DIFA SUBMISSION: REVIEW OF THE PERSONAL PROPERTIES SECURITIES ACT - GENERAL ISSUES

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1 25 July 2014 PPSA Review Secretariat Commercial and Administrative Law Branch Attorney-General s Department 3-5 National Circuit BARTON ACT 2600 By to ppsareview@ag.gov.au Attention: Mr Bruce Whittaker Dear Mr Whittaker DIFA SUBMISSION: REVIEW OF THE PERSONAL PROPERTIES SECURITIES ACT - GENERAL ISSUES The Debtor and Invoice Finance Association of Australia and New Zealand (DIFA) appreciates the opportunity to make this further submission to the Review of the Personal Properties Securities Act (PPSA). Information about DIFA and the DIFA member list were included in our submission dated 10 June in relation to PPSA small business issues. Attachment A is a Table of General Issues and Proposed Solutions which draws on the experiences of DIFA Members and their clients under the Personal Property Securities Regime. As with our earlier submission, our proposed solutions are aimed at improving the efficiency and effectiveness of the Regime for all users. Many of the issues raised in the Table A affect all secured parties and grantors, while some focus on the particular concerns of debtor financiers. As highlighted in the Table, the majority of the concerns of DIFA members (and by implication their clients and potential clients) centre around the drafting and practical implications of Section 64. We believe that Section 64 is not currently achieving its full potential and that this may be able to be remedied by legislative amendment and, in some cases by changes to the functionality of the Register, without prejudicing other users of the Register. If you would like to discuss this submission please contact me on or by to catherine@afc.asn.au. Yours sincerely, Catherine Shand AFC Corporate Lawyer

2 ATTACHMENT A PERSONAL PROPERTY SECURITIES ACT STATUTORY REVIEW GENERAL SUBMISSION 25 JULY 2014 TABLE OF GENERAL ISSUES AND SOLUTIONS PROPOSED BY THE DEBTOR AND INVOICE FINANCE ASSOCIATION NOTES: In the following Table, references to Section 64 are to the non-purchase money security interest in accounts provisions in Section 64 of the PPSA. Some of the Section 64 issues that were identified in the DIFA small business submission dated 10 June 2014 are repeated here for completeness. Issue Issue and Example/Case Study Proposed Solution/s 1. CONCEPTS / DEFINITIONS 1.1 Section 64 - Drafting and interpretation As a general comment, many aspects of section 64 are unclear and problematic. In particular, section 64 (1) (b) is difficult to understand. DIFA members took legal advice from various sources both before and after the commencement of the PPSA and there is still uncertainty in the industry about the interpretation of Section 64. There is an increasing number of disputes between receivables financiers, insolvency practitioners and legal advisers about Section 64. Uncertainty about the application of Section 64 is not a desirable outcome for receivables financiers, their clients, other financiers or insolvency practitioners. We suggest that a significant revision of Section 64 should be a priority outcome of the statutory review of the PPSA. Specific concerns are detailed below. 1.2 Section 64 - Attachment Section 64(1) (b) states that the non-pmsi holder must hold the security interest when notice is given but attachment cannot occur until the notice period has expired. This is illogical. Amend section 64 to address this issue. 1.3 Section business day notice requirement There is a technical problem with Section 64 based on the wording - a security interest in accounts cannot be registered until the 15 business day period has expired. It is proposed that Section 64 be amended to allow a non-purchase money security interest over an account to be registered at any time, but that it not have 1

3 Receivables financiers and their clients do not want to delay perfection for 15 business days so far as the PMSI holder is concerned, whilst having perfection by registration so far as other later suppliers are concerned. The current wording means that a receivables financier may be at risk from new PMSIs that are registered during the notice period. Some financiers do not fund until the full notice period has expired and until they have done a further search at the end of the notice period to see if any new PMSIs have been registered, in which case they give a fresh Section 64 notice to that new PMSI holder and may risk their priority if they fund against that PMSI holder s supplies before a further 15 business days have passed. This is a major issue for some financiers and can result in delays in for businesses obtaining finance. priority against existing PMSI security interest holders until the 15 business days (or any shorter period as per the following point) has expired. Any new PMSI holder will be able to find the receivable s financier s registered interest by searching the register. This would protect receivables financiers against new PMSI registrations during the notice period without removing the protection for existing PMSI holders. 1.4 Section business day notice requirement The notice period for section 64 notices was originally 5 business days which worked well with the 20 business day period under the Corporations Act to perfect the security interest, however when the section 64 notice period moved out to 15 business days, the 20 business day rule remained. This is a very short period to complete registrations and ensure they are complaint with all guidelines in the Act. The section 64 notice period should be reduced to 10 business days, or the registration period increased to 30 business days. The preferred course is to change section 64 so that a registration against accounts can be made and become effective at any time and will achieve priority from that date (subject in the case of prior PMSI holders to the notice requirements). The general rule will then apply and, under the Corporations Act, registration must be completed within 20 business days of the factoring or invoice discounting agreement commencing. 1.5 Section 64 - Drafting error There is an error in the drafting of Section 64 (1) (b). The Section 64 (1) (b) should be amended by removing the 2

