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Review of the Personal Property Securities Act 2009

Consultation Response Template

Consultation Paper 3

Instructions:

Please use the form below to provide feedback with respect to the proposed recommendations and issues listed in each section of the form. Please refer and respond to the proposed recommendation or issue as set out in Consultation Paper 3. The heading and paragraph number of the relevant sections of the consultation paper are included to help guide you.

Please note your agreement or disagreement with the proposed recommendation by deleting either ‘Yes’ or ‘No’ where indicated. Comments can be provided in the box below each proposition. There is no word limit for comments but succinct responses clearly setting out the reasons for agreement or disagreement with the proposed recommendation will be of most use for the purposes of the review.

You may respond to as many or as few propositions as you wish.

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Name: Allens, Ashurst, Herbert Smith Freehills, King & Wood Mallesons and Norton Rose Fulbright Australia Organisation: Background/Expertise/Interest in PPSA Review: We are large Australian law firms which each have significant corporate financing and insolvency practices. Since the inception of the reform process which introduced the Personal Property Securities Act 2009 (Cth) (“PPSA”) and the Personal Property Securities Regulations 2010 (Cth) (“PPS Regs”), we have seen them operate in practice in a wide variety of transactions and have advised a wide variety of business clients on them. We regularly undertake registrations and searches on the Personal Property Securities Register (“PPSR”). Members of our firms have published numerous articles and contributed chapters to various books in connection with PPSA. We lecture on the PPSA at universities and regularly speak at industry conferences in Australia. Contact Details: Helena Busljeta T +61 2 9296 2541 | M +61 438 640 493 helena.busljeta@au.kwm.com

2.2.1 Should Chapter 4 be mandatory, where it applies?

In what circumstances, if any, should the Chapter 4 enforcement mechanisms be mandatory? Comments: Our understanding is that Chapter 4 provides a set of "backup rules" which a secured party can use if it wishes, we believe that this is how the Act was intended and how it should continue to operate. The long standing position that parties to a security agreement are free to negotiate the terms of their arrangements, subject to limited specific regulation in situations considered appropriate (e.g. National Credit Code) and established common law and equitable legal principles, should not be departed from. This was the overarching intention of Chapter 4 when introduced: see e.g. cl 4.1 of the of the Replacement Explanatory Memorandum which states "The Bill would not codify the rights, duties and obligations of the parties to a security agreement as the parties should be free to negotiate their own contractual terms, subject to the provisions of the Consumer Credit Code (the Code), to the extent that it is able to operate concurrently" and cl 4.6 of the Replacement Explanatory Memorandum which states "The enforcement provisions would not diminish the rights and remedies available to parties, whether those remedies are provided for by the security agreement, any Commonwealth or State and/or Territory law and/or any rule of law or equity (clause 110)…". That approach is consistent with sections 18(1), 110, 114, 119 and 254. To make all of the provisions of Chapter 4 where it applies mandatory would we think complicate rather than simplify the enforcement of security interests, significantly limit the rights of parties to reach agreed contractual arrangements about enforcement and increase the regulatory burden on secured parties. Chapter 4 sets out requirements which are quite rigid. There does not appear to be any pressing policy need for increasing the regulation of secured parties, or for limiting the methods of enforcement available for secured parties. The PPSA should be easily adaptable to changes in the

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2.2.1 Should Chapter 4 be mandatory, where it applies?

market and the way security is taken and enforced. The Act is designed to facilitate commerce by making it easier for parties to use security over assets as a basis for obtaining finance. Therefore it should facilitate the taking and operation of security rather than restrict it. The PPSA should give flexibility to the manner in which security interests operate to allow for changes and developments in market and legal practice. It would be inconsistent to regulate enforcement by secured parties, but not by the receivers they appoint. We are not sure that the New Zealand enforcement provisions in the PPSA are mandatory as suggested in the paper, see Thorn v RFD Ltd (2012) PPSR 700-010, [2012] NZHC 1959.

2.2.2 The meaning of "default" Proposed recommendation 3.2: That the Act be amended by replacing references to "default by the debtor" (or similar) with "default" or "default under the security agreement", and that the term "default" be defined in s 10 along the lines of the corresponding definition in the NZ PPSA. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

2.2.3 Section 109(1)(b) - incidental security interests Should s 109(1)(b) be retained? If so, why? Comments: Yes, this provision might be useful: e.g. where a trust which operates as an in substance security interest is created over the proceeds of a transferred account, to back up the transfer.

2.2.4 Section 109(2) - property located outside Australia Proposed recommendation 3.4: That s 109(2) be deleted.

Do you agree with the proposed recommendation? See below Comments: Whether such a provision is required depends on whether or not Chapter 4 or any part of it is mandatory. We suggest that if any part is mandatory that it should be possible to contract out of any provision in Chapter 4 in relation to property of any nature situated outside Australia whether or not it is listed in s115. Such property may already be subject to other regimes.

2.2.5 Section 109(3) - investment instruments and intermediated securities Is s 109(3) too wide, too narrow, or both? How should it be amended? Comments: We agree with the observations in the paper. The wording of s 109(3) should be amended so that it captures all forms of market-traded collateral.

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2.2.6 Section 109(5) - personal, domestic or household collateral Is s 109(5) necessary? Comments: No. We see no reason why the full suite of powers available under Chapter 4 should not be available for personal, domestic or household collateral. Where consumer protection is necessary, it is provided under different statutes.

2.2.7 Section 111 - exercise rights under Chapter 4 Should s 111 also apply to rights duties and obligations under a security agreement or at law generally, in addition to those under Chapter 4? Comments: We do not believe that s 111 should be extended to rights under security agreements or at law generally. A secured party should be entitled to enforce all or any of its rights in accordance with the terms of the security (and subject to well recognised/established legal principles). Extending s 111 in the way proposed would not be consistent with, and would go much further than, other legislative regulation on the exercise of rights under securities: eg. s420A Corporations Act and the general law duties of good faith and like. See also our comments on 2.2.1. If however, Chapter 4 is to be mandatory it would be necessary to reconsider whether s 111 should be included.

