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Consumer Leasing - Not as Easy as it seems

By Steven Klimt, Partner Clayton Utz

1. Introduction

Consumer Leasing is not often given the attention in considering the impact of regulation that is given to consumer lending. At first sight, there appears to be little by way of regulation that has an impact upon consumer leasing. The regulation that is expressly in place appears benign in comparison to that which covers consumer lending.1 However, regulation of consumer leasing has an impact on the way in which financiers are able to offer lease products, the way they structure their businesses and the rights that consumer/leases have in relation to lending. Moreover, a legal analysis of consumer lending involves consideration of issues that will be relevant in other contexts.

In this paper, I will deal with a number of difficult and topical issues that arise in consumer leasing. Interestingly, many of them involve complex legal analysis, but I will try to make that analysis as accessible as possible.

2. Novated Leases

A novated lease is an arrangement whereby an employee leases a motor vehicle, then enters into a separate agreement with their employer, under which:

(a) the lease is novated to the employer, who takes over responsibility for relevant obligations during the term of the employee's employment; and

(b) there is a pre-agreed novation back to the employee at the completion of the employee's employment with the employer.

3. Extent of the employment related leases exemption from the National Credit Code (NCC)

The employment related leases exemption from the NCC was drafted with the intention of exempting novated leases from the ambit of regulation by the consumer credit legislation. This is to overcome the issues that arise with whether such leases can be said to be wholly or predominantly for personal, domestic or household purposes.

Section 171(2) of the NCC provides:

"This Part does not apply to a consumer lease under which goods are hired by an employee in connection with the employee's remuneration or other employment benefits."

It is generally accepted that this section exempts novated lease arrangements in their entirety from the ambit of regulation under the National Consumer Credit Protection Act (NCCP). For example, ASIC, in Appendix 2 to RG 203 which describes " credit and consumer Leases excluded from regulation" states that the following are exempt from regulation:

1 Subject of course to the changes to the NCC effected by the Consumer Credit Legislation Amendment (Enhancements) Act 2012 (Cth) to align more generally the regulatory treatment of consumer leases with credit contracts under the NCC.

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"Consumer leases under which goods are hired by an employee in connection with the employee’s remuneration or other employment benefits. Examples of employment-related leases are leases novated to an employer and paid under salary sacrifice arrangements with the employer."

There are 3 points worth noting about this exclusion. First, the NCC is drafted on the assumption that contracts for hire or lease do not fall within the definition of "credit". That is why Part 11 is expressed as a standalone regulation and section 9 deems a contract for the hire of goods where the hirer has an obligation or option to purchase the goods as a sale of goods by instalments if the total amount payable exceeds the cash price of the goods. Such contracts (generally hire purchase contracts) will be regulated if, because of the deeming, they fall within the definition of "credit contract" under section 5(1) (section 9(2)). I analyse the conceptual basis behind this in more detail in section 4 of this paper.

Secondly, as a consequence of this implicit analysis, the exclusion is limited to an exclusion from Part 11 that regulates consumer leases and not the NCC as a whole.

Thirdly, as drafted the exemption only applies to "consumer leases under which goods are hired by an employee in connection with the employee's remuneration or other employment benefits". This gives rise to structuring issues for financiers offering novated leases. If the novated lease arrangements provide for a formal novation of the lease agreement to the employee if the employee ceases being employed by the employer, that, as with many novations, may embody a new agreement being entered into between the lessor and the now former employee under which all of the obligations under the lease are now solely undertaken by the former employee. This would mean that there is a new contract for the hire for goods by the financier to the former employee As the former employee is no longer employed, it is difficult to see how that new lease can be said to involve goods being hired "by an employee in connection with the employee’s remuneration or other employment benefits". Accordingly, although it appears that there is a general assumption that the exemption covers novation arrangements in their entirety, financiers should take care in structuring these arrangements to ensure they will always fall within the exemption.

4. Add-on products and leasing

Nature of Add-on Products

The following are examples of features/add-ons that may be included in a novated vehicle finance lease which is subject to the exemption set out above under section 171 of the NCC:

Various after market products, such as paint, upholstery/trim or rust protection;

Document/establishment fees;

Commission/brokerage paid to the broker/originator, typically in the form of an upfront free;

Guaranteed asset protection insurance (GAP insurance);

Consumer credit insurance (CCI);

Extended vehicle warranty;

Wear and tear protection for tyres and interiors;

Fees payable to a financial adviser engaged by the employee to obtain independent financial advice with respect to entering into the financial lease;

Negative equity, being finance to pay any shortfall on the trade-in value of any previously financed vehicle.

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Typically they are accommodated by being financed as a capitalised amount by the lessor, although in some cases they are embedded in commission/brokerage payable to the agent, which will nonetheless be included as a capitalised amount in the lease documents.

Nature of a lease

A lease is “a conveyance or grant of the possession of property to last, in the case of goods, for a fixed term with a reservation of rent. A lease must be for a lesser estate or term than the lessor has in the property. If the lease comprises the lessor's whole interest in the goods then it will be an assignment or a conveyance, and not a lease. Also, complete possession as against others must be granted — that is, a lessor cannot purport to lease the same goods to two or more unrelated lessees simultaneously.”2

In general terms therefore, a lease involves a conveyance or grant of possession of property. It is a proprietary right. At its heart, it is simply a bailment of goods for an agreed term, subject to ongoing payment of rent. In the case of a finance lease (as opposed to an operating lease) the aim of the lease is to recoup to the lessor the costs of the goods together with a rate of return on the outlay required to cover those costs.3 The lessee obtains a right to exclusive possession and use of the property, subject to ongoing payments of rental amounts attributable to particular periods of such possession and use and certain conditions relating to that possession and use. The lessor retains a reversionary interest in the goods. The lease can include all kinds of goods and any services or ancillary arrangements that attach to the goods (see my comments below).

Is the "enhanced" arrangement a lease?

The key issue to consider in each case is whether the agreement with the relevant non-lease item can still be said to be limited to the fundamental features of a lease identified in the previous section. To the extent that it does not, then there will be a risk that a Court will consider the agreement is either:

(a) no longer a lease, but instead a contractual arrangement involving a bundle of rights and obligations, a subset of which are equivalent to the rights and obligations that arise in a lease;

(b) a composite, severable arrangement that may be considered to consist of a lease agreement and a further separate agreement or agreements dealing with the relevant add-ons/features.

In either of these cases, it then becomes necessary to consider what regulatory implications arise from that contract or contract(s). I add that, in my view, it is difficult to contemplate a circumstance where a Court would be warranted in severing what is clearly a single contractual arrangement between the parties into separate, divisible sub-agreements. However, that conclusion does not impact on the analysis below, which does not depend on a finding that the agreement is severable. However, such a finding will generally exacerbate the risks I identify below.

Add-ons/features that do not change the nature of the lease agreement

Of the add-ons/features that I have identified, financing of the after-market products, commissions or documentation/establishment fees as part of the lease agreement in my view would not change the nature of the agreement such that it could no longer be said to be a lease.

