Chapter 5 - Consideration of more technical issues
A major implication of the relatively short timeframe for this inquiry
was the significant limit on the ability of the committee to consider all, or
even the majority, of the bill in detail. As noted elsewhere in this report,
this is a lengthy and complex bill which is seeking to implement significant
national reform affecting many people, organisations and industries. It was
difficult for even experts in the area who had been involved from early in the
project to feel that they had time to understand the whole of reform.
In response, the committee developed a two-pronged approach to the
inquiry in relation to technical aspects of the bill. The committee identified
some significant issues, and submitters had some broad issues of concern, that
were explored in detail by the committee. These matters are discussed in this
chapter. Others aspects of the reform could not be considered in detail. For
the Senate's benefit many of them are identified in the next chapter, but
without analysis by the committee.
The matters discussed in this chapter reflect commentary on the
provisions of the exposure draft bill as referred. If the policy decision is to
proceed with the bill then the recommendations in this chapter are directly
relevant to the suggested final form of the bill.
Alternatively, if the policy decision is to adopt an international model
with a national register, the recommendations relating to the register and
related privacy issues would be directly relevant to the new bill.
The matters explored in this chapter are:
- the proposed national PPS register, especially privacy aspects of
- the proposed new requirement to act in a commercially
- the need for international conflict of laws provisions and the
possible content of any provisions;
- the proposed enforcement provisions;
- aspects of the proposed bill dealing with intellectual property;
- the proposed chattel paper provisions.
PPS national online register
A central feature of the proposed PPS reform is the establishment of a
national online register. The purpose of the register is to provide what the
Department describes as:
...a real-time online noticeboard of personal property
over which a security interest has been, or may be, taken. The PPS Register would replace an array of existing electronic and paper-based registers. It
would be a voluntary registration scheme, allowing secured parties to weigh up
the costs and benefits of registering their security interests.
By describing the proposed register as a 'noticeboard' the Department is
highlighting the fact that, unlike land titles registers, it is not intended to
be a register that gives definitive information about the ownership of any
particular property. In relation to providing information about security
interests, the register is only designed to alert the world to an actual
or possible interest in personal property. It is then up to the person
searching the register to use the register information to make any further
inquiries on which to base a purchase or lending decision.
The second major function of the register is that:
It is anticipated that registration would be the most
commonly used method of perfecting a security interest for the purpose of
establishing priority in enforcement and effectiveness on insolvency.
The other main methods of perfecting a security interest, outlined in
more detail above in the explanation of perfection in chapter 2, are
possession and control. The exposure draft bill would establish that possession
and control as methods of perfection in fact have priority over registration as
a method of perfection. However, the nature of secured lending transactions
often means that possession and control are not available as methods of
perfection. For example, if finance is provided for the purchase of a boat, the
grantor will want to use the boat before the loan is repaid so it will not be
possible for the finance company to have possession or control of the security
(the boat). The register will then provide a single national option for
registering the lender's security interest.
The Department observes that use of the register is voluntary - and it
is correct that there is no statutory requirement for any party to register a
security interest - but those who choose not to register may do so at their
peril. In many instances under the proposed reform a person with a security
interest who does not obtain perfection through registration will be sanctioned
by losing priority against those who do register their security interest in the
property. This gives effect to a deliberate policy choice to motivate parties
to use the register and therefore to ensure that the register is effective as a
national register of personal property security interests.
About the proposed register
The establishment of a national register is widely regarded by
submitters as a major benefit of the proposed PPS reform. Although there will
be significant costs in moving to the proposed new system, the register is one
of the key aspects of the reform that is expected to lead to substantial cost
It is also designed to benefit casual users of the system who will be
able to simply and easily access the information they need without having to
negotiate their way through multiple jurisdictions and unfamiliar legal
Of course, the proposal to establish a register has properly attracted
detailed scrutiny by some submitters to the inquiry to ensure that it is
appropriately established and managed and contains effective security measures,
particularly in relation to the way in which information will be collected and
returned in a search of the register.