2.2.8 Section 115 - contracting out - when should the "use" be determined, and how? Proposed recommendation 3.8: That the words "is not used" in line 2 of s 115(1) be replaced with "the grantor does not intend, at the time it entered into the security agreement, to use". Do you agree with the proposed recommendation? Comments: The intention of the grantor has a subjective rather than objective element. Whatever approach is taken, it must specify criteria which enables certainty to be established at the time of entering into the security agreement.

2.2.8 Section 115 - contracting out - the expression "contract out" Proposed recommendation 3.9: That s 115(1) be amended by replacing "may contract out of" in s 115(1) with "may agree that a party need not comply with", and that a corresponding amendment also be made to s 115(7). Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper. As stated in our submission of 25 July 2014, if the grantor is able to contract out, then all parties claiming through the grantor (including transferees of the collateral) should be affected by that contracting out.

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2.2.8 Section 115 - contracting out - Section 115(1)(q) - the right of redemption Should parties be allowed to contract out of the grantor’s right to redeem collateral under s 115(1)(q)? Comments: Yes. The general law provides for the protection of the equity of redemption, and there is no need for s 115(1)(q) to be amended.

2.2.9.1 The meaning of the section Proposed recommendation 3.11: That s 116 be amended to set out the principles described in Section 2.2.9.1 more clearly and succinctly. Do you agree with the proposed recommendation? Yes Comments: We agree that it would be helpful but not essential for the drafting of s 116 to be amended to make clearer the principles laid out in the consultation paper. We think that the section has the desired effect as currently drafted, but it is difficult to follow.

2.2.9.2 Are the exclusions appropriate? Is the current exclusion of corporate receivers from Chapter 4 appropriate? Comments: Yes. We consider the current exclusion appropriate. As is noted in the paper, the receivership of property of a corporation in Australia is regulated by the Corporations Act. Receivership and management needs to be a flexible process under which the receiver manager is appointed to be in charge of the business and assets of the grantor and step fully into the grantor's shoes. It would be difficult to carry on a receivership under the rigidities of Chapter 4. That may ultimately be destructive of the grantor's business, the value of its assets, and stakeholders like employees. We consider that, as a general observation, this process, which is common in the enforcement of securities granted by companies, works well.

2.2.10 Section 112(3) - licences Proposed recommendation 3.13: That s 112(3) be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

2.3.1 Terminology Proposed recommendation 3.14: That the headings to ss 120 and 121 be amended to refer to security interests in "certain payment obligations" (or a similar expression), rather than to security interests in "liquid assets". Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

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2.3.2 Collateral to which the sections apply Would it be appropriate to expand ss 120 and 121 to apply to some other types of payment obligations as well, or to payment obligations generally? Should the Act simply permit a secured party to exercise any of a grantor's rights in relation to any collateral that is subject to the security interest? Comments: We agree with the comments made in the paper. We cannot see any reason for restricting s 120 to payments owing on accounts, chattel paper and negotiable instruments only. The secured party should be permitted to exercise any of the rights of the grantor in relation to the collateral.

2.3.3 Should the availability of the remedy be tightened? Should s 120 be improved to mitigate its impact on obligors? If so, how? Comments: No. A secured party should be entitled to enforce its security immediately on default, including by recovering receivables by notice to the grantor's debtors if those receivables form part of the secured collateral. (Compare the position with the debtor receiving a notice of assignment from the assignee, who would be obliged to recognise the title of a valid assignee on receiving notice of the assignment.) We suggest that this may be the one provision in the PPSA where the five business day period is too long, rather than too short. Why should an account debtor get five days grace of payment simply because it needs to pay it to another party? We suggest that the five business day period be removed.

2.3.4 Effect of the five business day period in s 120(3) Proposed recommendation 3.17: That s 120(3) be amended to read as set out in Section 2.3.4. Do you agree with the proposed recommendation? Yes Comments: If the five business day period is to be retained (see above), yes, for the reasons stated in the paper. However, we suggest that the five business day period be removed (see above).

2.3.5 Sections 120(4) and (5) - the application of amounts collected Proposed recommendation 3.18: That s 120(4) be deleted, and that s 120(5) be amended to require that all amounts recovered under s 120 be applied in accordance with s 140. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

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2.4.1 Sections 123(2) and (3) - seizing intangible property - licences (a) Should ss 123(2) and (3) be amended to apply to all personal property other than goods? (b) Is there a reason for singling out licences under ss 123(2) and (3)? Comments: Re (a): We do not see why it should be necessary for a secured party to first seize an intangible before exercising enforcement rights, such as a power of sale: e.g. see s 128, and ss 138A, 138B and 138C, which we submit should grant a power of sale on default without suggestion that seizure is a pre-condition. See also our comments in relation to 2.5.1.1. Apart from exercising a power of sale, the only relevance of seizure as a concept is for the retention of collateral under s 134. We suggest that it should be unnecessary to introduce an artificial concept of "seizure" in relation to intangible collateral which is not capable of possession, merely so that they can be "retained" under the current drafting of s 134. The net effect of the proposal is simply that a secured party would need to give two notices to the grantor, one to "seize" the collateral, and another, which could be immediately after, to retain it. We suggest that seizure be removed as a requirement in s 134, at least in relation to personal property other than goods. Re (b): It is not clear to us why licences are singled out under ss 123(2) and (3).

2.4.2 Section 124 - security interests that are perfected by possession or control Should s 124(2)(b) be amended or deleted? Comments: See our comments at 2.4.1 that seizure should not be required to exercise another enforcement right. For similar reasons to those stated in relation to 2.4.1 we consider that, if a secured party wishes to seize collateral, notice to the grantor is all that should be required for the secured party to seize collateral when the secured party already has possession or control of the collateral.

2.4.3 Accessions Proposed recommendation 3.21: That the Act be amended to provide that a secured party with a security interest in an accession can remove that accession when enforcing its security interest. Do you agree with the proposed recommendation? Yes Comments: We agree that the Act should be amended to clarify this for the reasons stated in the paper.