After-market products are simply additions to the property that is the subject of the lease. The lessor has agreed to provide possession of property that includes certain features (being a

2 R Bird, Osborn's Concise Law Dictionary, 7th ed, Sweet & Maxwell, London,

3 A Duggan & E Lanyon, Consumer Credit Law, Butterworths, 1999, page 509.

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vehicle painted the relevant colour, containing the particular upholstery or trim or having had rust protection applied to it). That the sequence of events leading to the customer taking possession of a motor vehicle that contains the relevant features involves an initial purchase of an unmodified vehicle to which the features are later added does not alter that position.

As discussed above, the nature of a lease is the grant of possession of property in exchange for rent. Inherent in this arrangement is the understanding that the rent charged will be calculated to recoup the costs incurred by the lessor plus an appropriate rate of return for the lessor. Provided the relevant document/establishment fees represent a recovery of the lessor's actual costs of setting up the lease arrangements, the inclusion of those fees in the capitalised amount used to calculate the rent is simply part of the recoupment of costs that is typical of all lease arrangements. Similarly, while the position is less clear, provided that the relevant commissions represent a genuine cost associated with the distribution/origination of the lease products, there are reasonable arguments that they are also simply part of the legitimate costs of the lessor incurred in effecting the lease arrangements and fall within the typical confines of a lease arrangement. Alternatively, to the extent these fees may not be regarded as costs, they can simply be characterised as part of the lessor's rate of return and accordingly do not change the nature of the agreement.

Non-lease items may change the nature of the lease agreement

For all of the other features/add-ons identified above (i.e. the last 6 dot points under the heading "Nature of Add-on products" above) (the non-lease items), there is a significant risk a Court would consider the inclusion of the financing of those arrangements in the lease agreement brings that agreement outside the fundamental features of a lease agreement. In particular:

(a) in the case of GAP insurance, CCI, extended vehicle warranty and wear and tear protection for tyres and interiors, subject to the particular terms applying to these contracts, the lessor could be involved in paying upfront premiums or fees associated with those insurances (or insurance-like products, depending on the exact nature of the extended vehicle warranty and wear and tear protection) on behalf of the lessee. In each case, as a result of that payment, the lessee will acquire direct, contractual rights under the relevant insurance policies. This assumes that for each of these products (certainly it will be the case for GAP insurance and CCI), the products involve the acquisition of contractual rights personal to the lessee from a third party (that is, other than the lessor), rather than those rights attaching to the title in the relevant motor vehicle;

(b) in the case of fees payable by the lessee to a financial adviser or a payment in respect of negative equity owing on a previously financed vehicle, the lessor will advance money in payment of those fees or amount owing in extinguishment of a debt owed by the lessee.

In either of these cases, this means that in addition to the grant of possession of the vehicle by the lessor, the lease agreement will include the following additional elements that do not fall within any of the typical components of a lease:

(i) payment by the Lessor of money on behalf of, and for the benefit of, the customer/lessee;

(ii) inclusion of the amount of that payment as an additional capitalised amount in the total amount used to calculate the rental payments required under the lease agreement.

The question is what potential implications do these additions have on a regulatory analysis of the agreement?

NCCP/NCC

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Any credit that is provided will only be regulated by the NCC if it is provided wholly or predominantly for personal, domestic or household purposes. It is clear that at least some of the novated leases will be wholly or predominantly for personal, domestic or household purposes. This is because in at least in some circumstances, even if a vehicle is provided in the context of the customer's employment, the use of the vehicle will be wholly or predominantly for personal, domestic or household purposes. To the extent that this assumption is not met, the NCC will have no application to the relevant contract.

Additionally, the NCC only applies to contracts with natural persons (or strata corporations). It does not apply to contracts solely with corporate entities.

For the purpose of this analysis, I assume that the novated lease arrangements in their entirety fall within the exemption that applies to employment-related consumer leases under section 171(2) of the NCC (see section 3 of this paper).

It is likely that a lease agreement that includes a non-lease item will still be a contract for the hire of goods that is potentially subject to regulation under Part 11 of the NCC. Part 11 applies to consumer leases, which are defined as "a contract for the hire of goods by a natural person or strata corporation under which that person or corporation does not have a right or obligation to purchase the goods". All of the elements of this definition continue to be satisfied by the lease agreement, notwithstanding the inclusion of any of the remaining features/add-ons.

However, to the extent that Part 11 of the NCC was considered to continue to apply to the lease agreement, the inclusion of the non-lease item should not impact on a lessor's ability to rely upon section 171(2) of the NCC. The lease agreement would only continue to be caught by Part 11 by virtue of the lease features of the agreement and, to the extent those features previously fell within the exemption under section 171(2), the same analysis should continue to apply.

However, section 171(2) only exempts consumer leases from the application of Part 11 of the NCC. As a result, the issue remains whether a lease agreement that includes a non-lease item could be subject to regulation under the remainder of the NCC provisions that deal with credit contracts.

In order for a contract to be generally regulated under the NCC (as opposed to regulated as a consumer lease):

it must be a contract under which credit is or may be provided (section 4 of the NCC). Section 3 of the NCC provides that credit is provided if under a contract:

(i) payment of a debt owed by one person is deferred; or

(ii) one person incurs a deferred debt to another; and

a charge must be made for the provision of the credit.

There is a real prospect that a Court could form the view that a lease agreement which includes a non-lease item does involve the provision of credit that is regulated under the NCC.

As set out above, in substance the non-lease item involves the lessor advancing money for the benefit of the customer, with repayment of that money being incorporated into the rental payments that are required to be paid under the lease agreement. Rental payments for the hire of goods, on their own, do not involve the provision of credit. This is because there is no deferral of debt. The contract arrangements can be looked at as a series of severable arrangements, pursuant to which the lessee is required to pay for each rental period as it comes. So if there are monthly rental payments, the construction of the arrangements is that the lessee pays a monthly amount in consideration for the grant of possession of the goods for the month. However, with the inclusion of the financing of a non-lease item, the rental payments are not just consideration for the hiring of goods (that is, the grant of possession), but also consideration for the payment that was made for the benefit of the leasee by the lessor. The question is whether those rental payments involve a deferred debt to the lessor?

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The lease agreement will generally not include any positive obligation for the lessee to repay the amount advanced on the lessee's behalf. As a result, there is an argument that there is no deferral of a debt, as the only obligation that the leasee incurs is to pay the rental payments when they become due; that obligation has not been deferred. However, the following statement of Goode, R M, in the context of UK legislation also involving the concept of deferral of a debt4 provides a strong basis for the finding of a deferred debt with respect to non-lease items:

"Debt is deferred, and credit extended, whenever the contract provides for the debtor to pay, or gives him the option to pay, later than the time at which payment would otherwise have been earned under the express or implied terms of the contract. Unless the contract otherwise provides, payment is earned when the benefit is supplied".