4 secured party which not yet be holding a priority interest when it gives the notice. word holding in the first line and replacing it with which will hold. 1.6 Section 64 - Priority limited to PMSIs 1.7 Section 64 - On-hire of equipment 1.8 Section 81 - Rights on transfer of account or chattel paper If a supplier has an all moneys retention of title clause, its security interest may only be a PMSI to a limited extent which means that the receivable financier only achieves priority over that part of the security that is a PMSI. If equipment is on-hired, section 64 can be ineffective due to the reference in section 64(1) to same grantor. A receivables financier s client may lease/hire goods and the debt (i.e. lease/hiring charge) is purchased. The client may have leased the goods from another financier; that financier may have a PMSI in the goods and may claim the debt as proceeds. The goods are inventory as they have been leased. That is addressed by serving a notice under section 64 on the lease financier so that the receivables financier obtains priority over the debt. But if there is an interposed entity, section 64 cannot be used because the grantor of the PMSI and the client (transferor of the debt) are not the same, due to the reference to the same grantor. Clause 1.9 of the Regulations does not solve the problem. Due to the current drafting of Section 81, it can only be used to override a prohibition on assignment if the prohibition clause restricts or prohibits the transfer of an account or chattel paper for currency due or to become due. Currency means notes and coins. If the contract is silent in this regard and section 81 is applied literally then it is probably effective. However if the contract states a method of payment that is It is suggested that Section 64 priority should apply to the entire security interest of the prior PMSI holder. The same grantor requirement should be modified or removed. This should be reviewed to provide more clarity or an improved description of the term currency. See comments below on the definition of currency. It is suggested that the word currency be replaced with the word payment. 3

5 anything other than currency then section 81 is not effective. 1.9 Definition of currency The word currency was substituted for money during drafting of the PPSA, introducing ambiguity. See, for example, s 81(1) (b) which refers to currency due, when the usual commercial expression is money due Chattel paper This concept is of doubtful relevance to the Australian market. It adds unnecessary complexity and uncertainty to the PPSA Sections 84, 85 and 86 - proceeds For receivables financiers, the overlap between the chattel paper and account concepts and the fact that section 71 prevails over section 64 gives rise to uncertainties. The current wording of these sections makes it difficult for the primary producers of grain and livestock to obtain receivables finance over the proceeds of sale of their produce due to the priority given to the proceeds of crops and livestock. This is explained in more detail below Section 85 Grain Section 85 applies so that a perfected security interest granted in relation to a debt which enabled the crop to be produced will have first priority over any other security interest that is granted in the same crop or proceeds. Currency should be defined to include all forms of payment as money not a medium of exchange ; or should be left undefined. It is suggested that either 1. The concept of chattel paper be removed from the PPSA; or 2. Chattel paper be restricted to arrangements where it is demonstrated to be of relevance in the Australian finance market. In particular an invoice or similar document which evidences a sale on retention of title terms should not constitute chattel paper. These provisions should be amended to allow priority for receivables financiers so that primary producers can obtain receivables finance for the proceeds of crops and livestock. The proceeds of crops include grain, therefore a security interest as described above when perfected and lodged within specified time frames will prevail over ANY security interests in crops and the proceeds. Section 64 will not prevail. A receivables financier is also at risk of a subsequent security 4

6 interest gaining automatic priority over accounts. This makes it almost impossible to achieve gain an acceptable security position Section 86 Livestock Section 86 of the Act applies so that a perfected security interest granted in relation to debt which enabled the livestock to be fed or developed will have first priority over any other security interest except a PMSI, that is granted in the same livestock or proceeds. Livestock extends beyond live animals and includes carcasses. Proceeds includes meat or wool, therefore a security interest described above when perfected and lodged within specified time frames will prevail over all security interests in crops and the proceeds unless the security interest is a PMSI. Section64 will not prevail and there is a risk of a subsequent security interest gaining automatic priority over accounts. As with crops, it is extremely difficult to gain an acceptable security position for a receivable financier Sections 85 and 86 - Discrepancy It is not clear why the words (other than a purchase money security interest) appear in Section 86. They mean that a PMSI over livestock maintains its priority under Section 86 whereas a PMSI over crops loses priority under Section 85. The Explanatory Memorandum for Section 86 states, without further explanation, that: 3.7 A similar rule would be established for livestock, but whereas the crop PMSIs would have priority over other PMSIs, the priority interests in livestock would not have priority over PMSIs (clause 86). It would be more efficient for the financiers of crops and livestock (both general financiers and receivables financiers) if these provisions were consistent. These sections should be consistent unless there is a clear reason for the different treatment of livestock and crop PMSIs. 5

