25 July 2014
PPSA Review Secretariat
Commercial and Administrative Law Branch
Attorney-General’s Department
3-5 National Circuit BARTON ACT 2600
By email to ppsareview@ag.gov.au
Attention: Mr Bruce Whittaker
Dear Mr Whittaker
DIFA SUBMISSION: REVIEW OF THE PERSONAL PROPERTIES SECURITIES ACT GENERAL ISSUES
The Debtor and Invoice Finance Association of Australia and New Zealand (DIFA)
appreciates the opportunity to make this further submission to the Review of the
Personal Properties Securities Act (PPSA). Information about DIFA and the DIFA
member list were included in our submission dated 10 June in relation to PPSA small
business issues.
Attachment A is a Table of General Issues and Proposed Solutions which draws on the
experiences of DIFA Members and their clients under the Personal Property Securities
Regime. As with our earlier submission, our proposed solutions are aimed at improving
the efficiency and effectiveness of the Regime for all users. Many of the issues raised in
the Table A affect all secured parties and grantors, while some focus on the particular
concerns of debtor financiers.
As highlighted in the Table, the majority of the concerns of DIFA members (and by
implication their clients and potential clients) centre around the drafting and practical
implications of Section 64. We believe that Section 64 is not currently achieving its full
potential and that this may be able to be remedied by legislative amendment and, in
some cases by changes to the functionality of the Register, without prejudicing other
users of the Register.
If you would like to discuss this submission please contact me on 9231 5877 or by email
to catherine@afc.asn.au.
Yours sincerely,
Catherine Shand
AFC Corporate Lawyer
ATTACHMENT A
PERSONAL PROPERTY SECURITIES ACT STATUTORY REVIEW 2014 - GENERAL SUBMISSION
TABLE OF GENERAL ISSUES AND SOLUTIONS PROPOSED BY THE DEBTOR AND INVOICE FINANCE ASSOCIATION
25 JULY 2014
NOTES:
 In the following Table, references to “Section 64” are to the non-purchase money security interest in accounts provisions in Section 64 of the PPSA.
 Some of the Section 64 issues that were identified in the DIFA small business submission dated 10 June 2014 are repeated here for completeness.
Issue
Issue and Example/Case Study
Proposed Solution/s
As a general comment, many aspects of section 64 are unclear
and problematic. In particular, section 64 (1) (b) is difficult to
understand.
Uncertainty about the application of Section 64 is not
a desirable outcome for receivables financiers, their
clients, other financiers or insolvency practitioners.
We suggest that a significant revision of Section 64
should be a priority outcome of the statutory review
of the PPSA.
1. CONCEPTS / DEFINITIONS
1.1 Section 64 - Drafting and
interpretation
DIFA members took legal advice from various sources both
before and after the commencement of the PPSA and there is
still uncertainty in the industry about the interpretation of
Section 64. There is an increasing number of disputes
between receivables financiers, insolvency practitioners and
legal advisers about Section 64.
Specific concerns are detailed below.
1.2 Section 64 - Attachment
Section 64(1) (b) states that the non-PMSI holder must hold
the security interest when notice is given but attachment
cannot occur until the notice period has expired. This is
illogical.
Amend section 64 to address this issue.
1.3 Section 64 - 15 business day
notice requirement
There is a technical problem with Section 64 based on the
wording - a security interest in accounts cannot be registered
until the 15 business day period has expired.
It is proposed that Section 64 be amended to allow a
non-purchase money security interest over an account
to be registered at any time, but that it not have
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Issue
Issue and Example/Case Study
Receivables financiers and their clients do not want to delay
perfection for 15 business days so far as the PMSI holder is
concerned, whilst having perfection by registration so far as
other later suppliers are concerned. The current wording
means that a receivables financier may be at risk from new
PMSIs that are registered during the notice period. Some
financiers do not fund until the full notice period has expired
and until they have done a further search at the end of the
notice period to see if any new PMSIs have been registered, in
which case they give a fresh Section 64 notice to that new
PMSI holder and may risk their priority if they fund against
that PMSI holder’s supplies before a further 15 business days
have passed.
