Master Builders Australia

Second Submission to the Attorney-General’s

Department

on

The Personal Property Securities Act Review -

Personal Property Securities Act 2009

25 July 2014

© Master Builders Australia Limited 2014.

Master Builders Australia Limited

ABN 68 137 130 182

Level 1, 16 Bentham Street (PO Box 7170), YARRALUMLA ACT 2600

T: +61 2 6202 8888, F: +61 2 6202 8877, e nqui ri es @m as terbui lde rs.c om .au, www.mas te rbui lde rs .c om .au

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C O N T E N T S

1 Introduction ................................................................................................................... . 2

2 Purpose of Submission ................................................................................................. . 2

3 Background................................................................................................................... . 3

4 Focus Group Feedback................................................................................................. . 4

5 Specific Provisions of the PPSA..................................................................................... 5

6 Conclusion .................................................................................................................. . 10

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1 Introduction1.1 This submission is made on behalf of Master Builders Australia Ltd and on

behalf of the Australian Chamber of Commerce and Industry (ACCI). Master

Builders represents ACCI on forums relating to the Personal Property

Securities Act, 2009 (Cth) (PPSA) and makes this submission as a result of

the appointment by ACCI to the relevant consultative bodies.

1.2 Master Builders Australia is the nation’s peak building and construction

industry association which was federated on a national basis in 1890. Master

Builders Australia’s members are the Master Builder state and territory

Associations. Over 124 years the movement has grown to over 32,000

businesses nationwide, including the top 100 construction companies. Master

Builders is the only industry association that represents all three sectors,

residential, commercial and engineering construction.

1.3 The building and construction industry is a major driver of the Australian

economy and makes a major contribution to the generation of wealth and the

welfare of the community, particularly through the provision of shelter. At the

same time, the wellbeing of the building and construction industry is closely

linked to the general state of the domestic economy.

2 Purpose of Submission2.1 On 4 April 2014, the Attorney-General announced a review of the Personal

Property Securities Act 2009 (PPSA).

2.2 On 6 June 2014 Master Builders provided an initial submission on the PPSA

and its effect on small business (Initial Submission). We also indicated in that

submission Master Builders would be holding a workshop on the PPSA on 2

July 2014 with its National Contracts Advisory Committee (NCAC) led by

external counsel. That workshop was held and matters set out in this

submission were aired at that time. The main conclusion from that workshop

was:

Most participants in the industry (with the exception of suppliers which

regularly provide credit to their customers and the large national principal

contractors) either are ‘blissfully’ unaware of the PPSA (being a significant

proportion of these participants) or have heard of it but find it far too

complex to understand and therefore,

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do not wish to have anything to do with it (or for the more

thoughtful participants, upon making inquiry find it far too costly to obtain

proper advice and implement proper systems). These participants usually

only become interested (if at all) in the PPSA on the occurrence of an

insolvency event.

The large volume of registrations required to protect each and every security

interest in every building contract and subcontract is considered to be a

structural issue that needs a great deal of further investigation.

2.3 We now provide this second submission on relevant issues under the PPSA,

focusing on matters of concern to the building and construction industry but also,

we submit, of concern to the wider business community. Master Builders has not

attempted a section-by-section analysis of the PPSA – for that level of detail see

the work cited at paragraph 3.3 of this submission. At the level of detail, we have

considered four issues which we submit are a priority for reform. We have also

suggested further measures to obtain structured stakeholder feedback.

3 Background

3.1 Master Builders is concerned that the PPSA is now entrenched in Australia’s

legal system. Ideally, the legislation would be repealed, a necessary

implication from some of the comments in our Initial Submission and from

feedback we receive from members who are, in large part, not well versed in

the intricacies of the PPSA per the quotation at paragraph 2.2. However

Master Builders recognises the commercial reality that there would be more

immediate difficulties rather than problems overcome if repeal were to occur.

We are mindful of the fact that the PPSA has replaced over 70 different

Commonwealth, State and Territory statutes, and over 40 different registers.1

3.2 Having said that, there is a view that elements of the PPSA should be

completely re-thought, especially in relation to PPS leases, discussed below.