7 1.15 Section Time for responding to a request 1.16 Section Obtaining information about prior registrations Section 277 stipulates a compliance period of 10 business days for responses to requests under Section 275 for information about security interests. This is considered too long when a receivables financier (or potentially any other financier such as an equipment financier) trying to understand registrations prior to providing specialist funding to a new client. This issue is related to that of multiple registrations and clutter on the Register caused by unnecessary multiple registrations by some financiers and failure by many financiers to remove registrations in respect of discharged security interests. If there were fewer and more comprehensible registrations, the process of a new financier investigating existing registrations would be simpler and quicker. This would greatly advantage business trying to obtain additional finance from alternative sources (eg receivables finance) to their general financier. A related issue is the difficulty in interpreting many registrations, which gives rise to the need to go through the formal Section 275 process. Many grantors do not understand the nature of the registrations against them, so a new financier has to go through the Section 275 process if it cannot get clarification from the current secured party(ies). Often a grantor does not wish to alert an existing financier that they are seeking finance elsewhere, nor does an alternative financier want to give current financiers the opportunity to discourage the client from obtaining alternative finance. This is of particular concern to small and specialist financiers (such as receivables and equipment The section 277 notice period should be reduced to 5 business days. The Register should contain more information about the underlying security interest, perhaps by requiring the secured party to lodge a copy of its security agreement, as was the case with charges registered on the ASIC company charges register. 6

8 financiers) who are competing with the major lenders for business. In some cases, the debtor or grantor may need to formally authorise or request the secured party to provide the information under Section 275(7), for example if there is a confidentiality agreement in place Turnover trusts A typical subordination deed and some other arrangements include a turnover trust. For example, a person (eg a shareholder) may provide a loan to the grantor which is subordinated. So far as a financier is concerned the loan will, for most purposes, be considered to be equity. The person agrees that the loan cannot be repaid while the financier s facility is on foot and if it is repaid the repayment is held on trust for the financier. That trust is a turnover trust and should be registered on the PPSR. A similar issue can arise under a guarantee and a deed of priority. Turnover trusts should not be deemed to be a security interest for the purposes of the PPSA and should be excluded from the definition of a security interest. A turnover trust is not a traditional security interest, but is probably a security interest which should be registered to be enforceable against a liquidator. There is no evidence that disclosure on a public register is required to achieve a public policy objective and it is an unnecessary burden to register these security interests. Further it is not commercially appropriate for a security interest to be registered against a lender merely because the lender has agreed to subordinate its interest. If a turnover trust is a security interest that could have repercussions for negative pledge covenants binding on the lender. The entitlement to repayment of the debt can be determined by the general law. 7

9 2. REGISTER / REGISTRATION 2.1 Register - Section 64 - contacting PMSI holders 2.2 Register - Section 64 - notice to PMSI holders It can be difficult for a receivables financier to contact prior security holders. It is also very labour intensive to extract and document the data required for the giving of section 64 notices. It has been reported that 1-2 staff members are sometimes engaged in preparing section 64 notices. This adds to the delay and expense for the clients of receivables financiers. Section 64 requires notice to be given to prior PMSI holders in order to obtain priority over them. It would be expected that a receivables financier could rely on a grantor search to ascertain who these secured parties are, based on whether a search shows that any security interests are PMSIs. However, if a secured party has omitted to mark the PMSI field in their registration, this does not change the underlying nature of the security as a PMSI (whether or not the PMSI holder has complied with the requirements to obtain super PMSI priority), but the receivables financier may not know to give them a Section 64 notice. The receivables financier s position in such a case is unclear. To address this issue, we understand that some receivables financiers give a Section 64 notice to all those with a security interest against the grantor in case they are PMSIs, which may confuse non-pmsi secured parties and result in delays to settling the facility. It may also unnecessarily alert prior secured parties to the proposed receivables finance facility. The Register should have functionality to allow an intending financier to issue a section 64 notice to PMSI holders via the Register contact details. Another option would be for the Register to provide an extract of all the fields required for giving of notice in a mail merge format to an intending financier. Section 64 should be amended to address this issue. In the meantime, AFSA could issue guidance alerting financiers to this issue We agree with this statement and in particular we advise that it has come to our attention that there are fraud risks related to the current release process. In releasing a security interest from the register staff do not need to log in to the PPSR system with the passwords and codes allocated to them, they only need to enter onto the screen that allows releases and apply the SPG and access code. If releases are processed in this fashion we have no way to determine who has processed the release. We request that a change to the register be made so that it is a requirement that you must log into the register using secret codes allocated before a release can be processed so that audit records can be maintained to mitigate fraud risk. 8