2.4.4 Section 126 - disposal of collateral from the grantor's premises Should s 126(2) refer to "reasonably required by" rather than "necessarily incidental to"? Comments: Yes, for the reasons stated in the paper. The “necessarily incidental” test is a harsh one, particularly by comparison with other tests which relate to reasonableness.

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2.4.5.1 Priority agreements Should s 127 clarify that a higher ranking secured party can still be bound by an agreement to allow enforcement by a junior secured party? Comments: Yes, we consider that it would be useful to clarify this. As stated in our submission of 25 July 2014, the provisions for seizure by higher ranking parties should not be limited to security interests – if another party with a prior claim to a secured party is entitled to possession of the property they should be able to take it.

2.4.5.2 Competitions with non-security interests Should the Act be amended to resolve who can control enforcement procedures as between a security interest and an encumbrance which is not a security interest but which is superior? Comments: No. We agree with the comment in the paper to the effect that it would be very difficult to create a comprehensive scheme able to address all the possible scenarios. This matter should be left to the general law.

2.4.5.3 Section 127(4) - the hand-over period Where a senior secured party gives notice to a junior secured party that it proposes to take over enforcement proceedings under s 127, the junior secured party has five business days to hand over the collateral. Is this appropriate? Comments: If the collateral is immediately deliverable, and the higher ranking secured party is entitled to it, then it should be immediately delivered. The junior secured party should be obliged to "hand over" on demand in these circumstances, i.e. the period which is necessary in a mechanical sense for the junior creditor to do what is necessary to "hand over". In most cases, this should be able to be done well within 5 days and should be done as soon as it can be effected. There is no reason why a lower ranking secured party should have any longer grace period in delivering possession than the grantor.

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2.4.5.4 Section 127(6) - recovery of costs Should s 127(6) be deleted? Comments: Yes, for the reasons stated in our earlier submissions. A higher priority party should not be obliged to pay costs incurred by a lower ranking party: such a rule seems to give a blank cheque to a lower ranking party. There are no tests in relation to the incurring of costs by the lower ranking party, and they could be incurred in a way that would not have been incurred had the higher priority party acted, and may have been incurred before the higher priority party knew that action had been taken. The pre-PPSA rules should apply, namely that a lower ranking security holder should take its chances. If it thinks the seizure would justify the costs and be able to pay out the higher ranking creditors, then it could do so. If not, it wears the risk that there is insufficient money to pay its costs and the higher ranking party.

This provision significantly tilts the balance in favour of lower ranking secured parties. As stated in our submission of 25 July 2014, if s127(6) is deleted, s127(9) will no longer be required. If s127(6) is retained, we repeat the comments in our submission.

2.5.1.1 Section 128(1) - need for seizure? Should a secured party be able to dispose of collateral without seizing it first? Comments: Yes, whilst in many cases the secured party will wish to take possession of the collateral in order to dispose of it, it should not be required to do so in order to sell the collateral. It may be that control and possession is not necessary for sale: it might be sold “as is, where is”, or the secured party may have sufficient possession or control to be able to sell the asset without having sufficient control or possession to have perfected the security interest. There may be circumstances in which the secured party may not wish to control or possess the collateral, for example, because of the risk of incurring liability as a result.

2.5.1.2 Section 128(2) - method of disposal Should a lease or licence of collateral be characterised as a "disposal"? No Comments: A lease or a licence is not a disposal and should not be characterised as such. If there is any need for an express power under the PPSA to lease or licence property, then it should be clear and in addition to the right to dispose.

2.5.1.3 Section 128(3) - timing of disposal Is there a need for s 128(3)? No Comments: We see no need for s 128(3), particularly given our view expressed above in relation to 2.5.1.2. A lease or licence is not a disposal.

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2.5.2.1 Restrictions on the right Is s 129(3)(b) useful, or should it be deleted? Comments: We consider, given the matters outlined in the paper, that s 129(3)(b) is unnecessary as other provisions provide sufficient regulation.

2.5.2.2 Notice of objection Is the objection procedure set out in s 130(1) necessary, given the protections available in s 129(3)? Comments: We consider, given the matters outlined in the paper, that the procedure in s 130(1) is unnecessary. At general law, a mortgagee or chargee exercising power of sale is not subject to an objection regime. Removing the objection procedure will more closely align the right of disposal under the PPSA with that position.

2.5.3.1 Section 130(1) - notice to the debtor Proposed recommendation 3.32: That s 130(1) be amended to require the secured party to also provide the notice contemplated by that section to the debtor. Do you agree with the proposed recommendation? No Comments: This would seem to be an unnecessary imposition. We don't see why the secured party should also have to give notice to the debtor. It has never been the case that a secured party holding a third party security needs to keep the debtor informed. How much is recovered from a grantor of third party security does not ultimately affect the aggregate liability of the debtor, as the debtor will be liable by way of indemnity to the grantor, and liable for the balance to the secured party. Further, it would be quite common for the secured party to be pursuing its remedies against the debtor at the same time as it is pursuing them against the grantor or even before doing so. The secured party does not need to pursue or exhaust remedies against the collateral before pursuing the debtor. In other jurisdictions the requirements to notify the debtor is explicable by the fact that "debtor" refers to both the grantor and the debtor of the secured liabilities.

2.5.3.2 Sections 130(1) and 144 - notice to higher-ranking secured parties Should the obligation to provide notice of intention to dispose of collateral to higher ranking secured parties in s 130(1) be included in s144 as an obligation of which a secured party is relieved where it is not able to ascertain the status or existence of the higher ranking secured party? Comments: We agree that notice should only have to be given to higher ranking secured parties as they appear on the register or who, to the knowledge of the secured party, hold security interests that are perfected by control or possession.