The exact details of the way in which the register will function are not
yet public. However, the Department has identified its plan for some of the
major aspects of its operation. For example, the Department has stated that it
is intended that only the minimum amount of information needed for each
transaction will be required, essentially using a layered system. For example,
if the transaction can be adequately captured using existing identifiers such
as a Vehicle Identification Number (VIN) or Australian Business Number (ABN) then it is expected that no additional personal identification information will be required
from the grantor. 
If there is no way to identify the property without resort to the
inclusion of personal information then the approach is again to keep the
recorded details to a minimum:
In determining the level of personal information required to
correctly identify an individual’s details, we have sought to balance privacy
needs against the need to ensure that information is correctly recorded and
searchable. The register has been designed so that only limited personal
information, name and date of birth will be recorded and available to be
returned in a search. It will not be possible to discover an individual’s name
or date of birth by using the register. Searchers will need both pieces of that
information before they commence a search.
The Department has stated that in addition to limiting the amount of
information recorded for each entry in the register, the way in which the
register returns information in response to a search will incorporate important
security safeguards. The key aspects of this are that the search function will
operate on an exact match basis and will not include a 'wildcard' search
feature. Information will also be obtained through a challenge-response
approach, which means that the person searching the register will enter the
terms they want to search against and the system will return any entries
exactly matching the search information entered.
This is intended to restrict the ability for searches to be undertaken to
'fish' for information.
There will be a fee for searching the register. The Department has
stated that the fee will be determined in accordance with the government's cost
recovery approach and this will mean that the impost will be modest.
A person searching the system will not be required to be identified
before a search can be made. However, payment for a search will be required
before it can be undertaken and payment will need to be made by an electronic
transfer of funds or by credit card. The Department's argument is that in
measuring the useability of the register against the incorporation of security
features that constrain the effectiveness of the system (and increase the costs
associated with using the system) the proposed approach represents an
Particular concerns relating to privacy and security are discussed in more
Ensuring appropriate security and privacy measures are in place is
essential to the success of the proposed national register. The Department has
made a point of explaining that it is taking privacy issues very seriously. An
officer told the committee that:
I wanted to start by assuring the committee that privacy
issues are of particular concern to the department and are being given careful
Some submitters considered the security and privacy aspects of the
proposed register in detail.
It was important that the committee received this evidence because privacy
issues are not areas of priority for all users of the system,
There are always issues with a public register, I think, but
we do not really have too many specific concerns. In part, I think that
reflects our client base as well. We deal mainly with companies rather than
with individuals. I am sure that is part of the reason why we are not so
concerned about them.
The committee notes the Department's efforts to date and its continuing
commitment to ensure that privacy concerns are addressed. The committee would
like to ensure that before the reform is finalised, government is certain that
it has done everything necessary to address real privacy issues. The committee
believes that the government needs to convincingly allay fears that information
required to be kept in the register can potentially be misused. Some of the
possible implications outlined to the committee if privacy needs are not
adequately met are extremely serious: they include the system being used for
criminal purposes to locate and harm individuals such as in circumstances
involving domestic violence orders and victims of crime.
Although these scenarios are probably far from the ordinary experience of
business-to-business, and even business-to-individual secured lending
transactions, the scope of the register is broad reaching. It would be
unacceptable for the system to meet the needs of the vast bulk of its users if
its design could allow serious harm to anyone.
Broadly, the important privacy concerns identified to the committee are:
- important details relating to the register being included in
regulations rather than primary legislation (especially requirement that
address information will not be returned to a searcher);
- an invasion of privacy if too much personal information is
required to register a transaction versus the possible mistaken identity of a
person if not enough information is obtained,
accuracy of register information,
the possibility of 'twins' (entries for different people with identical names
and dates of birth);
- identity theft;
function creep, including whether the database will be improperly
used to build financial profiles and assess credit worthiness;
- data-mining (individual details being obtained by companies to
assist with the marketing of credit to consumers);
- additional concerns raised by the Office of the Privacy
Commissioner, for example in relation to requirements for the registrar,
clarification of privacy issues and amendments needed to definitions.