Proposed Solution/s
priority against existing PMSI security interest holders
until the 15 business days (or any shorter period as
per the following point) has expired. Any new PMSI
holder will be able to find the receivable’s financier’s
registered interest by searching the register.
This would protect receivables financiers against new
PMSI registrations during the notice period without
removing the protection for existing PMSI holders.
This is a major issue for some financiers and can result in
delays in for businesses obtaining finance.
1.4 Section 64 - 15 business day
notice requirement
1.5 Section 64 - Drafting error
The notice period for section 64 notices was originally 5
business days which worked well with the 20 business day
period under the Corporations Act to perfect the security
interest, however when the section 64 notice period moved
out to 15 business days, the 20 business day rule remained.
This is a very short period to complete registrations and
ensure they are complaint with all guidelines in the Act.
The section 64 notice period should be reduced to 10
business days, or the registration period increased to
30 business days.
There is an error in the drafting of Section 64 (1) (b). The
Section 64 (1) (b) should be amended by removing the
The preferred course is to change section 64 so that a
registration against accounts can be made and
become effective at any time and will achieve priority
from that date (subject in the case of prior PMSI
holders to the notice requirements). The general rule
will then apply and, under the Corporations Act,
registration must be completed within 20 business
days of the factoring or invoice discounting agreement
commencing.
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Issue
Issue and Example/Case Study
Proposed Solution/s
secured party which not yet be “holding” a priority interest”
when it gives the notice.
word “holding” in the first line and replacing it with
“which will hold”.
1.6 Section 64 - Priority limited
to PMSIs
If a supplier has an “all moneys” retention of title clause, its
security interest may only be a PMSI to a limited extent which
means that the receivable financier only achieves priority over
that part of the security that is a PMSI.
It is suggested that Section 64 priority should apply to
the entire security interest of the prior PMSI holder.
1.7 Section 64 - On-hire of
equipment
If equipment is on-hired, section 64 can be ineffective due to
the reference in section 64(1) to “same grantor”.
The “same grantor” requirement should be modified
or removed.
A receivables financier’s client may lease/hire goods and the
debt (i.e. lease/hiring charge) is purchased. The client may
have leased the goods from another financier; that financier
may have a PMSI in the goods and may claim the debt as
proceeds. The goods are inventory as they have been leased.
That is addressed by serving a notice under section 64 on the
lease financier so that the receivables financier obtains
priority over the debt.
But if there is an interposed entity, section 64 cannot be used
because the grantor of the PMSI and the client (transferor of
the debt) are not the same, due to the reference to the “same
grantor”. Clause 1.9 of the Regulations does not solve the
problem.
1.8 Section 81 - Rights on
transfer of account or chattel
paper
Due to the current drafting of Section 81, it can only be used
to override a prohibition on assignment if the prohibition
clause restricts or prohibits the transfer of an account or
chattel paper “for currency due or to become due”. Currency
means notes and coins. If the contract is silent in this regard
and section 81 is applied literally then it is probably effective.
However if the contract states a method of payment that is
This should be reviewed to provide more clarity or an
improved description of the term “currency”. See
comments below on the definition of “currency”.
It is suggested that the word “currency” be replaced
with the word “payment”.
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Issue
Issue and Example/Case Study
Proposed Solution/s
anything other than currency then section 81 is not effective.
1.9 Definition of currency
The word “currency” was substituted for “money” during
drafting of the PPSA, introducing ambiguity. See, for example,
s 81(1) (b) which refers to “currency due”, when the usual
commercial expression is “money due”.
“Currency” should be defined to include all forms of
payment as “money” not a “medium of exchange”; or
should be left undefined.
1.10 Chattel paper
This concept is of doubtful relevance to the Australian market.
It adds unnecessary complexity and uncertainty to the PPSA.
It is suggested that either
For receivables financiers, the overlap between the “chattel
paper” and “account” concepts and the fact that section 71
prevails over section 64 gives rise to uncertainties.
1.11 Sections 84, 85 and 86 proceeds
1.12 Section 85
The current wording of these sections makes it difficult for the
primary producers of grain and livestock to obtain receivables
finance over the proceeds of sale of their produce due to the
priority given to the proceeds of crops and livestock. This is
explained in more detail below.