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2.5.3.3 Section 130(2) - the contents of the notice Section 130(2) appears to require notices to specify the amount that will be owing on a particular day. This is not always ascertainable in advance especially where the collateral secures amounts owing under a derivative, where an interest rate fluctuates or where the collateral secures an overdraft facility. How might the section accommodate this? Comments: We do not take the view that s 130(2) in referring to "an amount is paid" should be interpreted as requiring the specification of the exact dollar and cents amount. Rather, an approach similar to that taken in Bunbury Foods Pty Limited v National Bank of Australasia Limited (1994) 153 CLR 491 should apply: see e.g. also AGC (Advances) Ltd v Tweed Canal Estates Pty Ltd (1988) 4 BPR 9404 at 9406. The purpose of such a provision should be to identify the debt rather than the quantum: see Fisher & Lightwood's Law of Mortgage 3rd Australian Ed.2014 at [20.15] in relation to notices of exercise of power of sale given under real property legislation (e.g. s 57 of the Real Property Act 1900 (NSW) which requires the notice to identify the 'default' and require it to be remedied or in the case of money, pay the money in respect of which the payment default has occurred). Decisions on such provisions indicate that it is not necessary to state the exact amount of the debt provided that the recipient is not misled and the notice affords the recipient the opportunity to remedy the default: see the commentary in Croft The Mortgagee's Power of Sale 3rd ed. Lexis Nexis Butterworths 2013 at 33-36.

2.5.3.4 Section 130(5) - exclusions Proposed recommendation 3.35: That s 130(5)(b) be deleted, and that s 130(5)(c) be amended to reflect the above discussion. Do you agree with the proposed recommendation? No to the suggestion

that s 130(5)(b) be deleted, yes to the amendments suggested to s 130(5)(c)

Comments: Section 130(5)(b) has similarity to s 441C, Corporations Act. Accordingly, we suggest that as it may serve a useful purpose in some cases, it should be retained.

2.5.4.1 Section 132(1) - timing of the statements Should the obligation in s 132(1) apply only when all the collateral has been disposed of? Comments: Yes, for the reasons specified in the paper. Section 132(1) may be burdensome if the sale is being conducted in many lots over a period of time. Its purpose would be served if an account was required to be given at the end of the enforcement period when all assets have been disposed of.

2.5.4.2 Section 132(3) - content of the statements Should the content of a statement of account provided under s 132(3) be limited to reporting what has been received or incurred to date, rather than requiring the secured party to make forward projections of amounts that are likely to be received in the future? Comments: We agree it should be limited to what has been received or incurred to date.

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2.5.4.2 Section 132(3) - content of the statements We repeat the comments we made on ss132(5) and (6) in our submission of 25 July 2014.

2.6.1 Section 135(1) - notice requirements Section 134 allows a secured party to retain collateral in satisfaction of the obligations secured, however the notice which must be given to other secured parties differs depending on whether they hold a PMSI or other security interest. It would be simpler if s 135(1) just required the retaining secured party to give the notice to each secured party with a registration that describes the collateral. Would this change be worthwhile? Comments: Yes, the legislation should be simplified so that the relevant secured party gives notice to any other secured party who has registered an interest against that collateral.

2.6.2 Section 135(3)(b) - statement of amount secured Section 135(2) requires the notice to state what the amount secured will be 10 business days after the notice is given. In certain circumstances this may not be possible to ascertain as described in relation to 2.5.3.3 above. How could this be dealt with? Comments: See our comments in relation to 2.5.3.3.

2.6.3 Sections 136 and 141 Proposed recommendation 3.40: That ss 136 and 141 be amended to accommodate the fact that title to the collateral may be with the secured party, rather than the grantor. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

2.6.4 Sections 137 and 138 - notice of objection Proposed recommendation 3.41: That ss 137 and 138 be amended to reflect s 61 of the Sask PPSA. Do you agree with the proposed recommendation? See below Comments: We query if the Canadian position is much of an improvement. The existing objection procedure favours the grantor over other parties but it has the advantage of being a black and white rule. The Sask PPSA appears to favour the secured party by creating a rule which is more grey. By only allowing persons who may be adversely affected to object, this means there will be debate over whether this is the case. We don’t think this will speed up the process. It is also unlikely that a secured party will feel confident proceeding to retain collateral if it has received an objection notice. Further, the Sask provisions require the secured party to give notice of the proposal to retain to a wider range of interested parties than our PPSA. In addition to the debtor and holders of lower ranking perfected security interests, notice has to be given to “any other person with an interest in the collateral who has given a written notice to the secured party of that interest prior to the day on which the notice is given to the debtor”. It follows that the Sask PPSA needs to limit the right to object to those persons in receipt of the notice whose interest would be adversely affected. We don’t think it is necessary to align our provision with the Sask approach. However, the ability for a secured party to challenge an objection in court would be a useful change.

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2.7.1.1 Terminology Proposed recommendation 3.42: That s 140 be amended as described in Section 2.7.1.1. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

2.7.1.2 Section 140(2) - interplay with s 133 (a) Should s 133 be amended to provide that the buyer takes the collateral free of higher-ranking security interest? No (b) Should the Act take the Canadian approach, and not require a junior-ranking secured party to use its recoveries to pay out the senior-ranking secured parties first? No (c) Should we just accept the potential incongruity between ss 133 and 140 and leave the provisions in their current form? Yes Comments: We suggest that s 133 be amended to make clear that it applies not only when a secured party is exercising its power of sale under s 128, but also where it or a receiver is exercising any power of sale under the security agreement or at general law. Otherwise, s 32 may inhibit the exercise of those powers. Particularly in the case of non-traditional security interests, eg a finance lease, it should be confirmed that the rules which apply have been applied on enforcement of traditional security interests (such as an equitable mortgage) allowing the senior secured creditor to dispose of the collateral free of junior security interests, with the latter then becoming (in effect) security interests over the proceeds of disposal of the collateral, rather than over the collateral itself. See St George Bank Ltd v Perpetual Nominees Ltd [2011] Qd R 389. In all other respects we suggest that the section be left in its current form. If amounts received by a higher ranking secured party under s 140 are sufficient to discharge the higher ranking security interest, then it will disappear. If they are not, then it will continue securing the balance. That seems to us to be an appropriate outcome.