Clearly, in the case of the non-lease item, the lessee obtains the benefit at the time the payment is made by the lessor ( such as in the case of an insurance policy either the acquisition of contractual rights under the insurance policy or the extinguishment of the debt owed by the lessee). Adopting the principles elucidated by Goode, the conclusion would be drawn that the rental payments include an element of deferred debt in respect of the financing of a non-lease item.

A counter-argument could be put that the rental payments are not able to be considered severably as partly amounts payable in respect of the lease of vehicle and partly in respect of the financing of the non-lease item; rather they can only be considered as single, indivisible rental amounts payable in consideration for the lease of the vehicle. However, that argument could be rejected on a number of bases, including:

(i) the lessor's underlying documentation and calculations would, in all likelihood show that the lessor treats the non-lease item separately, with specific amounts being attributed to the relevant amount financed for the non-lease item. While such materials would not be available to the lessee at the time the transaction is entered into, it would be available as part of discovery in any relevant proceedings;

(ii) one implication of that approach may be that the lessor has provided the advance of money for the non-lease item as a gift to the lessee. This would mean that, due solely to the nature of the documentation used to implement the arrangements, there was no provision of credit, merely an obligation to make lease payments; which would involve the Court in giving precedence to the form of the transaction over the substance.

There would be scope for a lessor to argue that any credit that is provided is not regulated on the basis that no charge is or may be made for the provision of the credit. In particular, the lessor would be able to argue that the amounts added to the rental payments for the non-lease item were limited to amounts that recouped the cost of that item. The lessor could argue that any return to it included in the calculations was attributable solely to the return embedded in rental payments. This would ultimately be a factual question. However, this approach would be susceptible to the argument that as there is a rate of return embedded in rental amounts that comprise payments in respect of the possession of the goods and repayment of a deferred debt, any rate of return included in the payments can be said to amount, at least in part, to a charge for the provision of credit. Accordingly, a lessor relying upon such an argument may be taking a significant risk.

4 (Consumer Credit Law, Butterworths, London 1989, paragraph 8.12, referenced in A Duggan & E Lanyon, Consumer Credit Law, Butterworths, 1999, page 45.

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5. Electronic formation of leases and novated leases - lessons for other types of contracts

This paper and the time allowed for my presentation does not allow me to go into all the issues relevant to electronic formation of lease agreements. However, I thought it might be interesting to deal with 2 discrete issues that may have wider application, execution of contract documents by "signing" with a stylus on a screen and execution of deeds electronically.

Signing by Stylus Process

I will cover a signature process that occurs as follows:

(a) Each lessee physically attends at the premises or the lessor/hirer or their agent to sign the documents.

(b) Each lessee is presented with an image of the lease and other relevant documents, such as application forms, direct debit requests and privacy consent forms, in full on an ipad or similar device. They are able to scroll through and view the documents in full before being invited to apply the stylus to sign the signing clause of the document on the screen in a way that replicates on the device the way in which they would have signed a paper document. Each lessee then uses a stylus to apply their signature on the screen of the device to denote their intention to be bound/accept the contents of the lease documents. I refer to this as "in context signing".

(c) Technically it will not be possible for a person to tamper with the documents during the signing process, other than to apply a signature to pages of the document viewed on the device using the stylus. This includes that it is not possible within the process for someone to cut and paste or otherwise apply an image of a signature to the documents viewed on the device.

(d) Any witnessing will be undertaken using the same process; and

(e) Where documents are required to be countersigned, either from a technological perspective the lessee and the lessor's signatures will be embedded within the same document (single document solution) or they are embedded in separate identical files with each document containing an appropriately drafted counterparts clause (Multi-document solution).

Is a "signature" through the stylus process a signature at common law?

General Principles

In Australia it has long been recognised that a requirement for a "signature" need not necessarily be satisfied only by a signatory's name written in their own hand on a piece of paper. In particular, it has been said that:

(a) "…the object of all Statutes which require a particular document to be signed by a particular person is to authenticate the genuineness of the document. A signature is only a mark, and where a Statute merely requires a document shall be signed, the Statute is satisfied by proof of the making of the mark upon the document by the authority of the signatory….in like manner, where the Statute does not require that the signature shall be an autograph, the printed name of the party who is required to sign the document is enough…the signature may be impressed upon the document by a stamp engraved with a facsimile of the ordinary signature of the person signing….But proof in these cases must be given that the name printed on the stamp was affixed by the person signing, or that such signature has been recognised and brought home to him as having been done by his authority so as to appropriate it to the particular instrument" R v Moore, Ex Parte Myers (1884) 10 VLR 322 at 324 (here a pawnbroker's pledge ticket bearing the printed name of the pawnbroker and signed by the pawnbroker's authorised agent was held to satisfy a

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statutory requirement that the pawnbroker's signature be attached to such tickets); and

(b) "speaking generally, a signature is the writing, or other affixing, or a mark to represent his name, by himself or by his authority…with the intention of authenticating a document as being that of, or as binding on, the person whose name or mark is so written or affixed" Geo Thompson (Aust) Pty Ltd v Vittadello [1978] VR 199 at 218 (in relation to a requirement for signing in the Bills of Exchange Act 1909 (Cth));

Application of general principles to the Stylus process

Subject to the case law below, in my view the stylus signing process ought to satisfy the general legal requirements for a "signature". This is because:

(i) the application of the stylus to the screen involves a person reproducing their signature under hand in a physical process that is analogous to the application of pen to paper;

(ii) this act will occur in a context that will demonstrate an authenticating intention on the part of the signer; and

(iii) this process could be constructed in a manner which will result in the secure linkage of that signature to the document to which it is applied.

Relevant case law

There is scant Australian authority on the issue of whether electronic means can be used for the purposes of satisfying a statutory signature requirement. Relevant case law includes the following:

(a) A decision of a Master in the NSW Supreme Court in McGuren v Simpson ([2004] NSWSC 35). The specific legal requirement in question in this case was section 54(4) of the Limitation Act 1969 (NSW), which states:

"An acknowledgement for the purposes of this section must be in writing and signed by the maker".

In that case, the Master found that this requirement could be satisfied by an email, noting that the Act ought to be read to accommodate technological change.

(b) A decision of Ball J in the NSW Supreme Court in Kation v Lamru Pty Ltd (No 2) [2012] NSWSC 356. Again, the specific legal requirement in question was section 54(4) of the Limitation Act 1969 (NSW). His Honour doubted the specific basis upon which the Master had arrived at her decision in McGuren v Simpson ([2004] NSWSC 35 (that is, in reliance on the principle that the relevant email represented a note in relation to a concluded agreement). His Honour added that it would be preferable to focus on the objective purpose for which a person's name is added to a document. His Honour indicated that "if a person inserts his or her name on a document which is an acknowledgment of the type contemplated by s 54(2) of the Limitation Act and if the name was inserted for the (objective) purpose of adopting the acknowledgment, then in my opinion it can be said that the document was signed by the person for the purposes of s 54(4). That is because, by including his or her name, the person intended to adopt the document, which is the very purpose for which a signature is required." (paras 33 and 34).