Grain Section 85 applies so that a perfected security interest
granted in relation to a debt which enabled the crop to be
produced will have first priority over ”any other security
interest” that is granted in the same crop or proceeds.
1. The concept of chattel paper be removed from the
PPSA; or
2. Chattel paper be restricted to arrangements where
it is demonstrated to be of relevance in the Australian
finance market. In particular an invoice or similar
document which evidences a sale on retention of title
terms should not constitute chattel paper.
These provisions should be amended to allow priority
for receivables financiers so that primary producers
can obtain receivables finance for the proceeds of
crops and livestock.
The proceeds of crops include grain, therefore a security
interest as described above when perfected and lodged within
specified time frames will prevail over ANY security interests
in crops and the proceeds. Section 64 will not prevail. A
receivables financier is also at risk of a subsequent security
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Issue
1.13 Section 86
Issue and Example/Case Study
Proposed Solution/s
interest gaining automatic priority over accounts. This makes
it almost impossible to achieve gain an acceptable security
position.
Livestock Section 86 of the Act applies so that a perfected
security interest granted in relation to debt which enabled the
livestock to be fed or developed will have first priority over
”any other security interest” except a PMSI, that is granted in
the same livestock or proceeds. Livestock extends beyond live
animals and includes carcasses.
“Proceeds” includes meat or wool, therefore a security
interest described above when perfected and lodged within
specified time frames will prevail over all security interests in
crops and the proceeds unless the security interest is a PMSI.
Section64 will not prevail and there is a risk of a subsequent
security interest gaining automatic priority over accounts. As
with crops, it is extremely difficult to gain an acceptable
security position for a receivable financier.
1.14 Sections 85 and 86 Discrepancy
It is not clear why the words “(other than a purchase money
security interest)” appear in Section 86. They mean that a
PMSI over livestock maintains its priority under Section 86
whereas a PMSI over crops loses priority under Section 85.
The Explanatory Memorandum for Section 86 states, without
further explanation, that:
“3.7 A similar rule would be established for livestock, but
whereas the crop PMSIs would have priority over other PMSIs,
the priority interests in livestock would not have priority over
PMSIs (clause 86).”
These sections should be consistent unless there is a
clear reason for the different treatment of livestock
and crop PMSIs.
It would be more efficient for the financiers of crops and
livestock (both general financiers and receivables financiers) if
these provisions were consistent.
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Issue
1.15 Section 277 - Time for
responding to a request
Issue and Example/Case Study
Proposed Solution/s
Section 277 stipulates a compliance period of 10 business
days for responses to requests under Section 275 for
information about security interests. This is considered too
long when a receivables financier (or potentially any other
financier such as an equipment financier) trying to understand
registrations prior to providing specialist funding to a new
client.
The section 277 notice period should be reduced to 5
business days.
This issue is related to that of multiple registrations and
“clutter” on the Register caused by unnecessary multiple
registrations by some financiers and failure by many financiers
to remove registrations in respect of discharged security
interests. If there were fewer and more comprehensible
registrations, the process of a new financier investigating
existing registrations would be simpler and quicker. This
would greatly advantage business trying to obtain additional
finance from alternative sources (eg receivables finance) to
their general financier.
1.16 Section 275 - Obtaining
information about prior
registrations
A related issue is the difficulty in interpreting many
registrations, which gives rise to the need to go through the
formal Section 275 process. Many grantors do not
understand the nature of the registrations against them, so a
new financier has to go through the Section 275 process if it
cannot get clarification from the current secured party(ies).
The Register should contain more information about
the underlying security interest, perhaps by requiring
the secured party to lodge a copy of its security
agreement, as was the case with charges registered
on the ASIC company charges register.
Often a grantor does not wish to alert an existing financier
that they are seeking finance elsewhere, nor does an
alternative financier want to give current financiers the
opportunity to discourage the client from obtaining
alternative finance. This is of particular concern to small and
specialist financiers (such as receivables and equipment
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Issue
Issue and Example/Case Study
Proposed Solution/s
financiers) who are competing with the major lenders for
business. In some cases, the debtor or grantor may need to
formally authorise or request the secured party to provide the
information under Section 275(7), for example if there is a
confidentiality agreement in place.
