Our submission highlighted the following key issues.
The concept of knowledge
The concept of knowledge is a key concept within the Bill as it is relevant to circumstances where persons may acquire collateral free of an existing security interest. Accordingly, it is important that the concept be clearly understood. The proposed Australian approach is different to that adopted in New Zealand, leaving areas of uncertainty. We submitted that it would be preferable to adopt the approach taken in New Zealand where the term is defined, for the purposes of the whole Act, as being actual knowledge, but the meaning is expanded for the purposes of specific provisions.
Impact on securitisation
As mentioned in our initial client update, the Bill captures a number of transactions which have previously not been regarded as security interests. In particular, a security interest is expressly defined to include an interest provided for by a transfer of an account or chattel paper. This would extend to various receivables which are commonly subject to securitisation transactions and accordingly the establishment of securitisation programmes may be required to comply with the Bill, notwithstanding that they do not create security interests.
Unregistered managed investment schemes
Certain types of personal property are included in the meaning of controllable property. In relation to controllable property, a security interest may be perfected by control rather than registration. Interestingly, although investment instruments (as defined) are included within the meaning of controllable property, investment instruments do not currently include interests in unregistered managed investment schemes. Accordingly, taking a security interest over such interest can only be perfected by registration (notwithstanding that it is common market practice to perfect a security interest in such assets by way of control).
Registration is not constructive notice of the existence of the security interest
Notwithstanding that the majority of security interests will be perfected by registration and further that it is possible for third parties to take an interest in the collateral free of the security interest if they do not have the requisite knowledge, registration of a security interest does not provide constructive notice to third parties of the existence of such security interest. Indeed, unless a security interest is perfected by possession or control, it would appear that there can be a significant number of circumstances whereby third parties can take an interest in the assets over which the security interest was granted without being subject to the security interest due to their lack of knowledge of the existence of the security interest. If, as a consequence of registration, third parties were deemed to have constructive notice of the existence of a security interest, the circumstances in which disputes could arise as to whether or not a third party is subject to a preexisting security interest would be reduced.
Ability to override restrictions in security agreements
There are a number of circumstances provided for by the Bill which have the practical result of allowing grantors of security interests to avoid or ignore restrictions contained in security agreements preventing dealings with the asset the subject of the agreement. The super priority of a purchase money security interest (PMSI), the ability of third parties to take personal property free of security interests if they acquire the property in the ordinary course of business of the vendor and section 116 (which creates the statutory right for the grantor of a security interest to transfer the assets the subject of the security interest without seeking the consent of the secured party) would appear to be against the interests of a secured party who has registered its security interest on the PPS register.
Broad duty on enforcement
Section 178 imposes a duty on a secured party to obtain at least market value for collateral on disposal (on enforcement) or, if the collateral does not have a market value, to obtain the best price that is reasonably obtainable at the time of the disposal having regard to the circumstances existing at that time. This duty is owed to any person with an 'interest' in the collateral concerned however it is unclear what 'interest' means.
Although this duty is similar to that already contained in section 420A of the Corporations Act, the use of the term 'interest' may result in the secured party owing duties to a broader range of persons than is currently the case.
Searching the register will not be enough
As perfection of a security interest can occur by way of possession or control, as well as by way of registration, there may be many circumstances where a security interest will not be noted on the register. Accordingly, the register will not necessarily provide a complete and reliable record of security interests over personal property, which would appear to go against one of the main objectives of the law reform.
When security interests are void
Although it is not necessary for a security interest to be registered to be valid, registration is encouraged as the failure to register can result in a loss of priority as against other secured creditors. The security interest may also be void against a liquidator, administrator or administrator of a deed of company arrangement if the grantor of the security interest is wound up, placed in administration or enters into a deed of company arrangement.
The Bill contemplates that a security interest will not be void if it is continuously perfected by registration during the period commencing five business days after the relevant security agreement is made and ending on the day that an order for administration or liquidation is made. In other words, registration is required to avoid such consequence and must occur within five business days of the making of the relevant security agreement (rather than the 45 days currently applicable to company charges under the Corporations Act). It is also a lesser period of time than was previously included in the NSW Bills of Sale legislation (prior to its repeal in 2006).
Given the unfamiliarity of secured parties with a new system, a transitional period with a gradual reduction in the time frame within which registration is required should be considered or alternatively a longer period allowed for to effect registration. Importantly, we note that at the time the Bill becomes law, no State or Territory of Australia will impose mortgage duty and, as a result, financiers should be able to attend to registration of security interests quickly.
Your PPS Navigator
To assist financiers and other parties who are granted a security interest in determining whether or not the Bill (as currently drafted) applies to their particular circumstances, we have developed a navigation tool. The tool raises questions we believe you will want to have answered, outlines the consequences flowing from the questions and directs you to the relevant provisions of the Bill which must be understood in order to ensure compliance and protection of security interests.
The PPS Navigator includes a flow chart to assist clients in understanding the main concepts and steps in the Bill (again as currently drafted) to be complied with should a party seek to enforce its security interest. We will be creating other Navigators for particular scenarios and we welcome your feedback on these tools and the scenarios where you believe a Navigator would be of assistance to you.
As the legislation is finalised, we will be providing further client updates to assist you in understanding this significant law reform and work through those issues necessary to ensure that your procedures and documentation are consistent with the new way of thinking which will result from the adoption of the Bill. Contact details for each member of our PPS team are provided for you below. If you have any questions in relation to PPS, please contact the nominated person in the office most convenient to you.
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This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.