The committee has not had time to consider all of these issues in
detail, but will particularly comment on two areas. These are the use of
regulations rather than including requirements in the primary legislation and
the privacy impact assessment issue.
The committee also appreciates the initiative demonstrated by the
Department in its evidence to the committee that in advance of the committee's
report it is considering some amendments to the exposure bill in light of
Privacy safeguards: regulations
versus primary legislation
The committee understands that the use of regulations to implement the
detail of primary legislation is often appropriate. The practice allows primary
legislation to be as concise as possible and permits matters of legislative
detail to be finalised and implemented more flexibly than if all legislative
requirements had to be included in the primary legislation.
However, it is of course always necessary to ensure that essential
matters are included in primary legislation and not left to regulation. In this
regard, the committee agrees with the suggestion that the critical privacy
safeguards relating to the register should be included in the primary
For example, while address details of any individual may be recorded in the
register, there is intended to be a safeguard in place so that no address
details will be returned to a searcher in response to any search of the
register. Evidence to the committee is that a change to this safeguard is one
of the aspects of the register that could lead to physical harm to individuals
and is therefore so important that it should be included in the primary
The committee agrees with this view and believes that it is important that any
other matters of such importance are also included in the final act rather than
in delegated legislation.
The committee recommends that the primary legislation for the personal
property securities reform include the key privacy protections for individuals,
including a prohibition on making the address details of any individual public.
Privacy Impact Assessment
The Privacy Commission and others recommended that before finalising the
PPS reform, and particularly prior to establishing the PPS register, that the
government undertake a Privacy Impact Assessment. A Privacy Impact Assessment
...an assessment tool that describes the personal information
flows in a project, and analyses the possible privacy impacts that those flows,
and the project as a whole, may have on the privacy of individuals...The purpose
of doing a PIA is to identify and recommend options for managing, minimising or
eradicating privacy impacts.
The Privacy Commissioner has published guidelines about the purpose of,
and recommended process for, carrying out these assessments.
The committee notes the Department's advice that it has recently
commenced a Privacy Impact Assessment. The assessment is being undertaken by
staff of the Department in accordance with the Privacy Commission guidelines
and is expected to take five or six weeks in total. The Department advised that
it is expected that the results of the assessment will be made public.
The committee believes that in relation to this reform the Department
has a genuine commitment to considering privacy issues, but is also of the view
that these privacy issues are of such importance that it is appropriate for the
Department's approach to be independently assessed by a person or organisation
with experience in preparing Privacy Impact Assessments. In the committee's
opinion this is necessary to ensure that the reform is objectively assessed
from someone with relevant experience and it will protect the Department from
possible criticism that the assessment was not undertaken professionally or in
The committee recognises that the Department has already invested
resources in undertaking the privacy impact assessment. In light of this, it
may be convenient without compromising the committee's objective if the
assessment is completed by the Department and then reviewed by an independent
person or organisation with experience in the field. The committee notes that
the Privacy Commission gave evidence that it does not undertake privacy impact
assessments, though it is happy to be consulted during the process.
The committee recommends that either:
- (a) a Privacy Impact Assessment be undertaken by a person or
organisation that is independent from the government and who has experience in
undertaking such assessments and the results of the assessment are made public,
- (b) the Department's Privacy Impact Assessment is reviewed by a
person or organisation that is independent from the government and who has
experience in undertaking such assessments, and the results of the review are
The committee recommends that if any issues raised by the Office of the
Privacy Commission in its submission are not considered as part of the Privacy Impact
Assessment then these matters should be separately considered by the Attorney-General's
Department and a response to the issue be provided to the Office of the Privacy
Commission in writing or made public.