2.7.2 Section 142 - right to redeem collateral Proposed recommendation 3.44: That s 142 be amended as described in Section 2.7.2. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper. We suggest that the section refer not only to sales under s 128 but also to sales under any power under the security agreement or at general law.

2.7.3 Section 143 - reinstatement of security agreement Proposed recommendation 3.45: That s 143 be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper. If retained, s143 should be amended to provide that only the grantor (rather than other persons) may reinstate a security agreement. If s143 is not changed, it should be amended to provide that if the grantor has waived its rights under this section, this should also apply to everyone else.

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2.7.5 Deficiency claims Does the Act need to make clear that a secured party is entitled to pursue its debtor for any shortfall between what it is owed, and what it recovers by enforcing against the collateral? Comments: No, we consider that this should be determined by the contract between the parties. Unless there is a limited recourse provision in a loan, the second amount would be payable by the debtor even without waiting to determine whether there is a deficiency). In the case of the retention of title agreement, the contract (and sale of goods legislation) should determine what is payable before following default.

3.2 The policy behind the provisions Should ss 267 and 267A be retained? Comments: We make no submission.

3.3 Terminology - "vests in the grantor" Is the term "vests in the grantor" sufficiently clear? Would there be any benefit in amending the terminology to say that the security interest is "void" or "ineffective"? Comments: No, for the reasons stated in the paper. The effect of the language is very clear. It works well. This terminology has been readily accepted and applied by the Courts: see e.g. In the matter of Maiden Civil (P & E) Pty Ltd; Richard Albarran and Blair Alexander Pleash as receivers and managers of Maiden Civil (P & E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd [2013] NSWSC 852. It is one area in which the Australian legislation is a significant improvement on its overseas counterparts. As the paper suggests, it is particularly valuable in relation to title based security. It avoids the contortions necessary in relation to that security evident in some Canadian decisions like Re Giffen and the need to treat a lessee or other grantor of title based security as the owner.

3.4.1 PPS leases Proposed recommendation 3.49: That s 268(1)(a)(ii) be amended to read:

"(ii) a PPS lease;". Do you agree with the proposed recommendation? Comments: We would prefer that this was dealt with by amending the definition of PPS lease. If the definition of PPS lease was changed so that the threshold term was extended significantly beyond the current one year(we understand the industry is suggesting 3 years) this would alleviate the issues referred to in the paper. Of course the change should only apply prospectively.

3.4.2 Serial-numbered property Should s 267 not apply to a security interest in goods if, at the time of insolvency, there is any registration on the Register that identifies the specific goods? If so, should this be limited to serial-numbered goods? If it should be broader, how should it work? Comments: We would prefer not to address this issue in this manner. We suggest that the issue be dealt with as set out in our response to paper 2 (see the discussion on chains of leases in paragraph 5.2.2).

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3.5 Turnover trusts Proposed recommendation 3.51: That s 268(2)(c) be amended by deleting sub-paragraphs (ii) and (iv). Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper and our submission of 25 July 2014.

3.6 Deeds of company arrangement Proposed recommendation 3.52: That s 267(1)(a)(iii) be deleted, and that any necessary consequential amendments be made to the related provisions. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

3.7 Innocent purchasers Proposed recommendation 3.53: That ss 267(3) and 267(A2) be expanded to include to the bankruptcy-related events referred to in ss 267(1)(a)(iv) and (v). Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

3.8 Foreign security interests Proposed recommendation 3.54: That s 268(1)(aa) be deleted. Do you agree with the proposed recommendation? No Comments: We consider that this provision is helpful in clarifying the position given the consequences of non-registration.

4.1.2 Should s 588FL be repealed? Proposed recommendation 3.55: That s 588FL of the Corporations Act be repealed. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper. One vesting provision is enough. It is a trap for uninformed secured parties, and thus small business. It has no counterparts overseas. There is no need for a second vesting provision, or for s 588FL, other than as a homage to history.

4.1.3 If s 588FL is retained If s 588FL is retained, should the amendments discussed in Section 4.1.3 be made to it? Comments: Yes, for the reasons stated in the paper. There is no reason in principle why, if s 588FL is retained, that it should apply to a different class of security interests to those the subject of s 267 and s 267A. Accordingly, (if retained) it should also be amended to remove deemed security interests from the purview of s 588FL.

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4.1.4.1 Sections 340 to 341A of the Act - circulating assets - the concept Do you support the suggested recasting of ss 340 to 341A, as set out in Section 4.1.4.1? Yes Comments: We consider that the current drafting of Part 9.5 gives rise to significant confusion and Part 9.5 should be simplified and be re-drafted to provide clear rules that operate with certainty.

4.1.4.2 Sections 340 to 341A of the Act - circulating assets - the location of the provisions Proposed recommendation 3.58: That ss 340 to 341A, in whatever form they may ultimately take, be removed from the Act and relocated to the Corporations Act. Do you agree with the proposed recommendation? Yes Comments: Given that these provisions deal with the regulation of priority between secured creditors and statutory preferred creditors, we consider on balance that it would be convenient to have all relevant provisions together in the Corporations Act.

4.1.4.3 Detailed comments on the provisions - ADI accounts - registration to indicate control Proposed recommendation 3.59: If the Register continues to allow a person registering a financing statement to indicate whether or not the secured party may have control, that s 340(2) be amended to make it clear that an ADI that is perfected by control over an ADI account does not need to register a financing statement and indicate that it has control, in order to cause that ADI account not to be a circulating asset for the purposes of s 340. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

4.1.4.3 Detailed comments on the provisions Would s 341 be clearer and more meaningful if it were to be expressed that the secured party would have control of an account unless it is shown that the grantor's usual practice is not to deposit the proceeds into the ADI account, and that it has the express or implied consent of the secured party to this? Comments: Yes we agree that the suggested amendment would make s 341 clearer. The change should be made. As stated in our submission of 25 July 2014, we also consider that s341 should not be limited to ADI accounts; proceeds should also be able to be deposited in accounts with similar financial institutions (including foreign banks). For the purpose of this provision, whether or not the institution with whom the account is held is an ADI is irrelevant.

