- Changes to personal property securities law will affect the way businesses, small and large, operate.
The exposure draft of the Personal Property Securities Bill 2008 (PPS Bill) was referred to the Senate Standing Committee on Legal and Constitutional Affairs this week. This brings the proposed wide-ranging reforms of personal property securities law a significant step closer to implementation, which will have an impact on the way businesses, small and large, operate.
A primary aim of the PPS Bill is to introduce one national system to regulate the registration of security interests over any property other than real property. The reform is non-political. The current federal government, as was the previous Liberal government, is fond of noting that the new legislation will replace over 70 separate federal, state and territory registration regimes with one online system. It truly will decrease red tape.
It is not possible to introduce a registration scheme for personal property securities in isolation. The legislation must include, at a minimum, rules to determine priority between competing security interests, whether registered or not. However, the Bill (as in the case of legislation in other jurisdictions that have adopted this model) goes much further and reforms many business and legal practices. The legislation:
- Regulates not only charges and mortgages but also certain leases of personal property, transfers of accounts receivable (and other debts), title retention arrangements and other arrangements securing the performance of obligations, all of which fall within the broad umbrella of "security interests".
- Prescribes the manner in which security interests will be validly created.
- Sets out priority regimes applicable as between security interests and between security interests and other types of interests (such as ownership interests).
- Introduces a new enforcement regime, which is largely optional.
An aim of the legislation, in addition to replacing the myriad of existing registration regimes, is to promote certainty in dealings with personal property, replacing the existing law which is often complex and based on outdated rules. While not often highlighted, this should be applauded. For example, the Corporations Act regime, which many believe regulates all personal property security interests granted by companies, does not do so. That regime regulates only a subset of those interests. Where a security interest is not covered by the Corporations Act its priority is determined under the general law. The new regime will regulate all security interests granted by companies.
To take another example, the arcane rules of "tacking", which apply either at general law or by statute to determine when a security interest has priority in respect of obligations incurred after the security interest is created, will be abolished. Instead, the rule will be that a security interest that has priority will have priority for all obligations secured, whenever these arise. This is a clear and logical rule, easily applied.
The new exposure draft takes into account numerous stakeholder comments. To take only a few examples:
- The rules applying to personal property leases, including circumstances in which registration is required, have been modified.
- Concerns regarding regulation of transfers of "accounts" (covering accounts receivable and a range of other monetary obligations) have been addressed by enlarging the exclusions from the definition of "accounts". Unperfected transfers of accounts which do not secure the payment or performance of an obligation will also now not be void on the insolvency of the transferor.
- The provisions for perfecting security interests over "investment instruments" (shares and the like) have been expanded and clarified.
This does not mean that the exposure draft is without fault. The decision to exclude the rules determining the law to apply to a security interest (the governing law provisions) is an error. Though there may not have been general consensus as to what the rules should be, this does not mean that attempts to simplify these should have been abandoned. There are also various provisions where the Bill will, if adopted in its present form, lead to greater confusion rather than certainty. An example is section 235 which provides that all rights under a security agreement must be exercised in a "commercially reasonable manner". As this provision will not apply to consumer credit transactions, there is a question of how it could ever be "commercially unreasonable" to exercise rights clearly granted pursuant to a contract. Such provisions invite costly litigation.
It is hoped that the Senate Committee acts wisely to listen to industry stakeholders and the legal profession and incorporates amendments that facilitate simplifying the complex set of rules that currently govern personal property security interests in Australia.
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