New requirement to act in a commercially reasonable manner
Proposed new section 235 of the exposure bill is in Part 6.2 of the bill
entitled exercise and discharge of rights, duties and obligations. The
draft section provides as follows:
235 Rights and duties to be exercised honestly and in a
commercially reasonable manner
(1) All rights, duties and obligations that arise under a
security agreement or this Act mush be exercised or discharged:
(a) honestly; and
(b) in a commercially reasonable
(2) A person does not act dishonestly merely because the
person acts with actual knowledge of the interest of some other person.
A requirement to act 'honestly' is a concept known in Australian law,
but a requirement to act in a 'commercially reasonable manner' is not. The
Department advised that the 'commercially reasonable manner' test was included
in the exposure draft because it is part of the legislation in the United States, New Zealand and in the legislation in most Canadian jurisdictions.
Ms Flannery of Clayton Utz argued to the committee that the
'commercially reasonable manner' provision is of concern to stakeholders
because there is uncertainty about what it means and whether this would change
over time and in different circumstances:
...a point someone made to me was the fact that what is
commercially reasonable changes over time, so what you will get is a court
saying one year that something is commercially reasonable and then someone will
say two years later, ‘We think that the markets have changed’—and, as we all
know, financial markets are changing daily at the moment—’and something else is
now the normal commercially reasonable standard.’ So you will never get a line
in the sand.
There was also evidence given to the committee by Professor Duggan about the situation in Canada where all but one of the Canadian provinces has the
'commercially reasonable manner' requirement. Professor's Duggan's evidence was
that the absence of the requirement has not generated any problems in that
The Department's evidence was that it has considered in detail whether
or not to include this obligation in the Australian reform. It accepted that
the expression does not have a settled meaning in Australia,
but in its view it is appropriate to include the requirement as the Department
expected that in some circumstances it will contribute to cost savings for
parties and will provide an appropriate safeguard for consumers and businesses
where there is currently a gap.
Although the committee received considerable evidence against the inclusion of
the requirement, this is probably unsurprising given that most of the witnesses
who addressed this issue have an interest as the secured party who would be
seeking to enforce its interest.
The Department does not believe that the requirement will increase costs
or inappropriately undermine the ability of parties to contractually agree on
what constitutes behaving in a 'commercially reasonable manner' in their
circumstances. If parties with relatively comparable bargaining power have
detailed their agreed enforcement arrangements the Department expects that it
is likely that a court would find that the agreement between the parties was
The Department anticipates that including the provision will lead to
cost savings in relatively simple, low value transactions as these transactions
will not need lengthy contracts detailing enforcement provisions. If
enforcement of the contract is required then the parties can rely on the
section 235 requirements. The Department further considers that the
inclusion of the 'commercially reasonable manner' requirement would also
appropriately temper overly aggressive behaviour, although based on overseas
experience, it is expected that it would only operate in particularly serious
Because it is expected that only cases of extreme enforcement action would not
be considered to be 'commercially reasonable', the Department believes that the
provision would not lead to considerable litigation costs.
The committee is sympathetic to the concerns raised about uncertainty of
the meaning of 'commercially reasonable manner'. However, the policy equation
needs to take into account more factors than simply a lack of familiarity with
the concept: for example, is there a gap that needs to be addressed and does the
requirement fill the gap? In wide-ranging reform of this nature what protection
should be afforded to borrowers? What are the implications for compliance –
including certainty of the law and any direct and indirect costs?
On the basis that this is an important safeguard that is expected to
limit exploitation, but not to fetter the contractual ability of large and
commercially experienced parties, there are persuasive arguments to retain it.
The committee recommends retaining the requirement for rights and duties
to be exercised honestly and in a commercially reasonable manner. The intended
scope of these requirements should be explained in detail in the bill's
The explanatory memorandum should particularly explain that the
requirement to act in a commercially reasonable manner should not fetter or
undermine the ability of parties with similar bargaining power to contractually
agree about what constitutes commercially reasonable behaviour.
International conflict of laws provisions
The revised exposure draft bill does not include provisions to determine
the law that governs the validity of a security interest where parties disagree
about whether the law of Australia or the law of another country applies to a
secured lending transaction. These types of provisions are known as international
'conflict of laws' provisions.