1.16 - Turnover trusts
A typical subordination deed and some other arrangements
include a “turnover trust”. For example, a person (eg a
shareholder) may provide a loan to the grantor which is
subordinated. So far as a financier is concerned the loan will,
for most purposes, be considered to be equity. The person
agrees that the loan cannot be repaid while the financier’s
facility is on foot and if it is repaid the repayment is held on
trust for the financier. That trust is a “turnover trust” and
should be registered on the PPSR. A similar issue can arise
under a guarantee and a deed of priority.
Turnover trusts should not be deemed to be a security
interest for the purposes of the PPSA and should be
excluded from the definition of a security interest.
A turnover trust is not a traditional security interest, but is
probably a security interest which should be registered to be
enforceable against a liquidator. There is no evidence that
disclosure on a public register is required to achieve a public
policy objective and it is an unnecessary burden to register
these security interests. Further it is not commercially
appropriate for a security interest to be registered against a
lender merely because the lender has agreed to subordinate
its interest. If a turnover trust is a security interest that could
have repercussions for negative pledge covenants binding on
the lender. The entitlement to repayment of the debt can be
determined by the general law.
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Issue
Issue and Example/Case Study
Proposed Solution/s
2. REGISTER / REGISTRATION
2.1 Register - Section 64 contacting PMSI holders
2.2 Register - Section 64 notice to PMSI holders
It can be difficult for a receivables financier to contact prior
security holders. It is also very labour intensive to extract and
document the data required for the giving of section 64
notices. It has been reported that 1-2 staff members are
sometimes engaged in preparing section 64 notices. This adds
to the delay and expense for the clients of receivables
financiers.
The Register should have functionality to allow an
intending financier to issue a section 64 notice to
PMSI holders via the Register contact details.
Section 64 requires notice to be given to prior PMSI holders in
order to obtain priority over them. It would be expected that
a receivables financier could rely on a grantor search to
ascertain who these secured parties are, based on whether a
search shows that any security interests are PMSIs. However,
if a secured party has omitted to mark the PMSI field in their
registration, this does not change the underlying nature of the
security as a PMSI (whether or not the PMSI holder has
complied with the requirements to obtain “super” PMSI
priority), but the receivables financier may not know to give
them a Section 64 notice. The receivables financier’s position
in such a case is unclear. To address this issue, we understand
that some receivables financiers give a Section 64 notice to all
those with a security interest against the grantor in case they
are PMSIs, which may confuse non-PMSI secured parties and
result in delays to settling the facility. It may also
unnecessarily alert prior secured parties to the proposed
receivables finance facility.
Section 64 should be amended to address this issue.
In the meantime, AFSA could issue guidance alerting
financiers to this issue We agree with this statement
and in particular we advise that it has come to our
attention that there are fraud risks related to the
current release process. In releasing a security
interest from the register staff do not need to log in to
the PPSR system with the passwords and codes
allocated to them, they only need to enter onto the
screen that allows releases and apply the SPG and
access code. If releases are processed in this fashion
we have no way to determine who has processed the
release. We request that a change to the register be
made so that it is a requirement that you must log
into the register using secret codes allocated before a
release can be processed so that audit records can be
maintained to mitigate fraud risk.
Another option would be for the Register to provide
an extract of all the fields required for giving of notice
in a mail merge format to an intending financier.
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Issue
Issue and Example/Case Study
Proposed Solution/s
2.2 Register - Section 64
A person searching the Register does not know that Section
64 applies to a security interest (except a prior PMSI holder
who has received a Section 64 notice from a receivables
financier). This is of concern in insolvency situations where an
external controller, receiver or administrator is not aware of
the application of Section 64 to a particular security.
A receivables financier should be able to note on the
Register that Section 64 applies to its security interest
and the Register should disclose this on a search of
the grantor.
2.3 Register - Change of name
of secured party or Secured
Party Group
It is unclear if a change of (i) a secured party’s name and (ii) a
secured party group on the PPSR is a registration event and if
the Registrar has the necessary power under the PPSA to issue
a single Verification Statement where the change of name is
the result of a bulk transfer of security interests between
secured parties.