4.1.4.3 Detailed comments on the provisions Proposed recommendation 3.60: That ss 341(3)(d) and 341A(1)(b) be deleted. Do you agree with the proposed recommendation? Yes Comments:

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4.1.4.3 Detailed comments on the provisions Yes, for the reasons stated in the paper.

4.1.4.3 Detailed comments on the provisions Proposed recommendation 3.61: That s 341(1)(a)(i), and the corresponding reference in s 341(1)(a)(ii) to "specifically appropriated" inventory, be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper and our submission of 25 July 2014. The requirement in the current legislation that to be controlled inventory needs to be "specifically appropriated" is uncertain. Also, as a policy matter, it is an unnecessary step. For control all that should be needed is that the inventory cannot be sold without specific consent by the relevant holder of the security interest. In other words sub-paragraph (ii) is sufficient. The test as to whether a specific item of inventory is subject to control should simply be "can it be sold without the secured party's express specific consent?".

4.1.5 Compulsory acquisitions Should the Act deem the types of transactions mention in the section to be consensual so that s 50 can apply to them, or should the issue be dealt with in the Corporations Act? Comments: The Act should be amended to give the benefit of s 50 and s51 to compulsory acquisitions preferably by removing the need for a transaction to be consensual, or, if not, by expressly referring to the relevant compulsory acquisition and scheme mechanisms. In broad policy terms we see no reason why a purchaser under a compulsory sale should have less protection than the purchaser under any consensual sale. We think in fact that the use of the term "consensual" is really a requirement aimed at interests such as liens, rather than transfers and purchases. We have already discussed in our response to Paper 2 the need to limit the application of ss 50 and 51 so that they do not apply the taking free rules to security interests. We would go further. Both sections deal with consensual transactions under which any interest in person property is acquired or created. In that way they go far beyond the other taking free provisions which deal only with taking the relevant asset. They should be consistent with the other taking free rules. We think that a party which takes a share or other security under a compulsory acquisition provision (as opposed to a transfer under a scheme of arrangement) would previously have taken free of prior interests because of the operation of the compulsory acquisition provision regardless of whether it was a bona fide purchaser for value without notice. A transferee under a scheme relied on being a bona fide purchaser for value without notice. The difficulty is that that rule does not protect a purchaser in relation to legal interests, and PPSA security interests may well be legal interests. This is a significant deterioration from the previous position. A scheme needs to operate to the full ownership, and it is important to have certainty, otherwise a greenmailer can hold an acquirer to ransom by taking an security interest and then informing the acquirer of it.

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4.1.5 Compulsory acquisitions Regulation 7.1 was a "bandaid" solution inserted because at the relevant stage it was not possible to change the Act. Its operation is still not entirely clear. It disapplies the provision saying that the security interest continues. It does not , however, say that it does not continue, and there must be some question mark as to its operation given that the transactions are also excluded from the taking free provisions. The Act is now silent as to whether it does continue or does not. It could be suggested that the solution is left to the general law. In that respect it may be of more help in relation to compulsory acquisition than schemes of arrangement. There have since the introduction of the PPSA being relatively few takeovers and acquisitions or cancellation schemes of arrangement, but in them we understand that parties take a view and hope for the best. We suggest that it is important to achieve certainty, and remove all doubt, and it can be easily done.

4.1.6 Verification of claims in an insolvency proceeding Proposed recommendation 3.63: That the question referred to in Section 4.1.6 be referred to the arm of Government responsible for insolvency law reform for its consideration. Do you agree with the proposed recommendation? Yes/No Comments: We make no submission.

4.1.7 Liquidator's remuneration Proposed recommendation 3.64: That the arm of Government responsible for insolvency law reform be asked to consider the question referred to in Section 4.1.7. Do you agree with the proposed recommendation? Yes/No Comments: We make no submission.

4.2 The Shipping Registration Act 1981 Proposed recommendation 3.65: That the Shipping Registration Act 1981 be amended to allow a secured party to lodge a caveat on the Shipping Register. Do you agree with the proposed recommendation? Comments: We make no submission.

4.3 The International Interests in Mobile Equipment (Cape Town Convention)Act 2013 Are there any particular issues arising out of the Cape Town Act that need to be considered in the context of this review? Comments: Given that the Convention is not finalised, we make no submission. To the extent practicable though, it would be desirable to avoid double registration and inconsistent overlap. However, we are happy to leave this for another forum.

4.4 Other state and territory legislation Is it desirable to eliminate the uncertainty in the interplay between the Act and other taking free rules, either by way of clarification in the Act or by making appropriate amendment to the relevant state and territory legislation?

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4.4 Other state and territory legislation Comments: If any particular issue is identified, it should be addressed by a specific provision. We do not think that clarification by general language is possible or desirable. It could give rise to greater confusion.

5.1 Section 6 - the gateway to the Act Is s 6 necessary, or should the Act simply rely on the rules in Part 7.2 to determine whether the Act applies? Comments: We support retaining s6. For example, in practice, it has been very helpful to have s 6 describe a primary connecting factor to engage the application of the PPSA that the grantor is an Australian entity. It is simple and clear. If it were removed as a relevant factor, parties and their advisers would be put to a more complex analysis to determine whether a registration under the PPSA is warranted or advisable.

5.2.1 Equivalent concepts in other jurisdictions Would it be helpful to include a provision in the Act that corresponds to s 8(2) of the Sask PPSA, in relation to either or both of "attachment" and "perfection"? Comments: Yes, we consider that it would be helpful to have such a provision. However, we think that it could be improved. The difficulty with the current drafting of the Saskatchewan provision is that it requires a status under the other law for a security interest "similar to that of the equivalent security interest created and perfected pursuant to this Act". That would seem to indicate that the substance of the PPSA should be reflected in the other Act, including its priority etc. All that should be required for perfection under the other law is that the relevant security interest obtains protection in relation to priority, buyers and insolvency processes under the other law which would not have been available had the relevant step not been taken.

5.2.2 Consistency with other parts of the Act Would it be desirable to align the language used in Part 7.2 (and ss 39 and 40) with the language used in the Act more generally? Comments: Yes, it would be desirable to align the language in Part 7.2 with the balance of the Act.

