Australia: Personal Property Securities - Proposals for Reform

Last Updated: 5 July 2006
Article by Randal Dennings and Graeme Howatson

Most Read Contributor in Australia, November 2017

Key Point

  • Reform of Australian personal property securities is back on the agenda. We discuss the new proposals.

Personal property securities are securities which may be given over many different classes of property, except land. Statute law has long recognised some forms of security (for example, bills of sale), while others, such as security over water rights, are a recent creation.

Because personal property securities are governed by the laws of the States and Territories, there are often inconsistencies between jurisdictions regarding the types of property over which security can be taken, or the method of creation and registration of a particular type of security. As a result, since at the least the early 1970s, there have been proposals for law reform. Few of these proposals have been successful. The Standing Committee of Attorneys-General again raised the issue of reform in April 2006, by producing an options paper, Review of the law on Personal Property Securities. In this article, we summarise some of the paper's main points.

Why is reform necessary?

The options paper lists a number of reasons for reform. Some of these reasons are:

  • A business operating in a competitive economy should be able to efficiently offer all its property as security for raising debt capital. Currently, credit providers are discouraged from accepting some classes of property as security because the existing laws provide different levels of protection for different classes.
  • Credit providers currently have to comply with the different laws in each State and Territory. This unnecessary compliance burden also increases costs for the parties to a securities transaction.
  • The USA, Canada and New Zealand have already reformed their personal property security laws so that it is possible to register any transaction that is a securities transaction, regardless of the form of collateral being offered as security. This reform also eliminates separate systems of registration for different types of collateral.

What reform is proposed?

A personal property security regime should make it possible to register a security over tangible and intangible property of any kind (other than land), regardless of where in Australia the property is located, and whether it is owned by an individual or a company. Intangible property includes (for example) a chose in action and intellectual property. The regime should also allow for the registration of any security interest where the security provider has the use of the collateral while its legal ownership is held by the security-holder.

Generally speaking, the priority rules that give a registered security priority over an unregistered security and a registered security priority over a later registered security work well. Any exclusions from the regime should be clearly identified in the legislation and could include:

  • Liens: It would be onerous to require registration as a condition for achieving priority for securities that arise by operation of law because the security-holder may not be aware that they have a security that should be registered. Accordingly, the regime could give priority to unregistered liens over registered securities.
  • Floating charges: One option for dealing with floating charges is to allow the parties to agree that the security will attach to particular property, including after acquired property, at a specified time in the future (such as on the occurrence of a certain event). Also, it is suggested that when an advance is provided to facilitate the "purchase" by a chargor of particular assets, a fixed charge over those assets should have priority over a general floating charge.

Features of the proposed regime

The transfer of collateral from one person to another would not affect a registered security. On the other hand, the transfer of collateral for value would extinguish an unregistered security if the transferee did not have notice of the security. The transfer of collateral without value would not affect an unregistered security.

Consumers should be able to acquire low value property (property acquired at market value for less than $2,000) free of any security interest over that property.

Only a security-holder with priority over all other secured parties could take possession of and sell the collateral. The sale of the collateral extinguishes any other security interest over it, and the purchaser acquires the collateral free of any of those interests. The seller must apply the proceeds of the sale to their own debt, and any surplus would go to other security-holders in the order of their priority, and then to the security provider.

The regime should allow, but not require, registration. The incentive for security-holders to register is the gaining of priority over other security-holders, but apart from possible loss of priority, no consequences would flow from a failure to register. The registration of a security lapses after five years, but could be renewed. In relation to the discharge of securities, two alternatives are suggested. A security-holder who registers a security should be obliged to either:

  • register every discharge of security; or
  • register every discharge of security taken in the course of a consumer transaction and, for other transactions, give the owner of the collateral the right to require the security-holder to register a notice of discharge.

Rather than requiring the lodgement of the security instrument, an alternative would be to require the lodgement of only the information to be included in the register. Those who needed access to the security instrument would have a right to obtain a copy from the security-holder. There could be a requirement that serial numbers or registration numbers be supplied when certain consumer goods, such as motor vehicles and high value consumer products, are registered. A person who searched the register by using the relevant number and acquired the goods for value without notice of the security acquires them free of any security interest registered without including the relevant serial or registration number.

There may be inconsistency between the personal property security regime and the Consumer Credit Code. One option would be for the Code to prevail in the event of any inconsistency.

A major transitional issue is the capture of existing securities data, with the options including transferring the data in the existing registers to the new register, or requiring existing security-holders to re-register their securities.

Personal Property Securities Seminars

In conjunction with the release of the options papers, the Commonwealth Attorney-General's Department conducted seminars in the mainland State capital cities. Speakers at the Brisbane seminar included the Attorney-General, the Honourable Philip Ruddock, Federal Court Justice Collier and banking representatives. All speakers agreed that it was time for reform. It was suggested that reform could be implemented either by the passing of a Commonwealth law or by the method used to enact the Consumer Credit Code (a model law passed by one State and adopted by the other States and Territories).

What's next?

Submissions on the paper closed on 2 June 2006 and will be considered by the Standing Committee of Attorneys-General when deciding:

  • whether or not reform should take place; and
  • if reform is to take place, how personal property securities law should be reformed.

Clayton Utz has made a number of submissions on the options paper for clients. A key recommendation included in the submissions is that if the reforms do proceed, a lengthily transitional period is desirable to allow users of the register sufficient time to adapt to the new regime.

Although submissions have closed, a copy of the options paper can still be obtained from the Attorney-General's website.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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