(c) The Federal Court of Australia in Getup Ltd v Electoral Commissioner [2010] FCA 869 considered a signature method that:

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(i) permitted a signer to access a website and apply her signature electronically using a "digital pen" or her finger on the trackpad of a laptop, or a mouse; and

(ii) caused the website to generate an electoral enrolment form and apply the signer's signature to that form for transmission by fax to the Electoral Commissioner.

Perram J found that for the purposes of section 10 of the Electronic Transactions Act this was a method of identifying the signer and indicating the signer's approval of the information communicated that, in all the relevant circumstances, was as reliable as was appropriate for the purposes for which the information was communicated. The stylus method I am considering is similar to this process.

That case was decided in a different public law context but is illustrative of how a Court may view "on screen" signing technologies such as a "digital pen" or a stylus. As a result, the case does not provide direct guidance as to what constitutes a "signature" at law where it is not possible to have recourse to the facilitative principles under the Electronic Transactions Acts.

However, Perram J noted that "[absent the Electronic Transactions Act] minds might perhaps legitimately differ as to whether the word "sign" in the Electoral Act encompasses digital signatures [of the type outlined immediately above]." Although this is obiter dictum, it demonstrates that judicial views are mixed as to what methods may be seen to constitute a "signature" at law, in cases where it is not possible to rely on the facilitative provisions of the Electronic Transactions Act. This highlights the risk that a Court may take a different view to mine, although, consistent with the general principles that have been applied to signatures under the common law, I think that in the fullness of time, it will be generally accepted that an appropriate process for signature by stylus on a device will be treated no differently to a signature on a piece of paper.

Can Regulated leases under the NCC be validly signed by paperless methods?

In this section of the paper, I focus solely on the execution of regulated leases by individuals.

The main requirements under the NCC are section 173 and 173A, which provides as follows:

173 (1) A consumer lease must be in the form of a written lease document:

(a) signed by the lessor and the lessee; and

(b) containing the information required by this Division.

(1A) Subject to subsection (2), a consumer lease may consist of one or more separate documents.

(2) The regulations may make provision for or with respect to the form of consumer leases and the way they are expressed.

(2A) In the case of a lease document consisting of more than one document, it is sufficient compliance with this section if one of the documents is duly signed and the other documents are referred to in the signed document.

173A (1) The regulations may authorise other ways of making a consumer lease that do not involve a written document.

(2) In that case, the provisions of this Division apply with such modifications as are prescribed by the regulations.

No relevant regulations have been made.

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"Written contract document"

The first question is whether the stylus application process will involve a written lease document.

Section 204(1) of the NCC provides that:

(a) "writing" includes "any mode of representing or reproducing words in a visible form"; and

(b) "sign" includes the affixing of a seal or the making of a mark.

Section 187(1) of the NCC relevantly provides that "without limiting the provisions of this Code it is declared that:

(a) any contract, mortgage or guarantee referred to in this Code may be made in accordance with the Electronic Transactions Act 1999; and

(b) any requirement or permission by or under this Code, however expressed:

(i) to give information in writing; or

(ii) to provide a signature

......

may be met in accordance with the Electronic Transactions Act 1999."

Significantly, it does not refer to a "lease document". However, as a lease is a contract, it is likely that that it is covered by that expression in section 187(1). Interestingly, Part 3 of the Electronic Transactions Regulations, although it is expressed to apply to electronic communications under the National Consumer Credit Protection Act (regulation 8), applies in respect of "debtors", "mortgagors" and "guarantors" and therefore is limited in its application to credit contracts. Accordingly, Part 3 of the Electronic Transactions Regulations does not apply in respect of consumer leases under Part 11 of the NCC.

Section 9(1)(a) of the Electronic Transactions Act 1999 (Cth) (ETA) relevantly provides that "if, under a law of the Commonwealth, a person is required to give information in writing, that requirement is taken to have been met if the person gives the information by a means of an electronic communication, where ... at the time the information was given, it was reasonable to expect that the information would be readily accessible so as to be usable for subsequent reference".

It is not clear whether the requirement under section 173(1)(a) of the NCC for a credit contract to be in the form of a "written lease document" is a requirement for information to be "given" in writing for the purposes of section 9(1)(a) of the ETA (to permit that requirement to be met by means of electronic communication). In my view:

(a) the better view is that section 9(1)(a) of the ETA does not apply, as section 173(1)(a) does not contain any obligation to give a document in writing;

(b) however, there is still a requirement that there be a written lease document for the purposes of section 173(1)(a) of the NCC;

(c) there are good arguments that there is a written document, having regard to the definition of writing in section 204(1) of the NCC;

(d) the issue that remains is whether that written document has been signed for the purposes of section 173(1)(a).

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"Signed by the lessor and lessee"

Section 10 of the ETA relevantly provides that if under a law of the Commonwealth the signature of a person is required, that requirement is taken to have been met in relation to an electronic communication if:

(a) a method is used to identify the person and to indicate the person's intention in respect of the information communicated;

(b) the method used was either:

(i) as reliable as appropriate for the purpose for which the electronic communication was generated or communicated, in light of all the circumstances, including any relevant agreement; or

(ii) proven in fact to have fulfilled the functions described in paragraph (a) by itself or together with further evidence; and

(c) the person to whom the signature is required to be given consents to that requirement being met by way of the use of that method.

The first question is whether the methods used by the lessor to identify the lessee are as reliable as appropriate for these circumstances. Assuming that it will be done in accordance with the lessor's obligations under a finance lease to obtain certain identification information and verify that information under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). These processes will support the level of identification that is inherent in other elements of the process, namely the inclusion of the lessee's name in the document being signed and the application by the lessee of their handwritten signature to the screen using the stylus. In my view, there are good arguments that these processes are appropriate for the purpose of entering into a credit contract with a customer, particularly given that they effectively mirror the processes adopted for a hard copy lease.

There are also good arguments that the method used to indicate the lessee's intentions (i.e. Lessee applies the stylus to the screen to indicate that they are making an offer as set out in the lease document) is as reliable as appropriate for this circumstance. In particular, as this is analogous to an individual who signs at the foot of a paper document, and who in those circumstances is taken to have made an offer on the terms of the contract document, there are good arguments that such a method is as reliable as appropriate to achieve that same purpose.

Additionally, the lessor's documentation will need to include a consent on the lessor's part for the customer to sign the credit contract by the method implemented, in order to meet the requirement referred to above.

Countersigning by Lessor - Single Document Solution

As set out above, section 173(1)(a) of the NCC requires that there be a written lease document signed by the lessor and the lessee. If a Single Document Solution is adopted then that would in my view result in there being a written lease document signed by both the lessor and the lessee.