The Department had included some conflict of laws provisions in the
May 2008 exposure draft, but there was apparently severe disagreement
about the content of those draft provisions so they were removed from the
revised draft bill.  Instead of including
conflict of laws provisions in the revised bill, the Department has included
new provisions at Appendix A to the Revised Commentary. The Department advised
that it would welcome feedback on the content of these provisions. 
There is widespread support for the inclusion of some conflict of laws
provisions in the final bill, and one succinct example of this support was
given by the Mr Gilbert of the Australian Bankers' Association who
believes that it 'is important and necessary is to ensure that the
international dimension of conflict is dealt with.'
The development of the Appendix A provisions was informed by existing
international practice, but they do not directly adopt an existing
There is general agreement that the Appendix A provisions are a significant
improvement on the May 2008 provisions. For example, Mr Wappett advised the
...my view on the new, alternative provisions that are in the
appendix is that they are a very significant improvement on what was proposed
in the earlier draft, and I think they would be an appropriate set of terms to
However, the four law firms in their combined submission expressed some
concern about Appendix A:
I think you do need some conflicts
of law provisions. We are still looking at this latest set of proposals. It is
better than the initial set of proposals but it still seems to be extremely
complex and going into a degree of detail that nobody else has done. If we go
down the route of specifying conflicts of law principles, I have a feeling—and
I could not answer off the top of my head because we are still looking at it
and have been focusing on other things—that there is a much simpler model. The
New Zealanders have a simpler model. I do not think that you need to codify
The committee understands the importance of conflict of laws provisions
being included in the bill and accepts the clear evidence that Appendix A is an
improvement on the provisions in the May exposure draft.
However, the committee's view is that further thought can be given to
the final content of the international conflict of laws provisions. The
committee was impressed by the evidence to it that a key consideration in
assessing the content of any conflict of laws provisions is whether they are
consistent with international practice: consistent international practice
assists with certainty and efficiency in international dealings. A question
beyond whether Appendix A is a better approach than the May draft is whether
Appendix A is the most appropriate approach. Professor Duggan's evidence is
relevant to this consideration:
...so far as possible the conflict rules should be uniform with
the conflict rules in other jurisdictions because if you have different
countries saying different things about how conflict of laws issues should be
resolved then you may end up with a different country’s law apply depending on
where a case happens to be litigated...You really want to avoid that to prevent
parties forum shopping. I would go further than saying, yes, there should be
conflicts provisions in the bill; I would say that there should be conflicts
provisions in the bill and they should track the conflicts provisions in New Zealand, in all the Canadian provinces and in article 9.
Based on the evidence received, the committee's view is that the
Appendix A provisions are acceptable conflict of laws provisions - and they are
definitely an improvement on those suggested in the May 2008 provisions, and
better than no provisions at all. However, the committee also notes that the
Appendix A provisions are substantially longer and more detailed than, for
example, the provisions in the New Zealand legislation.
Given the committee's view that it is critically important to make the
legislation as readily understandable as possible, and the recommendation that
implementation of the reform be extended by at least 12 months (recommendation 3),
the committee considers that the government should reconsider adopting the approach
taken in an existing international model such as that in the New Zealand
provisions. This approach could have the benefits of increasing certainty,
relative simplicity and direct international consistency.
The committee recommends that the bill adopt existing international
personal property security conflict of laws provisions, such as the New Zealand
conflict of laws model, unless there is a particular reason to depart from
Hague Convention on intermediated
In addition to general conflict of laws provisions, the topic of the Hague
Convention on the Law Applicable to Certain Rights in Respect of Securities
Held with an Intermediary which affects a particular category of personal
property securities involving intermediated securities was raised with the
The purpose of the convention is to harmonise conflict of laws provisions
relating to intermediated securities.