Where a change of secured parties and secured party
groups is the result of bulk transfer of (say 100 or
more) security interests between secured parties,
these transfers should not be considered a
registration event for the purposes of Section 157.
If these changes are registration events and a secured party
changes the details for whatever reason (e.g. acquisition of a
loan book from another financier), that secured party may
need to issue a Notice of Verification to each grantor as a
result of the change.
The PPS Registrar should be authorised to issue a
single Verification Statement in lieu of all secured
parties involved in the transfer issuing individual
notices of verification statements to each grantor
affected by the change.
NB: In the case of a legal assignment of the debt, the grantor
would have been required to consent to transfer of debt
and/or security in any event and should therefore be aware of
the proposed “registration event”.
The need to split a single summary verification statement into
individual verification statements has been described by one
member as a “nightmare”.
2.4 Register - Change of
address for service - giving of
notice identifier (GONI)
It is unclear if a change of a secured party’s address recorded
on the PPSR as the address for service is a registration event
or if the Registrar has the necessary authority under the PPSA
to issue a single Verification Statement.
Change of address should not be a registration event
for the purposes of s157 of the PPSA.
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Issue
Issue and Example/Case Study
Proposed Solution/s
If it is a registration event and a secured party changes its
address for service for whatever reason (e.g. acquisition of a
loan book from another financier), a secured party may need
to issue a Notice of Verification to each grantor as a result of
the change.
2.6 Register - Removal of
expired registrations
The process for providing a release and undertaking to amend
a registration at settlement is not working as would have been
envisaged under the Act. In many instances secured parties
are not removing the registration from the PPSR as
contemplated by the release document.
Members have commented that the “threat” of a report to
AFSA about failure to remove a registration usually has no
effect.
There should be some requirement for secured
parties to review their registrations and remove
dormant ones (with the consent of the client) where
there is little or no likelihood of any credit being
requested or required. In other words, the PPSA
should provide stricter provisions about the removal
of expired registrations, so that it more fully reflects
its intended role as a “notice board” of security
interests.
The comment has also been made that most of the major
short term hirers of equipment have lodged PMSIs in similar
form against any entity that may have applied for credit with
them. Because many small businesses pay scant attention to
registrations against them, many dormant registrations exist
against these entities from hiring companies that they have
done no business with ever or for a lengthy period of time.
It could also assist if the Act mandated that the
registration token be provided in addition to a release
document at the time of settlement.
2.8 Register - Reporting
functionality
The PPSR reporting functions could be improved.
The report fields should be enhanced to include
information about a GONI, Grantor Name ABN and
ACN.
2.9 Register - Removal of
registrations
A DIFA member experienced an instance where a registration
was removed. They ascertained internally that they did not
release the security interest so contacted the PPSR for an
explanation, they did not respond or provide any explanation
as to why it was deleted and simply reinstated it. As the
The register should maintain a record of historical
registrations as was held by ASIC.
For efficiency this should be a separate report within
the search output, ideally a “current” section and a
“satisfied” section including the date and time of
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Issue
2.9 Register -Fraudulent
removal of registrations
Issue and Example/Case Study
Proposed Solution/s
Register is live and does not leave any visible trail it is
concerning that data can be removed without our
acknowledgement or control.
A secured party should therefore retain searches to provide
evidence that a registration was undertaken in case this issue
arises again.
release.
A related concern is about fraud risks with the current release
process. In releasing a security interest from the register, staff
do not need to log in to the PPSR system with the passwords
and codes allocated to them, they only need to enter onto the
screen that allows releases and apply the SPG and access
code. If releases are processed in this fashion there is no way
to determine who has processed the release.
It is suggested that a change be made to the Register
so that it is a requirement that a user must log in using
secret codes allocated before a release can be
processed, so that audit records can be maintained of
who processes a release in order to mitigate the fraud
risk.
We will also raise this matter through the AFSA PPS
Operations Forum.
3. MISCELLANEOUS
3.1 Priorities
Financiers providing sale and lease back finance (or
equivalent) should realise that it is no longer appropriate for a
receivables financier release its security interest over the
relevant collateral. Instead the security interest should be
subordinated.
AFSA or industry bodies could issue guidance and a
short form subordination document.
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