Countersigning by Lessor - Multi-document Solution

However, in the case where there is a Multi-Document Signing Solution there is some risk to a lessor that the requirements of section 173(1)(a) of the NCC will not have been met. In particular:

(a) the process of the lessor signing a separate electronic file embodying the lease document, and not the same electronic file that was signed by the lessee, results in the lessor not signing a written lease document that was signed by the lessee, but rather signing a copy of the document signed by the lessee;

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(b) as a result, the process will technically result in there being two lease documents; the electronic version signed by the lessee and the copy of that file that was signed electronically by the lessor;

(c) the NCC clearly contemplates that the lease document can be made up of more than one document. Amongst other things, section 173(1A) of the NCC specifically provides that "a consumer lease may consist of one or more separate documents". Consequently, there is no issue with the lease document potentially being comprised of two documents, being the separate electronic documents signed by the lessee and lessor respectively;

However, the issue is whether two separate contract documents, one signed by the borrower, one by the credit provider, satisfies the requirement in section 173(1)(a) that there be written lease document? In my view it does because of section 173(1A) which specifically recognises the possibility of a consumer lease consisting of two or more documents. I point out that the position is different in relation to credit contracts where there is no equivalent in section 14 to section 173(1A).

Deeds

In some circumstances, documents relevant to consumer leases may need to be in the form of a deed so as to obviate the need for consideration to support a contract at law. Relevant documents might be indemnities, guarantees or deeds of novation.

The formal requirements in respect of deeds (including in relation to witnessing and attestation) in all of the various Australian States and Territories can be summarised as:

(a) deeds executed under the laws of New South Wales, Queensland, South Australia and Western Australia need to be witnessed and attested to (and the facilitative provisions in those States' Electronic Transactions Acts cannot be relied on to satisfy the legal requirement for the witness's signature)5;

(b) deeds executed under the laws of Tasmania need to be witnessed (but there is no requirement for attestation, and it is possible to rely on the facilitative provisions in Tasmania's Electronic Transactions Act to satisfy the legal requirement for the witness's signature)6;

(c) deeds executed under the laws of the Australian Capital Territory and the Northern Territory need to be witnessed and "delivered" (but there is no requirement for attestation and it is possible to rely on the facilitative provisions in those Territories' Electronic Transactions Acts to satisfy the legal requirement for the witness's signature)7;

(d) deeds executed under the laws of Victoria must be expressed to have been sealed (i.e. "Signed, sealed and delivered")8 although deliver means any word or conduct that shows that party executing regards the deed as presently binding9. Part 2 Div 2

5 Conveyancing Act 1919 (NSW) s 38, Electronic Transactions Regulation 2012 (NSW) reg. 5(f); Property Law Act 1974 (Qld) ss. 45 and 47, Electronic Transactions (Queensland) Act 2001 (Qld) ss. 11, 14 and 16 and Schedule 1, Item 6; Law of Property Act 1936 (SA) s 41, Electronic Transactions Regulations 2002 (SA) reg. 5(1)(b); Property Law Act 1969 (WA) s9, Electronic Transactions Regulation 2012 (WA) reg. 3(1)(b). See also Electronic Transactions Act 2011 (WA) s8(1).

6 Conveyancing and Law of Property Act 1884 (Tas) s 63.

7 Law of Property Act 2009 (NT) ss. 47 and 49, Civil Law (Property) Act 2006 (ACT) s 219(1)(a)

8 Property Law Act 1958 (Vic) s 73A

9 Implied by Property Law Act 1958 (Vic) s 73B; see also Xenos v Wickham (1867) LR 296

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of the Electronic Transactions (Victoria) Act 2000 (Vic) provides that writing, signature and production of document requirements may be met by an electronic communication; and

(e) the parties to a deed are generally required by statute to sign or affix their mark to a deed under the laws of all of the Australian jurisdictions (but the parties are not precluded from using the facilitative provisions of their respective Electronic Transactions Acts that permit legal requirements for signatures to be satisfied by electronic communications).

This means that there is a real risk that an electronic process to execute deeds may not result in the creation of a validly witnessed and attested deed under the laws of New South Wales, Queensland, South Australia or Western Australia, because on the current state of the authorities attestation involves actually having to be present at the execution of the document and for the witness to sign or make a mark indicating the physical witnessing of a Deed. This may be difficult to achieve where, for example, a witness electronically verifies witnessing the execution of the deed through an email sent to their separate email address.

In Ellison v Vukicevic (1986) 7 NSWLR 104 at 112 a purported witness to execution of a deed was found not to have been present when the document in question was executed. Young J considered the requirement in the Conveyancing Act 1938 (NSW) that "a deed must be attested by a person who is not a party to the deed". His Honour indicated that s 38 probably reproduces in the most part the pre-existing law, including that the deed must be attested by a person who is not party to the deed. Although the word "attested" is not defined in the statute, His Honour relied upon the following statement in a nineteenth century English case to reach the conclusion that the document in question was not a deed because it was not attested:

"…[attestation] means, as I understand it, that one or more persons are present at the time of the execution for that purpose, and that as evidence thereof they sign the attestation clause, stating such execution" - Wickham v Marquis of Bath (1865) LR 1 Eq 17 at 24.

In Mostyn v Mostyn (1989) 16 NSWLR 635 at 638-9, the issue was that the execution of the document by all but one of the parties was not attested by a person who was not a party to the document i.e. in all but one instance the witnesses were parties to the document. Again, Young J repeated his view that s 38 of the Conveyancing Act requires that with respect to each person who executes a deed, his or her signature must be witnessed by an independent witness (that is, a person not a party to the deed) and that such witness must attest overseeing the execution by that party by signing his or her own name in the appropriate place.

Both the above cases state the relevant principle but did not actually involve a scenario where a purported attestor had been present when a party executed a document but did not sign the document as a witness. It would of course be possible, even with electronic execution of a document, for a witness to be present when the party affixes their signature electronically to the document.

This issue arose in the case of Netglory Pty Ltd v Caratti [2013] WASC 364 (9 October 2013). In that case, a person alleged that he was present at the time that a document said to be a deed was executed, although that person did not sign that document at that time, and in fact sought to sign the document as an attesting witness seven years after the document was executed by the relevant party to it. The party contending that a deed had come into existence submitted that attestation is effectively a synonym for witnessing and no signature is required of the attesting witness. Edelman J considered the relevant authorities in detail before rejecting that submission, as well as the alternative submission that a party who was present at execution could complete the attestation by signing the relevant document at a later time - see paras [91] and [92] and paras [122] to [147] inclusive (as to whether attestation requires a signature) and paras [148] to [169] inclusive (as to whether any signature needs to be contemporaneous with the signature being witnessed. This authority may be able to be distinguished where an electronic witnessing process in relation to the contemporaneity requirement where the electronic process involves execution by the party and the witness that is substantially contemporaneous, when compared with the Netglory case where the putative

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witness sought to sign the relevant document seven years after the document was executed by the relevant party.