The Australian Financial Markets Association is keen for Australia to become a party to the convention. Mr Love explained:
I think the main thing to understand about the treaty is that
it actually does not change substantive law with regard to people’s rights. It
is merely a conflicts of law regime where it is just pointing to which
jurisdiction’s laws are going to govern a particular dispute. It is seen
generally, certainly by our members—and we have a large number of the
international banks and others—that it is very desirable to have one set of
principles governing the settlement of disputes around the world.
The committee considers that in the interests of international
consistency and efficiency the government could explore the ratification of
this convention in accordance with the government's usual procedure.
A number of submitters provided evidence to the committee of their
concern with aspects of the proposed approach to enforcement in this reform. Ms Nicole Rich, representing the Consumer Action Law Centre, outlined the centre's misgivings:
We do not think there is any significant
deterrence built into the legislation, and we believe that that is one aspect
that could be improved. We think that sanctions are necessary for certain
obligations, including that the register should not be accessed in the first
place unless it is for an authorised purpose. That is why we think there need
to be not only sanctions but a regulator to enforce them. The only regulator we
could think of is ASIC, because that is not necessarily the role of the Privacy
Commissioner, and we certainly do not believe that the registrar should have
those kinds of functions.
You do not have to change any of the substantive content of
the bill, but you can insert provisions that allow for a regulator to take
action to enforce obligations or to sanction somebody for not complying with
their obligations. 
The Office of the Privacy Commissioner also recommends that 'the PPS Bill contain additional offence provisions' due to
concerns that the exposure draft provisions may contain legislative gaps and
may not be sufficient to deter unauthorised conduct.
The committee considers that this is another area of the draft bill
which deserves significantly more detailed consideration before the terms of
the bill are finalised. Some of the keys concerns about enforcement raised with
the committee are:
- how the government proposes to ensure that information held in
the register is not obtained for an improper purpose;
- if information is obtained for an improper purpose, how the
person engaging in the conduct will be identified and sanctioned;
- whether the proposed penalties are appropriate, sufficient and
likely to be effective;
- whether the registrar will have the power to initiate inquiries
into possible inappropriate activity;
- whether there is a gap in the proposed enforcement because
individuals and small businesses are exempt from the provisions of the Privacy
- whether the proposed reform should include requirements that can
override contractual arrangements between the parties, and if so, in what
The committee recommends that the scope and content of the enforcement
provisions of the exposure draft bill be reviewed by the Department with
particular attention to ensuring that the provisions are comprehensive and
Impact on the leasing industry – especially the position of an unregistered
The exposure bill deems that certain leases will be subject to the
provisions of the PPS reform. A "PPS lease" is explained by the
Department as follows:
A lease or bailment of tangible property, where the lessor or
bailor regularly engages in the business of leasing or bailing tangible
property, for a term of more than one year, an indefinite term, a term of less
than one year that is renewable or a term of up to one year where the lessee or
bailee retains possession after one year. Where tangible property may or must
be described by a serial number, a PPS lease need only be for a term of 90
days, a term of less than 90 days that is renewable or a term of less than 90
days where the lessee or bailee retains possession for at least 90 days.
In relation to the definition of a PPS lease, Mr Turner believes that
the exposure draft is 'replete with unnecessary definitions and long and
complex provisions that rather than simplify and clarify add unnecessarily to
its complexity and introduce confusion' and outlines his reasons for
identifying this as one of those provisions.
The committee received evidence that the provisions of the bill in
relation to leasing will have a significant effect on the industry. One
particular issue that attracted attention from witnesses relates to proposed
sections 233 and 234 of the exposure draft and especially their effect on the
priority of a lessor with an unperfected security interest. These sections are
lengthy but relevant as they have the effect of significantly changing the
existing rights of a lessor seeking to recover in situations of the insolvency
of the grantor. Ms Flannery helped explain the effect of the draft provisions
and the proposed change to existing law:
I will just give you an example. I am a lessor of
manufacturing equipment. I lease it to my colleague Karen for a term of two
years but I fail to register it. As the law currently stands today, when Karen became bankrupt, I would just take my equipment back because I own that equipment. I
would take it and lease it to someone else. If the PPS regime is introduced, my
lease will be a PPS lease and I will have to register it.