It is clear that the PPSA was established to enhance access to finance credit

and to do so on the basis of the establishment of a register of secured

property that would be easy to utilise. The distance from this simple aim to

the actual impact on business is large. The wider the idea of property that

may be the subject of a security interest, the greater is the likelihood that

1 Attorney-General’s Department ‘Review of the Law of Personal Property Securities: Discussion

Paper 1 – Registration and Search Issues’ (Nov 2006)

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credit will be able to be obtained in the context of a relevant transaction. In

contrast, where security interests are identified as arising from situations

where registration is highly problematic for our members (and this is

exemplified in In the matter of Maiden Civil (P&E) Pty Limited et all)2 then the

extension of the PPSA does not have the positive effect that its introduction

sought to facilitate. This dichotomy is the essential tension that leads to some

of the problematic outcomes for small business in particular.

3.3 Master Builders also refers the Review to Chapter 17 of the work by Duggan

& Brown entitled “Australian Personal Properties Security Law”.3 In that

chapter is contained a schedule of policy and drafting issues that the authors

have outlined showing problem areas with the PPSA. We note that this list

extends from page 361 to page 364 of the work. A detailed examination of all

of the matters set out in Chapter 17 would be worthwhile. The extent of the

problems identified is indicative of the large number of problems that business

has confronted in the application of this new law.

4 Focus Group Feedback4.1 To the extent that there are implementation issues (rather than the conceptual

flaws which underline the initial reaction about repeal set out above at

paragraph 3.1), Master Builders proposes that focus groups of users of the

system be convened by the Attorney-General’s Department and/or the

Australian Financial Security Authority (AFSA) with a view to obtaining direct

industry feedback on the following questions:

As descriptions of collateral have led to real identification issues (see the

Hastie Group decision discussed at paragraph 5.4 and following of the

Initial Submission), is the free text box concept for the better description of

collateral working and if not, what solutions in the on-line application

process might overcome the deficiency?

How might the on-line application process otherwise be changed so that it

becomes much more user friendly?

2 [ 201 3 ] N S W S C 8 5 2 3 LexisNexis Butterworths 2012

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How might the ‘clutter’ on the register be reduced through time?

This process would directly inform terms of reference (b) and (e) that is

getting direct feedback about the level of awareness and understanding of the

PPSA and finding out how the Personal Property Securities Register (PPSR)

might be appropriately simplified.

4.2 Master Builders considers that the Review should recommend that a

discussion paper, informed by feedback from in particular small business

proprietors, together with the outcome of the focus group(s) mentioned at

paragraph 4.1, would enable stakeholders to better focus on reform priorities.

In other words, in shaping any reform, further stakeholder feedback should be

obtained and the results canvassed in an accessible document that clearly

sets out the direction of any reform. The requirement, set out in the terms of

reference, that priority actions should be referred to the Attorney-General and

to the Parliamentary Secretary to the Prime Minister by the Review could be

incorporated into a discussion paper for further stakeholder feedback before

enactment of any changes.

5 Specific Provisions of the PPSA

5 . 1 E x c l us i on of F i x t u r es

5.1.1 Section 8(1)(j) makes it clear that the PPSA does not apply to “an

interest in a fixture.” The exclusion raises a number of practical

problems, particularly the required degree of affixation say during

the course of construction. Master Builders notes that taking a

security interest in a chattel that becomes a fixture is problematic as

the security interest is lost on affixation. If a fixture is incapable of

being collateral and a security interest cannot be registered, it has

been argued that the proceeds of t r an s f o r m ed property is something

in which the security interest inures and that s32 could be invoked

to attach the security interest to the proceeds. We believe that

argument to be wrong. We believe Wells4 is correct:

4 P Wells “Personal Property Securities: Possibilities, Problems and Peculiarities (2008) 1 Journal of theAustralasian Law Teachers Association 335

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A reservation of title clause is unlikely to be effective as against a

mortgagee’s claim once the property subject to that clause has been

affixed to real estate. The position will not be improved by registration of

the supplier’s security interest (perfection) as it is the nature of the

property, rather than the priority of competing claims, that is important in

determining the rights of creditors to the property.5

5.1.2 On balance, however, we favour the extension of the PPSA to

fixtures for the reasons outlined by Duggan and Brown6. In

addition, the provisions of s92 would assist to ensure that recovery

of an affixed chattel did not damage the structure.