6. Novated leases - commercial or consumer credit under the Privacy Act?

There is a perennial issue as to whether novated leases are commercial or consumer credit for the purposes of the Privacy Act.

A lessor will be a credit provider relevantly if it is an organisation carrying on a business or undertaking of which a substantial part of that business or undertaking is the provision of credit. (See section 6G of the Privacy Act.)

Credit is defined in sub-section 6M(1) of the Privacy Act as "a contract arrangement or understanding under which:

(a) payment of a debt owed by one person to another person is deferred; or

(b) one person incurs a debt to another person and defers payment of the debt."

Subsection 6M(3) provides "without limiting subsection 1, credit includes:….

... (b) a contract arrangement or understanding of a kind referred to in that subsection that is for the hire, lease or rental of goods, or the for the supply of services, other than [a number of exclusions that are not relevant for present purposes then included]". (emphasis added)

The intention of this drafting is clearly to include contracts for hire, lease or rental of goods in credit. However, the inclusion of the phrase "of a kind referred to in that subsection" in subsection 3(b) appears to introduce an additional requirement that the contracts for hire, lease or rental must also involve the deferral of a debt as set out in subsection 1. There is a real issue as to whether conceptually a lease involves the deferral of a debt (see the discussion in sections 3 and 4 of this paper). However, there has been a general industry and regulator acceptance that leases do fall within the meaning of "credit" for the purposes of the Privacy Act (notwithstanding this additional requirement) and accordingly, I will in this paper assume it does without further analysis. The consequences of a lease not being "credit" would mean that the lessor would be precluded from obtaining information in relation to consumer credit from credit reporting bodies such as Veda.

The issue then to determine is whether the credit provided by the lessor is consumer credit or commercial credit.

Consumer credit is defined in Section 6 as "credit:

(a) for which an application has been made by an individual to a credit provider, or that has been provided to an individual by a credit provider in the course of the provider carrying on a business or undertaking as a credit provider; and

(b) that is intended to be used wholly or primarily:

(i) for personal, family or household purposes; or

(ii) to acquire, maintain, renovate or improve residential property for investment purposes; or

(iii) to refinance consumer credit that has been provided wholly or primarily to acquire, maintain, renovate or improve residential property for investment purposes."

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This definition is substantially similar to, but not identical to, the relevant definition for credit regulated by the NCCP. However, in contra-distinction to the NCCP Act, there is no specific exemption for credit provided for business or investment purposes.

Commercial credit is defined in section 6 as "credit (other than consumer credit) that is applied for by, or provided to, a person". Relevantly, under the Privacy Act, a "person" encompasses virtually any type of entity, while an "individual" as defined in section 6 is limited to a natural person.

The main practical consequences of the novated lease being consumer credit or commercial credit for the lessor are:

(a) If it is commercial credit, relevant information about an individual can only be exchanged with a credit reporting body, such as Veda, if the individual consents (section 20F(1)(b), items 2 and 3). If it is consumer credit the consent of the individual to the exchange of the information with a credit reporting body is not strictly necessary; and

(b) If it is commercial credit, a lessor would be able to take advantage of the Privacy Amendment (External Dispute Resolution Scheme—Transitional) Regulation 2014, which, until 11 March 2015, exempts credit providers from the requirement of having to be members of an external dispute resolution scheme under section 21D(2)(a)(i) before they can disclose personal information to a credit reporting body, if the disclosure to a credit reporting body is made in connection with commercial credit. In other words, if the novated lease can be characterised as commercial credit, the lessor would not be required to be a member of an External Dispute Resolution Scheme until, at the earliest, 11 March 2015.

Although the position is not entirely free from doubt, in my view novated leasing arrangements can, if structured appropriately, fall outside the definition of consumer credit for the reasons set out in the following paragraphs.

It is clear from the definition of credit, for the purposes of the Privacy Act, the "credit" is the "contract arrangement or understanding" which has the particular features set out in the definition. Accordingly, the "application" for credit in the paragraph (a) of the definition of "consumer credit" must be an application for a contract, arrangement or understanding. Similarly, the "credit" that "has been provided to an individual by a credit provider" in that paragraph must be a contract, arrangement or understanding entered into between the individual and the credit provider.

The first issue to consider is whether there is an application by an individual. In many cases the application for credit can be said to be made jointly by the employer and the employee. This position can perhaps be tested by the proposition that if there were simply a single application by the employee, unaccompanied by the application by the employer, the lessor would not be prepared to enter into the novated leasing arrangements. Where there is a joint, non-severable application made by 2 persons, one of whom is an individual and one of whom is not (for example if the employer is a corporation), there are good arguments it is not an application by an "individual". There are statutory interpretation principles to the effect that the singular includes the plural, however, while this would enable a joint application by 2 individuals to be covered by the subsection, it would not cover a joint non-severable application by an individual and a non-individual, such as a body corporate. This argument is also supported by the fact that the definition of "credit" covers a contract arrangement or understanding. Although there are 2 separate contracts, it is clear the 2 contracts are part of a single understanding (see our reasoning below).

The next issue to consider is the purpose for which the credit is intended to be used "wholly or primarily".

The following are relevant extracts from the Privacy Commissioner's Fact Sheet 3: Consumer credit and commercial credit

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"What is consumer credit? Consumer credit is credit which an individual obtains when acting in a private capacity, and which is to be used primarily for domestic, household or family purposes. What is commercial credit? Commercial credit is credit which an individual or a business entity, such as a sole trader or partner, obtains for business purposes not connected with the individual's domestic, household or family interests. How can I tell whether the credit someone has applied for is consumer or commercial credit? In many cases it will be obvious from the circumstances, for example if credit is being applied for under a business name. If there is any doubt, you should ask the customer whether he or she is applying in a private or a business capacity. If he or she is applying in a private capacity, it is consumer credit. If in a business capacity it is commercial credit. What if someone applies for credit for both private and business purposes? This sometimes happens, for example if someone buys equipment for use in business activities, but also uses it at home for domestic purposes. In this situation you can ask the customer whether the transaction is primarily for private or primarily for business purposes, and the answer should tell you whether you should treat the application as consumer or commercial."

Many novated leasing arrangements can be characterised as the following 2 separate contracts:

(a) An initial contract for lease of the vehicle between the employee and the lessor;

(b) A second contract entered into at the same time or instantaneously after the first contract with the following features:

(i) employer has all of the obligations under the lease while the employee remains employed;

(ii) employee has to undertake some of the non-monetary obligations under the lease on behalf of the employer while the employee remains employed;

(iii) if the employment ends, the employee undertakes all the obligations under the contract and the employer has no further obligations either under the same contract or by virtue of a further novation of the contract to the employee.

There are the following arguments that can be put to support the position that it would not be appropriate to consider the purpose of the contracts in isolation, but it in conjunction with one another:

(a) The initial contract would never come into existence on its own, but for the fact that the novated contract is entered into at around the same time;

(b) The contracts are, in essence part of the same arrangement;

(c) The initial contract with the individual has no independent existence. It is immediately superseded by the novated contract.

