drafting and that is reflected
across the board in Australian legislation. I was not proposing to really get
into commenting on the drafting style per se. But in terms of the substantive
issues, my view is that they have been narrowed significantly and I would be
surprised if there are more than 15 or 20 issues outstanding at the moment.
Option 2: primarily adopt an
existing international model
The primary advocate of this approach is Professor Anthony Duggan who is an academic with international expertise in personal property securities
law. Professor Duggan has particular experience in personal property security
law in Australia and Canada.
Professor Duggan's suggestion is essentially that Australia adopt and apply
nationally one of the Canadian or the New Zealand models and that it only be
amended in ways that will definitely improve it. The main way in which Professor Duggan believes the exposure bill is a definite improvement on other models is that it
proposes the establishment of one national register.
One of Professor Duggan's chief concerns is with unintended
consequences. As he explains:
The New Zealand approach has substantial benefits...Close
adherence to the North American model makes sense, because it enables the local
lawmaker to free-ride on Canadian and United States learning and experience. By
contrast, departure from the model creates uncertainty and increases the risk
of error. These concerns are exacerbated if the drafting is done under time
constraints and without access to the kind of expertise the Canadians and
Americans had at their disposal when drafting their laws.
The other benefits of this option identified by Professor Duggan are
- using an existing model increases certainty;
- international experience and resources are available to inform
the law; and
- the international models are not as complex.
Professor Duggan recommends that this approach could also be
...[including] a provision for a comprehensive review at the
end of three to five years and appoint a committee of local and international
experts to do the review. One advantage of doing things this way is that, after
three to five years experience with the legislation, it should be easier to
find local experts in Australia than it is now.
The perceived disadvantage of this approach articulated to the committee
was chiefly a concern that an international model would not adequately meet
On the basis of the evidence submitted to the committee by several major
stakeholders that PPS reform of the scope proposed is unnecessary, the
committee considers that it is likely that another disadvantage of this model
would be major resistance from some of those affected by the bill due to
concern about change and a lack of familiarity with international models and
Professor Duggan is familiar with the development of the exposure draft
bill and the work invested in its development. He was asked whether, in light
of the work already invested in the bill, he still proposed starting again and
adopting an international model and his evidence was significant:
I understand there is pressure to get the new law into place
quickly and I also understand that a lot of people would prefer a home-grown
product and not just a copy of some other country’s efforts. The trouble is
that it seems to me there is just not enough time or expertise to achieve this
and, even if there were, at the end of the day the differences between the
Australian version and the Canadian one probably would not be all that great.
If it were me I would say yes, start again. I understand the
difficulties of doing that. But it is a question of going ahead now with this
product for the sake of getting in quickly or taking a little bit of extra
time, maybe going back to the drawing board, to get it right. I think in the
longer term interest of everybody it is better to do the latter. What can I say
about other people’s views? I have glanced quickly through most of the written
versions of the submissions that you have received. Very few of them come to
grips with the legislation overall. Most of them just talk about particular
issues. Most of them express support for the general idea of a single
comprehensive national register. But none of them really engage with the detail
of the legislation. Probably the only one that does is the submission from the
four large law firms. When people say that they support the legislation and so
far as they can see there are only half-a-dozen or so issues that need to be
fixed, you really need to ask whether people who are saying this are on top of
legislation of this kind and really understand the concepts and how this
To wind up, for what it is worth this is what I think
Australia might think about doing: for now, to enact a PPSA based on one or
another of the Canadian models, build in a provision for a comprehensive review
at the end of three to five years and appoint a committee of local and
international experts to do the review. One advantage of doing things this way
is that, after three to five years experience with the legislation, it should
be easier to find local experts in Australia than it is now.
As noted above, the committee believes there is merit in a move to an
'Article 9 style' PPS system, and there are benefits in both options. Option 2 encompasses
changes that would definitely improve the chosen overseas model (such as having
one national register rather than individual state registers), but essentially
copies an existing model. It seems, in the main, that the New Zealand and Canadian models are working effectively, are more simply drafted and
offer the assistance of established secondary materials and existing case law.
As suggested by Professor Duggan, after the imported model had been in place in
Australia for a few years it could be reviewed and any aspects that were
unsatisfactory could be amended at that time.
Alternatively, the approach reflected in the exposure draft bill (option
1) of starting with the New Zealand model and substantially amending it
has been undertaken with the intention of better reflecting what are seen as
Australian requirements. There are advantages to this approach, but at this
stage very serious concerns about the possible adverse effects of the bill have
been presented to the committee. These concerns are heightened by the fact that
many submitters felt that the timeframe for considering this exposure draft is
so tight that they have not had the time to fully analyse and understand all of
the provisions in the bill and to identify all possible concerns.
If the bill as drafted has unintended consequences then amendments to the
exposure draft may be needed relatively soon after its introduction, and the process
for this is complicated by the fact that the regime will be based upon a
referral of powers from the States. There is also an argument that 'it affects individual business dealings in a way that cannot
be altered with a touch of the regulator’s brush.'
The committee is cognisant of the considerable effort that has been
invested by the Department, governments and stakeholders in developing the
reform and of the challenges in changing course at this stage of the policy
development. The committee endorses the idea of an effective Australian PPS model, but has very strong reservations about proceeding with the bill in its current form. In
particular, the committee is concerned about the warnings issued by those with
considerable experience in the area of personal property securities about the
danger of serious adverse consequences.
The committee considers that the exposure draft bill could form the
basis of effective PPS reform legislation. However, the committee is strongly
of the view that the bill needs to be substantially redrafted, clarified and
simplified before it is presented to Parliament. In Chapters 4 and 5, the
committee outlines its views on some specific aspects of the exposure draft and
proposes a range of recommendations for changes.
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