5.1.3 Master Builders recommends that an alternative approach to the

current exclusion would be to vest in the proceeds of the fixture (on

sale of the structure) a priority payment to those whose security

interest was in the goods affixed. In essence Master Builders is

supportive of an amendment along the lines suggested by Toomey7

that an appropriate amendment to deal with the problem of fixtures

is to incorporate a provision in the PPSA which gives a security

interest in chattels that is perfected before or at the time when the

goods become fixtures priority over a claim to the chattels made by

a person with an interest in land. Hence, the security interest would

attach both before and after the goods have been affixed.

5 . 2 N on - U n i q ue S e r i al N u m b e r s

5.2.1 Members have discovered that their plant has appeared as

incorrectly encumbered under the PPSR, because certain

manufacturers do not use unique identification numbers for their

“vehicles” which may include heavy equipment used in construction.

5.2.2 Under the PPSR, collateral must be identified by a serial number

where it is a ‘motor vehicle’ (previously defined as anything capable

of moving at 10km per hour or designed to be towed at that speed

or from 1 July 2014 which has a motor with a power output of more

5 Id at p33966 Above note 3 of para 3.747 E Toomey “It’s not yours, it’s mine! The security interest holder, the mortgagee, and fixtures – a powerful cocktail” [2010] OtaLawRw 8

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than 200w and is capable of moving at 10km per hour).8 This

definition includes construction plant. The serial number to be

entered is either the vehicle identification number, chassis number

or manufacturer’s number. These vehicle identification, chassis and

manufacturer’s numbers must ‘appear … to uniquely identify the

vehicle’.9 However, certain plant manufacturers do not use unique

identification numbers, which means that plant is sometimes

incorrectly registered as encumbered (or is misinterpreted as being

encumbered). For example, one manufacturer only uses unique

identification numbers within each model, but not across models,

which means that duplication is possible.

5.2.3 Obviously, this potential for confusion on the PPSR as to whether

members’ plant is encumbered directly affects their ability to gain

finance. However, the PPSR does permit descriptions to be

included (in addition to a manufacturer’s number) or alternatively for

a model code to be included in the manufacturer’s number field

which may result in a unique description for the purposes of registration. 

Accordingly, the PPSR does allow plant to be uniquely identified, even

where it does not have a unique serial number. However, there is still the

possibility that searches for security interests against plant may disclose

misleading registrations, due to the fact that the searching party may only

use an abbreviated serial number (without a model code) as is envisaged

and permitted, for example, by s44.

5.2.4 A solution would be to r e q u i r e model data to be entered in addition

to serial numbers when registering heavy vehicles, such as plant.

This would mean that any search using duplicate serial numbers

would appropriately distinguish between vehicles. Alternatively, the

provisions  of s44 should be re-examined with a view to modifying

the requirement of the secured party losing the security interest

where a serial number is not included.

8 PPSA, s10 (Dictionary), s153(1) (table, item 4); Personal Properties Securities Regulations 2010 (Cth), r 1.7, Schedule 1, item 2.29 Personal Properties Securities Regulations 2010 (Cth), r1.6

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5 . 3 C ons i de r a t i on o f H a v i ng R e t en t i on o f T i t l e E x c l u d ed fr om t he PPS A

5.3.1 Under a Romalpa clause, title to the goods is retained by the

seller/supplier until payment of the purchase price is made. Under

the PPSA, because a Romalpa clause “secures payment” the

seller/supplier has a registerable security interest in the goods and

the recipient of the goods (who has a contractual and proprietary

interest in that personal property) becomes the grantor of that

security interest. This will be the case under the PPSA

notwithstanding how a clause in a construction contract, for

example, is drafted.