The next issue to consider is what is the purpose of this arrangement?

There are good arguments that the sole or primary purpose is to provide the employee with a lease of a vehicle as part of their employment relationship. I arrive at this view because the Privacy Act requires an assessment of the purpose of contract, arrangement or understanding. In particular, it does not require an assessment to be made of the underlying use of the goods being leased.

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This analysis has the advantage that it is consistent with the policy in the NCCP that novated leasing arrangements will not be treated as consumer credit (see section 3 above). It is clear that from a policy perspective the credit reporting provisions of the Privacy Act are intended to complement the provisions of the NCCP (see for example the relationship between the responsible lending obligations under the NCCP and the positive credit reporting obligations under the Privacy Act and the fact that the purpose requirements under the definition of "consumer credit" mirror the purpose requirements for regulation under the NCCP).

Under the NCCP, a lease contract will be regulated where, amongst other things, "goods are hired wholly or predominantly for personal domestic or household purposes" (section 170(1)(a) of the NCC) and there is a specific exclusion for "a consumer lease under which goods are hired by an employee in connection with the employee’s remuneration or other employment benefits."(section 171(2) of the NCC). This test accordingly looks to the purpose for which the goods are hired. It is therefore directed more to the underlying use of the goods, rather than the more general purpose of the lease contract. On that analysis there is no need for an exemption under the Privacy Act because it is not required in light of the different test for purpose.

However I cannot rule out possibility a Court or the Australian Information Commissioner may find joint that in the context of novated leases there are multiple purposes of providing a lease of a vehicle as part of an employment relationship and the actual intended use of the vehicle. If that analysis were accepted, the issue of purpose would have to be determined on an individual basis for each arrangement depending upon the circumstances that apply. I add that the sections quoted from the fact sheet above do not provide a definitive answer to the analysis to be adopted.

7. PPSA

There are many issues that arise in relation to the PPSA concerning consumer leases. I will only cover one issue in this paper in very general terms. That is the issue of downstream leasing and how it is impacted by the PPSA. An example of downstream leasing may be where a financier supplies vehicles to a company, which in turn hires them to other parties. For example, a financier may supply forklift vehicles to Customer A which in turn leases them on varying terms to companies using them in the course of their business. Similar types of arrangements could be in place in relation to vehicles used for personal domestic or household purposes.

A security interest for the purposes of the PPSA is defined as "an interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property)".

However, the PPSA also deems certain arrangements to be security interests, whether or not the transaction concerned, in substance, secures payment or performance of an obligation. This relevantly includes the interest of a lessor or bailor of goods under a "PPS lease".

A PPS lease is defined in section 13(1) of the PPSA and includes, amongst other things, a lease or a bailment of goods:

(a) for a term of, amongst other things, more than one year; or

(b) for goods that must be described by serial number in accordance with the regulations (which is principally motor vehicles, watercraft and aircraft), if the lease or bailment is, amongst other things, for more than 90 days. There is an amending Act before Parliament that will, if passed, eliminate this distinction, such that in all cases, the required term will be for more than one year.

The first issue therefore is whether the arrangements at either level constitute either a bailment or a lease of assets.

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Neither "lease" nor "bailment" is defined in the PPSA.

In the textbook "Palmer on Bailment" (Third Edition, Norman Palmer with Specialist Editors, 2009) (Palmer), Palmer states that "(T)he modern foundation of bailment has been clearly and authoritatively confirmed by a series of appellate decisions over the past decade", and, citing the speech of Lord Goff of Chievely in The Pioneer Container ([1994] 2 A.C. 324 PC), states that "bailment is founded exclusively on one person's voluntary possession of goods that belong to another" (at page 10). In the textbook "Commercial & Personal Property Law" (Simon Fisher, 1997), Fisher refers to the following statement of Windeyer J in Hobbs v Petersham Transport Co Pty Ltd (1971) 124 CLR 220:

"A bailment comes into existence upon a delivery of goods of one person, the bailor, into the possession of another person, the bailee, upon a promise, express or implied, that they will be redelivered or dealt with in a stipulated way."

Lease, in the context of section 13(1) means a lease of goods. However, there is little judicial consideration of the notion of a lease of goods. It is typically considered as being a hire of chattels, which is a form of bailment. Chapter 21 of Palmer on Bailment deals with "Hire of Chattels" and uses the terms "hire" and "lease" interchangeably. As a result, in my view, a lease for the purposes of the PPSA will at least extend to a hire of chattels. Palmer identifies the following four qualities that identity a contract of hire:

(a) the transfer of both the possession of a chattel and the right to possession of it, to a person who voluntarily receives it. To explain this distinction, Palmer footnotes the English case of "John George Leigh t/a Moor Lane Video v Commissioners of Customs and Excise, VAT Decisions/5000-5499/55098, Case Ref No. LON/89/83X, July 25 1989", in which the VAT Chairman stated:

"It should be borne in mind that there are two elements in a hiring. First there is a delivery of possession of the object hired: this, effected without any transfer of outright ownership, will create the legal relationship of a bailment and give rise to an obligation to return the object at or before the termination of the hiring. Secondly, there is a transfer to the hirer of the right to possession, as against all others, of the object hired for the period of the hiring. This gives the hirer a qualified ownership or special property in the object hired".

On that basis, a critical element of a lease will be a right to exclusive possession of the goods that have been bailed as against all others;

(b) an authority in the bailee to use it for the bailee's benefit;

(c) an advantage or reward accruing to the bailor in return for the possession and use. Palmer also notes (at 21-010) that the bailor's reward need not be monetary and could be some reciprocal advantage to the bailor. However, Palmer also goes on to note that "the reward accruing to the bailor must be the "price or compensation" for the granting to the bailee of "use of the thing being hired and the commercial purpose of the bailment as a whole must be capable of being identified as that of a hiring." Every aspect of the agreement and each separate obligation undertaken by the parties may need to be examined in order to answer that question";10

(d) a promise by the bailor to deliver up the chattel to the lessor (or at the lessor's instruction) at a stated or determinable time.

The next issue to consider is whether the following further conditions have been satisfied:

10 There is authority in the context of land leases that rent is not an essential constituent of a lease. It is not clear the extent to which that authority would be applied to a lease of goods.

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(i) the lessor or bailor must be regularly engaged in the business of leasing or bailing goods; and

(ii) for a bailment only, the bailee must provide value for the bailment. In particular, under section 13(3) of PPSA, section 13 only applies "to a bailment for which the bailee provides value".

If these conditions have not been satisfied, there will be no PPS lease and therefore no security interest for the purposes of the PPSA. I consider each condition in turn.

In relation to the requirement for being regularly engaged in the business of leasing or bailing goods:

(a) The exact interpretation that the Courts in Australia will give to this requirement is uncertain at this stage;

(b) Decisions of overseas Courts with regimes similar to the PPSA have been mixed in terms of how this requirement is treated. In Canada, the courts have to some extent ignored the number of times a lessor has entered into a lease or bailor entered into a bailment. Instead, the courts have focused on whether or not leasing can be described as a "proper component" or "significant part" of the lessor's business.