Even though under general law at the moment I have an asset
of $40 million that I can take back because I have legal title to it, I will
not be able to take it back if I have forgotten to register. I will have to
claim for what I am owed, because section 234 says I can claim that, but I will
only get what every other unsecured creditor gets.
Despite the significance of the change in the position of a lessor with
an unperfected security interest, evidence from leasing industry representatives
strongly supports the proposed reform. Mr Bills, Associate Director of the Australian
Finance Conference (AFC), who for the purpose of giving evidence also
represented the Australian Equipment Lessors Association and the Australian
Fleet Lessors Association, observed that the big advantages of the reform are
that members will be able to put all of their assets on one register rather
than on separate registers or being unable to register certain property at all,
and that the reform establishes clear and transparent priority rules, which
will address uncertainties in the current law.
Mr Bills's evidence is that the AFC members are not troubled by the
proposed new requirement to register a lease in order to obtain perfection of
the security interest:
I know one situation in New Zealand that related to [property]. It was a situation where the person did not stick
the [property] on the register. It seemed pretty clear to us. We did not really
know why this had gone to court. It seemed to be crystal clear. If it has not
been stuck on the register, you have not got a security interest in that asset.
I think that was what the court decided. Most commentators in New Zealand were not surprised at all with the result. It was quite appropriate that that
should occur that way.
In relation to the effect of the law in other jurisdictions, the AFC's Legal and Market Consultant, Mr Stephen Edwards, observed:
Talking to others who have watched
the implementation of this kind of law across the globe, each country seems to
have one or two leasing or title retention cases quite early in the piece where
a lessor or a supplier ends up losing out because they have not registered.
That gets the message across. In fact, a number of the discussions we have had
with the Attorney-General’s Department over time have been about making sure
that, as far as possible, business is well educated about this bill.
One other aspect of detail relevant to leases was raised with the
committee by Clayton Utz in relation to the loss of priority of a lessor,
bailor or consignor. Clayton Utz agrees that it is appropriate for a competing
perfected security interest in a lease, bailment or consignment to defeat an
unperfected interest, but essentially argues that any value remaining after the
perfected interest has been satisfied should be returned to the party with the
unperfected interest (the lessor) rather than it becoming an asset available to
all unsecured creditors.
The committee recommends that consideration be given to improving the
priority of an unperfected lessor as against unsecured or other unperfected
interests in the goods.
The basic approach taken by the Department is, in the main, to treat intellectual
property in the same way as other property. In the Department's view:
...when it comes to the rules about the creation of security
interests in intellectual property, we would be looking to harmonise that
consistent with our functional approach of saying, ‘Why is intellectual
property different from other forms of property? If this rule works for
everything else, then it should work for intellectual property. Why should the
rule for intellectual property be any different?’ That is the approach we have
been taking, and no significant case has been made for saying intellectual
property warrants a special rule in terms of creating security interests. But
there are a couple of special rules, I can indicate. We have acknowledged the
need for a couple of special rules for intellectual property.
The evidence the committee received which addressed issues in relation
to intellectual property was somewhat sketchy. Little evidence was received
from intellectual property organisations and representatives in Australia, and two submissions were received from international representative bodies based
in the United States.
In relation to the views of Australian stakeholders the Department
advised the committee that:
The answer to what do Australian stakeholders think about the
bill is that initially there was a fair amount of ‘If it’s not broke, don’t fix
it,’ amongst the intellectual property community. We have met with them and
talked to them, and I think they now see that the bill can deliver benefits for
them. The committee has before it a submission—I think it is No. 32—from the
intellectual property committee of the business law section of the Law Council
of Australia, in which they say:
The committee is in general
agreement with the legislation and its objectives. It applauds the attempt at
harmonisation of law on the subject.
