An interim report on the operation of the Personal Property Securities Act 2009 was released last month to address the impact of the Act on small businesses and any priority action, including legislative amendments, that should be considered by the Government. Partner, Amanda Banton and Special Counsel, Lisa Gallate, discuss the report.
The Personal Property Securities Act 2009 (PPSA) was introduced to codify the varying and numerous state and territory laws into a national regime dealing with the registration of security interests over personal property. This regime not only included the introduction of the PPSA itself but also the creation of the PPSA Register (Register). Together, these measures aimed to:
- increase the consistency and certainty of secured finance
- reduce the complexity and costs of secured finance
- enhance the ability of businesses and consumers to use their assets as security and improve their access to cost-effective finance.
However, the Government did recognise that the PPSA was complex, and a “complex and vital area for economic activity”, and as such, provision was made for a review of the PPSA’s operation by the third anniversary of its commencement i.e. by 30 January 2015. On April 4 2014, the Government commissioned a review of the operation of the PPSA and its impact, after more than two years in operation. An interim report, released on 31 July 2014 sought to identify concerns with the PPSA through a submission process.
The nature of the concerns raised in submissions related mainly to:
- A lack of awareness of the PPSA and its effect, especially amongst small businesses.
- Its complexity and difficult interpretation.
A lack of awareness
Almost all of the submissions raise the lack of awareness of the PPSA among the small business sector despite Government implementation of media campaigns and community focused initiatives. The Interim Report states that “almost all of the submissions make the point that much of small business is either entirely unaware of the existence of the PPSA, or does not understand the extent to which the PPSA can impact on their business activities”. The consequences of this meant these businesses often lost assets during a customer’s external administration because they failed to correctly register their interests or were not aware that ownership of the asset was no longer sufficient protection. This issue was further compounded by the fact that they could ill afford the necessary financial or legal expertise to properly complete a registration. In addition, insolvency practitioners have been astute to determine whether equipment hire businesses that hire goods to an insolvent company or suppliers who supply goods on a retention of title basis have satisfied the PPSA requirements. The Interim Report suggests this is a widespread issue for hirers and suppliers.
The second major and recurring concern from submissions was the complex nature of the PPSA and how individual provisions were intended to relate to one another. Businesses saw this as an unnecessary contradiction to the PPSA’s intentions to make the statutory framework simpler. Although it needs to be appreciated that such broad ranging reforms in a relatively complex area are likely to attract a certain level of intricacy, many of the difficulties arise out of the language of the provisions which use many technical terms that are unfamiliar to the general business community and are derived from overseas models that are unfamiliar in Australia. The Interim Report provides by way of example, the concepts of “perfection” (the ways in which a security interest can be given as “robust a character as possible”), “intermediated security”, “security interest” (there being confusion whether it extends beyond a property interest to a contractual interest, such as joint venture agreements), “purchase money security interest” and “transfers” (it being unclear whether it includes a leasing of goods by a secured party to a grantor). Submissions have also noted that the register itself is difficult to navigate, not only in registering property to perfect an interest, but also in conducting searches.
As an aside observation, we have noticed in practice, that there is an apparent lack of production of the document that creates the security interest, on the register. Whilst the register will record the interest, it often appears not to include the physical copy of the document that creates it. This is a practical issue of application that could also be addressed in further consultations for the final report.
Although the final report is not expected until 30 January 2015, certain pathways to reform have been identified and suggested in the interim review. The problem with these proposals is that they come from different industries and business sectors and contain conflicting proposals. Some have suggested a narrowing of the PPSA, whilst some have proposed its expansion. Indeed some of these changes to the provisions have called for minimum thresholds on properties (given the difficulty and expense of working with the PPSA for low value property items) and others have submitted extending the PPSA to fixtures, water rights and excluded statutory licences. It is unlikely however that any ad hoc approach to reforms will be successful. The preference of the Interim Report’s author is not to recommend industry or property specific carve outs as this is likely to add to the overall complexity and uncertainty of the PPSA.
The Interim Report concludes that proposals for change raised in submissions and other relevant issues be the subject of consultation papers and released for broader industry consultation. The Interim Report has recommended that the review continue to engage with the Australian Financial Security Authority (AFSA) and its advice be sought on the practicalities of any proposed changes to the register. Also, that AFSA (and business representatives, especially for ROT suppliers and the hiring industry) develop a targeted short term education and awareness raising campaign of the PPSA and its registration requirements.
It is expected that the final report will go further in raising specific measures to improve the application and reduce the complexity of the PPSA for all areas of business. There is no doubt however, that more needs to be done in the short term to improve the awareness of the PPSA by small business, keeping in mind the necessary re- education strategies which may be required should any significant reforms be made in the future.