5.3.2 Given the operation of the PPSA, Master Builders notes that the

following scenario gives a contractor under most standard form

building contracts cause for concern. Aspects of the scenario link

back to the fixtures issue discussed in paragraph 5.1 of this submission. 

A supplier, pursuant to a supply contract with the contractor containing a

Romalpa clause, delivers materials to the site.  Title in the materials is

retained by the supplier, until such time as  the contractor pays the

invoice in full. The supplier has registered a security interest in respect

of those materials which protects the supplier in the event of contractor

insolvency if the materials are on site and the owner became insolvent.

5.3.3 The contractor is not entitled, under most standard form contracts,

to include such materials in a progress claim until title has passed to

the contractor. Say the contractor then pays the invoice on the last

day of the 30-day payment period and title passes to the contractor.

In the meantime, the contractor has also begun using the materials

in the works and has commenced preparing the progress claim

that includes the invoice for those materials. The contractor does not

register a security interest in the materials; it is novel that this would

be viewed as a necessary business practice.

5.3.4 The owner then goes into administration before the contractor has

submitted that progress claim (or before the owner has paid the

accepted progress claim). The materials are located on the site and

have partially been affixed to the land, therefore the administrator

claims ownership and possession of the materials and the

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contractor loses priority of its claim to the materials to the owner’s

creditors in the subsequent liquidation.

5.3.5 The owner (as grantor) had an interest in the materials which

arguably can be granted to the contractor (as secured party) to

secure payment of the progress claim (giving rise to a security interest).

Under PPSA, possession of the materials would override the contractual

claim the contractor has because this is a superior interest. In the ideal

situation, the contractor should have registered a security interest in the

materials at the time it obtained title to the materials on payment in full of

the invoice to the supplier. But this is just not common practice and in

the hurly burly of construction deadlines often not practicable.

Consideration should be given to carving out retention of title laws from

the PPSA. Master Builders’ members viewed the prior operation of the

law as satisfactory. We do not believe that this ‘carve-out’ would

otherwise damage commercial interests.

5 . 4 PP S Lease R e f o r m

5.4.1 Section 13 of the PPSA defines a PPS lease. The definition and the

idea of “deemed leases” encapsulated in the bailment of goods,

means that the provisions with regard to PPS leases have proven

problematic for the building and construction industry. Not the least

of which is the issue with s44 mentioned above where, for example,

hirers of equipment have lost their entitlement (including full

ownership) where a serial numbered good is not registered using

that serial number. This is because a search by serial number only

where, for example, a model number is registered, has not shown

the existence of the relevant security interest.

5.4.2 Master Builders has had the benefit of reading the Law Council of

Australia’s submission dated 6 June 2014 to the Review. We

endorse in particular paragraphs 25 and 26 as follows:

25. We submit that the review should consider whether

references to ‘bailment’ in section 13 should be deleted. The

preferred view is that the ‘PPS lease’ concept should be limited

to lease, rental or hiring arrangements where the lessee or

bailee pays for the use of the goods (not merely provides

‘value’, as defined). This would address concerns that,

despite

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sections 13(2)(a), 13(2)(b) and 13(3), a PPS lease might apply

to incidental bailment arrangements found in many kinds of

commercial contracts including construction, transport, storage

and maintenance agreements.

26. It is submitted that a bailment that arises as an incidental

aspect of a contract where the bailee is providing services to

the bailor and the bailor is paying for those services should not

be subject to the Act. While the better view is that this is how

the Act, as currently drafted, is intended to operate, there

has been considerable confusion about this issue which has

imposed unnecessary cost and administrative burdens on

many small businesses, where parties are in possession of

personal property, such as liquidators, refuse to give up

possession of the personal property in reliance on the

particular wording of the Act instead of the intended effect of

the Act.

5.4.3 Master Builders endorses the Law Council’s reform proposals.

Conclusion

Master Builders believes that a fundamental overhaul of the PPSA is required. Master

Builders has identified four priority areas where immediate reform should be

considered. We submit that a structured process for receiving additional stakeholder

feedback is vital before further measures are enacted.

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