A few issues were raised with the committee by Australian organisations
about the proposed intellectual property provisions, but these were limited and
primarily quite technical concerns.
Despite the relatively sanguine view of Australian organisations, the
exposure bill attracted international concern from two industry representative
organisations based in the United States. In particular, the committee received
a detailed submission, and heard evidence, from one of the organisations based
in the United States – the International Film and Television Alliance (IFTA).
IFTA was keen to ensure that features of existing intellectual property
arrangements for secured lending do not negatively impact on Australian and international
secured lending for intellectual property that would jeopardise film industry.
The Department advised the committee that in relation to international conflict
of laws provisions, it agreed with IFTA that 'the territorial level is the
basis on which the legislation should proceed.'
The Department also stated that it has considered all of the submissions made
to it directly and all of the submissions received by the committee.
The committee has not had time to analyse the merits of the proposed intellectual
property provisions and the concerns raised about the effect of the provisions in
detail. The committee is reassured by the Intellectual Property Committee's untroubled
view of the exposure draft approach. Given the recommended extension of time
for the implementation of the reform, the committee encourages the government
to remain open to considering any concerns raised with it about these proposed
sections. The committee also emphasises the importance of appropriate education
about the bill in general and the intended effect of the intellectual property
provisions in particular. Such education could include information in the
explanatory memorandum and material targeted at relevant international
industries and organisations, such as IFTA.
The committee recommends that the explanatory memorandum and the proposed
education campaign adequately explain the purpose and effect of the draft
intellectual property provisions, including disseminating the information to
appropriately targeted international industries, organisations and stakeholders.
The exposure bill introduces a concept that is not widely known in
Australian personal property secured lending. The new concept is that of a
'chattel paper'. The concept of 'chattel paper' is known in the United States' PPS legislation and the purpose of including these provisions in the bill is
apparently an attempt to create stimulus for a 'chattel paper' industry in Australia.
The Department describes a chattel paper as follows:
Chattel paper is one or more writings that show the existence
of both a monetary obligation and a security interest in or lease of specified
tangible property or a security interest in intellectual property or an
intellectual property licence. It does not include a negotiable instrument, an
investment instrument, and investment entitlement or a document of title. An
example of chattel paper is a hire-purchase agreement.
It was the view of some submitters that these provisions are unnecessary
and it would assist to simplify the bill if these provisions were removed. For example:
So you have a competing issue as to whether, under this
legislation, you register the chattel paper before you send off the
receivables. Also, you have to assign transfers if you have to register
transfers of receivables. It just creates complexity which is not needed. I
would submit respectfully that in this market we do not have a chattel paper
financing market, and that is one example where we have introduced that into
this legislation and it is just not needed.
Other evidence was given that it is considered unlikely that the
provisions will achieve the intended result of generating an Australian
industry in chattel papers, but that in the main the provisions are harmless:
I do not think it would necessarily have the beneficial
impacts that the draftspeople expected it to have in the sense of fostering
more of a chattel paper industry, but I do not think there is any harm in
leaving it in there.
Still other evidence to the committee was that these provisions are
From speaking to a number of people in the finance industry,
I think there are some distinct advantages—including the chattel paper
concept—in the bill. There may, for example, be some reasonable argument that
to perfect a security interest in chattel paper you may not need to take
physical possession of it or you may not need to have control of it in the way
that the bill currently contemplates. I think the proposed bill provisions will
work and will work effectively, and they are closely modelled on the provisions
that exist overseas. But, having said that, it is not a part of the bill that
is indispensable in terms of whether or not the reform process goes forward.
As noted above, the committee is of the view that the draft bill should
be simplified as much as possible, one aspect of which could be to remove these
provisions. The committee considers that if the government is minded to follow Professor Duggan's suggestion to primarily adopt one of the international models then the
Australian chattel paper provisions should not be added to the chosen
international model. However, if the exposure draft model is retained the
committee considers that the Department should reconsider the importance of
these provisions and remove them if they are not essential to the reform.
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