5.2.3 Meaning of "effect of perfection or non-perfection" - priority rules Would it be desirable to clarify whether the meaning of "effect of perfection or non-perfection" encompasses the effect of the priority and taking free rules, even though not all those rules are determined by whether or not a security interest is perfected? Comments: Yes

5.3 Rules for enforcing a security interest Would it be desirable to provide a governing law rule in the Act for the enforcement of security interests? If so, what should the rule be? Comments:

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5.3 Rules for enforcing a security interest We are inclined to think this is not necessary. Usually a foreign right (ie to enforce) can only be invoked locally if the relief is available in the form and manner that the relevant forum provides: see Nygh's Conflict of Laws in Australia Davies LexisNexis Butterworths Ltd 2014 Ng et al 9th ed. at [16.44]

5.4 Intermediated securities Proposed recommendation 3.73: That Part 7.2 be amended to provide that questions relating to the validity, perfection and effect of perfection or non-perfection of a security interest over an intermediated security be determined by the law (other than the law relating to conflict of laws) of the jurisdiction of the intermediary, or of the jurisdiction in which the intermediary maintains the securities account. Do you agree with the proposed recommendation? Yes Comments: This is a major gap. It is better to have an interim solution rather than wait fully until the treaty position is resolved and reflected in Australia law. We consider the governing law should be the law of the jurisdiction of the intermediary.

5.5.1 Section 235(5) - individual grantors Should the Act do more to accommodate the risk for a secured party that its grantor could relocate to Australia? Comments: We repeat our earlier submission of 25 July 2014.

5.5.2 Sections 235(1) and (2)(a) - certified investment instruments, chattel paper and negotiable instruments Should s 235 have the effect that a certificated investment instrument, chattel paper or negotiable instrument is located where the document is physically located? Comments: For the reasons stated in our previous submission of 25 July 2014, this provision should be clarified so it is clear that the location of investment instruments, chattel paper and negotiable instruments evidenced by physical instruments is not affected by the location of the physical instrument.

The law relating to the location of shares and contractual rights already operates to determine “the particular jurisdiction in which the personal property is situated” (regardless of whether the relevant property is evidenced by a physical instrument or by an electronic record). Therefore, the inclusion of s235(2) appears unnecessary and raises the question as to what is intended where the relevant property is evidenced by a physical instrument.

Adding to the uncertainty is the fact that the location of the physical instrument evidencing investment instruments, chattel paper and negotiable instruments determines the governing law in a number of circumstances under the Saskatchewan, Ontario and New Zealand PPS legislation.

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5.6 Section 237 - express choice of Australian law Is s 237 appropriate? Comments: Section 237(1) is appropriate. It is in Australia’s interest, and there is no detriment, in facilitating choice of Australian law by participants in cross-border transactions. This is so even though it is true that foreign jurisdictions may sometimes decline to accept the choice as it applies to property or grantors that are within their jurisdiction. We make no submission on s237(2). However, we consider that s237 should refer throughout to the law governing “validity and the effect of perfection or non-perfection" rather than a “security interest”.

5.6 Section 237 - express choice of Australian law If s 237 is retained in the Act, are the exclusions in s 237(2) appropriately framed or should they, for example, exclude all non-tangible property from the section? Comments:

• We make no submission.

5.7.1 Section 238(2) - goods intended for another jurisdiction Does s 238(2) need to be amended? If so, how? Comments: We agree that no amendment is needed, for the reasons noted in the final paragraph of the discussion in the paper.

5.7.2 Section 238(2A) Can you explain the role of s 238(2A)? No Comments: We agree it could be deleted.

5.7.2 Section 238(2A) Proposed recommendation 3.78: That s 238(2A) be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

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5.7.3 Section 238(3) - moveable goods Proposed recommendation 3.79: That the words "(including the law relating to conflict of laws)" in s 238(3) be replaced with "(other than the law relating to conflict of laws)", and that s 238(3)(c) be deleted. Do you agree with the proposed recommendation? Yes and no Comments: We support the removal of renvoi, for the reasons stated in the paper. although perhaps the more appropriate resolution where the foreign law directs you back to Australia is to provide that Australian law then applies without regard to the PPSA rules directing you back to the foreign law. More generally, s 238(3) is a troublesome rule. It applies to goods ‘of a kind’ that are ‘normally’ used in multiple jurisdictions, even if the particular goods are not. So, for example, it would presumably apply to a security interest over shipping containers (which are usually moved around on ships) even if the particular shipping containers were being used for permanent storage in Australia and were unlikely to be moved. The rule should be modified to refer to goods that are actually normally used in more than one jurisdiction, rather by reference to kind. Alternatively, rather than have an enquiry about what is ‘normally’ done either with the specific goods or with goods of that kind generally, it may be better to delete the rule. If the rule is retained, then we would be inclined not to delete s 238(3)(c), dealing with personal, domestic or household goods. This is because it is not an easy test to apply in this context. Most personal, domestic or household goods are of a ‘kind’ that you use in a different country if you go and live overseas, but not if you don’t.

5.8 Section 239(5) - ADI accounts Proposed recommendation 3.80: That s 239(5) be deleted. Do you agree with the proposed recommendation? Yes, partially Comments: We suggest that 239(5) be amended so as only to allow a choice of Australian law.

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5.9.1 Section 240(2) Should s 240(2) be deleted? Comments: Some rationalisation of the governing laws for letters of credit would be desirable. The best starting point would be to remove them from the definition of ‘negotiable instrument’, since they are not normally negotiable. There is overlap between s 240(1) and (2), but the former might not completely encompass the latter: the definition of negotiable instrument only includes letters of credit if they are required to be presented on claiming payment, but s 240(2) refers to letters of credit required to be presented on claiming payment or performance of an obligation. It is not clear if this difference is intentional. Section 240(7) should also be considered, as it applies to negotiable instruments that are not evidenced by certificates. Letters of credit are not usually evidenced by certificates, and so if a letter of credit is a negotiable instrument, then it would seem likely to fall within s 240(7). It is not clear whether the rule in s 240(7) is really intended to prevail over the rules in s 240(1) to (5) that appear to have been drafted with letters of credit specifically in mind. In summary, while we would not particularly object to deletion of s 240(2), we think the treatment of letters of credit needs more radical surgery.