(c) However, equally, overseas courts have been prepared to determine, in certain instances, that a single transaction may constitute regular engagement as required.

The second requirement is that, in respect of a bailment, a PPS lease only arises for "a bailment for which the bailee provides value". "Value" is defined in the PPSA to mean "consideration that is sufficient to support a contract". There are two potential interpretations; a narrow interpretation and a broad interpretation.

The narrow interpretation is that there needs to be some particular value specifically attributable for the bailment, rather than just contractual consideration supporting the bailment arrangement. So the relevant value must be "for" or "in respect of" the particular bailment and not value provided more broadly as part of some conglomerate arrangement. This is similar to the analysis in Palmer referred to in above that "the reward accruing to the bailor must be the 'price or compensation' for the granting to the bailee of 'use of the thing being hired'. Under the narrow interpretation, in order for the bailments to be caught, the bailments must be in the nature of hire arrangement involving payment of specific sums of money or other provision of other value that is paid in return for the right to possess and use the relevant goods.

The LexisNexis PPS service "Australian Personal Property Securities Commentary" (at 4.3.400) relevantly notes that some support for this position can be derived from the commentary provided by the Attorney-General's Department in relation to the revised draft PPS Bill, which provided that PPS leases include bailments in which the bailor provides value to the bailee "in respect of the bailment". The commentary suggests it is arguable, based on that language, that a delivery of goods as an incidental aspect of a services contract is not a bailment to which the PPSA is intended to apply.

However, "value" is specifically defined in section 10 of the PPSA to mean consideration that is sufficient to support a contract. Additionally, the comments referred to in the previous paragraph are equally consistent with the value being part of a broader consideration supporting a complex set of transactions. As a result, there is a broader interpretation which would allow a Court to apply any part of the consideration given by a bailee sufficient to support a contract to the bailment, in which case the requirement would be satisfied.

Assuming there is a PPS Lease, the financier's interest in the assets under the PPS lease will be what is known as a "purchase money security interest" (PMSI). Provided that the security interest is registered by the financier within the requisite time period, the financier will enjoy a form of superior priority that applies to PMSIs, as opposed to a general security interest.

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In addition to ensuring priority against the entity to which it originally provides the assets, the financier must also guard against the possibility that downstream arrangements between its customer and third parties, such as for example agreements its customer enters into to hire the assets to third parties. This is a complex and unclear area of the PPSA. The issues that need to be considered will depend significantly upon the specific circumstances of any sub-bailment/sub-lease, including the terms of relevant contractual arrangements, as well as how the Courts will interpret various provisions of the PPSA that have yet to be judicially considered in Australia.

There are a number of sections of the PPSA that may apply to this circumstance. I consider some of them in the remainder of this paper.

Section 32 of the PPSA provides that if collateral (that is the relevant personal property) gives rise to proceeds (by being dealt with or otherwise) the security interest:

(a) continues in the collateral unless the secured party expressly or impliedly:

(i) authorised a disposal giving rise to the proceeds; or

(ii) agreed that a dealing giving rise to the proceeds would extinguish the security interest; and

(b) attaches instead to the proceeds, unless the security agreement provides otherwise.

Whether this section could apply will depend on the exact nature of any arrangements that the financier's customer puts in place with respect to the assets and, in particular, whether such arrangements:

(a) give rise to proceeds for the purposes of the PPSA; and

(b) if so, whether the financier could be taken to have expressly or impliedly authorised a disposal giving rise to the proceeds or that a dealing giving rise proceeds would extinguish the financier's security interest.

Proceeds is broadly defined in section 31 of the PPSA and can include both payments received for collateral and personal property derived from a dealing with collateral. However, relevantly, a prerequisite for it to be proceeds for the purposes of the PPSA is that the payments or personal property must be identifiable or traceable personal property. Accordingly if the financier expressly authorises its client to hire the goods to third parties, it is possible that section 32 will operate to extinguish the financier's rights in the assets if the financier's provision of the goods under a contract of hire to a third party can be said to be a "disposal" of the asset. In this circumstance if the hiree pays a fee for hiring to the financier's client, it is difficult to see how there would not be "proceeds".

As to whether there is a disposal of the assets, dispose is not defined and there is therefore some uncertainty as to how it will be interpreted. There is clearly a distinction between the use of "disposal" in the first element of section 32 and "dealing" in the second element. While it is not without doubt, there are reasonable arguments that dispose should be limited to a sale or lease of the Assets (i.e. the grant of a proprietary right). Section 123 of the PPSA, which deals with disposal of collateral after seizure by a secured party contemplates only sales or leases or, solely in the case of intellectual property, licences of the collateral. If this were the case an issue would arise as to whether a contract for the hire of goods was a "lease". However, the definition of "account" in the PPSA includes a reference to "disposing of property (whether by sale, transfer, assignment, lease, licence or in any other way". As a result, a broader interpretation being given to disposal in clause 32 cannot be ruled out.

It is also necessary to consider the "take free" rules contained in part 2.5 of the PPSA and in particular, sections 45 and 46(1).

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Section 45(3) provides that a lessee for new value, of a motor vehicle of a kind prescribed by the regulations for the purpose of this section takes the motor vehicle free of a security interest in the motor vehicle if:

(a) the regulations provide that motor vehicles of that kind may, or must, be described by serial number; and

(b) the seller or lessor is in a class of persons prescribed by the regulations for the purposes of this subsection.

However this does not apply if the lessee leases the motor vehicle with actual or constructive knowledge that the sale or lease constitutes a breach of the security agreement that provides for the security interest.

The combined effect of Regulations 2.1 and 1.7 is that motor vehicles as defined in paragraph 2 and 3 of regulation 1.7 will be covered by section 45(3).

Regulation 2.2 provides:

The seller or lessor of a motor vehicle is in a prescribed class if the seller or lessor:

(a) holds a licence (however described) to deal or trade in that kind of motor vehicle; and

(b) the licence is issued by a licensing authority in the State or Territory where the sale or lease of the motor vehicle happens.

Section 46(1) provides that a buyer or lessee of personal property takes the personal property free of a security interest given by the seller or lessor or that arises under section 32, if the personal property was sold or leased in the ordinary course of the seller's or lessor's business of selling or leasing personal property of that kind. However this also will not apply if the lessee leases the personal property with actual knowledge that the sale or lease constitutes a breach of the security agreement that provides for the security interest.

The issue therefore will arise as to whether a subsequent dealing by the financier's customer constitutes a "lease" of the assets. The discussion above in relation to what constitutes a "lease" will also be relevant in this regard. Where the financier knows that its customer will hire the goods to third parties, it is likely to be difficult for the financier to assert that any such hiring is in breach of its original agreement with the financier.