10 2.2 Register - Section 64 A person searching the Register does not know that Section 64 applies to a security interest (except a prior PMSI holder who has received a Section 64 notice from a receivables financier). This is of concern in insolvency situations where an external controller, receiver or administrator is not aware of the application of Section 64 to a particular security. A receivables financier should be able to note on the Register that Section 64 applies to its security interest and the Register should disclose this on a search of the grantor. 2.3 Register - Change of name of secured party or Secured Party Group 2.4 Register - Change of address for service - giving of notice identifier (GONI) It is unclear if a change of (i) a secured party s name and (ii) a secured party group on the PPSR is a registration event and if the Registrar has the necessary power under the PPSA to issue a single Verification Statement where the change of name is the result of a bulk transfer of security interests between secured parties. If these changes are registration events and a secured party changes the details for whatever reason (e.g. acquisition of a loan book from another financier), that secured party may need to issue a Notice of Verification to each grantor as a result of the change. NB: In the case of a legal assignment of the debt, the grantor would have been required to consent to transfer of debt and/or security in any event and should therefore be aware of the proposed registration event. The need to split a single summary verification statement into individual verification statements has been described by one member as a nightmare. It is unclear if a change of a secured party s address recorded on the PPSR as the address for service is a registration event or if the Registrar has the necessary authority under the PPSA to issue a single Verification Statement. Where a change of secured parties and secured party groups is the result of bulk transfer of (say 100 or more) security interests between secured parties, these transfers should not be considered a registration event for the purposes of Section 157. The PPS Registrar should be authorised to issue a single Verification Statement in lieu of all secured parties involved in the transfer issuing individual notices of verification statements to each grantor affected by the change. Change of address should not be a registration event for the purposes of s157 of the PPSA. 9

11 If it is a registration event and a secured party changes its address for service for whatever reason (e.g. acquisition of a loan book from another financier), a secured party may need to issue a Notice of Verification to each grantor as a result of the change. 2.6 Register - Removal of expired registrations 2.8 Register - Reporting functionality 2.9 Register - Removal of registrations The process for providing a release and undertaking to amend a registration at settlement is not working as would have been envisaged under the Act. In many instances secured parties are not removing the registration from the PPSR as contemplated by the release document. Members have commented that the threat of a report to AFSA about failure to remove a registration usually has no effect. The comment has also been made that most of the major short term hirers of equipment have lodged PMSIs in similar form against any entity that may have applied for credit with them. Because many small businesses pay scant attention to registrations against them, many dormant registrations exist against these entities from hiring companies that they have done no business with ever or for a lengthy period of time. The PPSR reporting functions could be improved. A DIFA member experienced an instance where a registration was removed. They ascertained internally that they did not release the security interest so contacted the PPSR for an explanation, they did not respond or provide any explanation as to why it was deleted and simply reinstated it. As the There should be some requirement for secured parties to review their registrations and remove dormant ones (with the consent of the client) where there is little or no likelihood of any credit being requested or required. In other words, the PPSA should provide stricter provisions about the removal of expired registrations, so that it more fully reflects its intended role as a notice board of security interests. It could also assist if the Act mandated that the registration token be provided in addition to a release document at the time of settlement. The report fields should be enhanced to include information about a GONI, Grantor Name ABN and ACN. The register should maintain a record of historical registrations as was held by ASIC. For efficiency this should be a separate report within the search output, ideally a current section and a satisfied section including the date and time of 10

12 Register is live and does not leave any visible trail it is concerning that data can be removed without our acknowledgement or control. A secured party should therefore retain searches to provide evidence that a registration was undertaken in case this issue arises again. release. 2.9 Register -Fraudulent removal of registrations A related concern is about fraud risks with the current release process. In releasing a security interest from the register, staff do not need to log in to the PPSR system with the passwords and codes allocated to them, they only need to enter onto the screen that allows releases and apply the SPG and access code. If releases are processed in this fashion there is no way to determine who has processed the release. It is suggested that a change be made to the Register so that it is a requirement that a user must log in using secret codes allocated before a release can be processed, so that audit records can be maintained of who processes a release in order to mitigate the fraud risk. We will also raise this matter through the AFSA PPS Operations Forum. 3. MISCELLANEOUS 3.1 Priorities Financiers providing sale and lease back finance (or equivalent) should realise that it is no longer appropriate for a receivables financier release its security interest over the relevant collateral. Instead the security interest should be subordinated. AFSA or industry bodies could issue guidance and a short form subordination document. *** *** *** *** *** 11