5.9.2 Section 240(3) What is the purpose of s 240(3)? Should it be deleted? Comments: We wonder whether the intent of s 240(3) and (5) could be related to ss 70 to 72, which establish rules about interests (not just security interests) in at least some of the same kinds of property, and which seem to be general rules of Australian property law rather than dependent on the location of the grantor. Perhaps the aim is that Australian law should generally apply to interests in financial property, whether security interests or not, that arise from dealings involving changes of possession or control. In any case, if 240(3) and (5) are retained, they could be more clearly expressed, particularly (as noted in the paper) the reference to attachment ‘under the law of a place in Australia’.

5.10 Section 241 - proceeds Should s 241 be amended to incorporate the Canadian model or the UNCITRAL Guide recommendations in relation to the governing law rules for proceeds? Comments: There seems to be logic in the UNCITRAL approach, but we do not express any particular preference.

5.11 Section 40(5) Can you explain s 40(5)? Should it be deleted? Comments: We are not aware of a reason for its existence, and would be content to see it deleted.

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6.1 Other provisions in the Act - Section 339 Can you explain s 339 in the Act? Should it be deleted? Yes Comments: Yes, for the reasons stated in the paper, we favour its deletion. It is not clear what the Act is trying to achieve with this section. We do not see why the Act would attempt to rewrite private instruments, blind as to the way the term is used in those instruments, or as to what the consequences may be. It is particularly awkward when an instrument is rewritten to the extent that it covers assets subject to a security interest governed by the PPSA, but not to the extent the security interest is not governed by the PPSA. In other words, the instrument is rewritten in relation to some assets but not others. Where in an old security document the term "floating charge" is used, it can be useful in indicating that the secured party had consented to disposals of floating charge assets.

6.2 Letters of credit Do you have suggestions for ways in which the Act should treat security interests over rights under letters of credit in a manner that is different to security interests over other forms of collateral? Comments: Save as set out below we do not make any specific suggestions for different treatment. Some of the existing specific references in the Act and overseas equivalents seem to centre on the importance of physical possession of the letter of credit, whereas letters of credit are now increasingly issued electronically. Generally speaking we are not sure why they need to be treated any differently from other contractual obligations.] In relation to s 29, we repeat our previous submissions as follows: It is unclear how this section deals with a negotiable instrument that is itself an instrument and is not evidenced by a certificate, for instance, a promissory note, letter of credit or a bill of exchange. Possession of that bill of exchange or promissory note should suffice. Alternatively, control could be obtained if it is endorsed in favour of the secured party.

6.3.2 The meaning of "intellectual property" Is it appropriate to define the term "intellectual property" as at present, or should it be defined in a more general way? Comments: We consider that the definition of intellectual property should stay as it is. The main function it serves is to identify intellectual property which can be registered by serial number and on this basis is appropriate.

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6.3.2 The meaning of "intellectual property" Is it appropriate for the definition of "intellectual property" to provide for "the right to be a party to proceedings" in relation to any of the types of intellectual property listed in the definition? Comments: If this right were not included in the definition, and a security agreement granted security over the right along with other intellectual property, the question would arise whether that right fell within a different class for registration purposes. Other than that, we cannot identify any particular detriment that would flow if those words were deleted from the definition. But in any case, difficulties with this kind of classification of rights should be dealt with by more fundamental simplification of the registration system.

6.3.3 Section 105 - intellectual property relating to goods Do you have any comments or suggestions in relation to s 105? Comments: We consider that this provision should be deleted. We agree with the comments in the paper to the effect that the Replacement Explanatory Memorandum example is not accurate, as it ignores the requirement that the security interest has attached to the intellectual property under an additional security interest. The section should not be amended to remove the requirement for the additional security interest. That could (depending on how it was expressed) have the effect that a secured party could obtain the licensor’s interest in intellectual property by taking security over assets of a grantor that merely has a licence to use them. For example, you could acquire rights to Microsoft’s software (and not merely to a licence of it) by taking security over a computer. The owners of intellectual property should not be in danger of having their rights acquired by the secured parties of their licensees. Nor should there be any implication that the grant of a security interest can limit the rights of a licensee to terminate the licence in accordance with its terms, on enforcement of security or otherwise. The existence of s 105 caused concerns, at least for a time, that either of the above outcomes might apply. The requirement for the separate security interest seemed to dispose of them but, perhaps fuelled by the Replacement Explanatory Memorandum, doubts about the true operation of the section remain, and these doubts could best be overcome by deletion. Section 106 could also be deleted. It says that a security interest granted by a licensee binds the transferee of a licensor, to the same extent as it bound the original licensor. As the security interest granted by the licensee wouldn’t have bound the original licensor in the first place, the section is effectively meaningless.

7.1 Location of mechanical and other supporting provisions Proposed recommendation 3.89: That the constitutional, judicial and other supporting provisions in the Act be relocated into a separate piece of supporting legislation. Do you agree with the proposed recommendation? No Comments: We consider it more convenient to have such provisions in the PPSA.

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7.2.1 Other changes relating to presentation - the use of the term "grantor" Should the term "grantor" to be changed to "debtor" to conform to overseas models? No Comments: No, now that the Act has been in place since 2009 the term should not be changed. The use of the term "debtor" to describe the party subject to the security interest is confusing, as the secured debt may be owed by a different party. The only slight niggle with the use of the word "grantor" is its connotation that the security interest arises from an act of grant by it, which is not the case in relation to arrangements such as retention of title, consignments and leases. But that is far outweighed by the comparative advantages of the term.

7.2.2 Other changes relating to presentation - the name of the Act Do you agree that the name of the Act should not be changed? No Comments: No, now that the Act has been in place since 2009 the name should not be changed.