The Government’s red tape reduction… Do the proposed changes to the PPSA go far enough?

The Personal Property Securities Amendment (Deregulatory Measures) Bill 2014 (Cth) (Bill) was introduced to the Parliament of the Commonwealth of Australia on 19 March 2014 as part of Prime Minister Tony Abbott’s “red tape bonfire”.  The substantive amendments to the Personal Property Securities Act 2009 (Cth) (PPSA) appear minor--merely involving the repeal of two sub-sections.  But, as a fitting reflection of the complexity of the PPSA, these repeals have warranted an extensive 25 page Explanatory Memorandum proving that any tinkering with the PPSA is fraught with difficulty despite bringing a welcome amendment.

Although the outcry from the impact of the PPSA has come from many business sectors, these repeals are at the behest of equipment hire firms. Parliamentary secretary Josh Frydenberg said the PPSA was having a detrimental impact on hire firms and was costing the industry millions of dollars a year in registration fees and compliance costs.1  The Bill’s stated aim is to minimise the need for small and medium hire businesses to make registrations under the PPSA.

The PPSA applies to security interests in personal property—that is any interest created by a transaction that in substance secures payment or performance of an obligation. While this could cover chattel mortgages and finance leases, a security interest has never traditionally extended to hire arrangements where the hirer retained ownership of the goods.  The PPSA changed this and treats the owner as if it has a security interest—a concept that has baffled some industry groups which can no longer rely on the notion that ownership rights are paramount.  In order to protect their ownership interests in the hired goods, hire firms now need to register in the Personal Property Securities Register (PPSR).    

The general rule is that the PPSA deems any lease or bailment of goods for a term of more than one year, for an indefinite term or capable of extension to one year (by renewals or agreement between the parties) to constitute a security interest.  However, if the goods are motor vehicles, aircraft or watercraft (serial numbered goods), then the relevant term is 90 days or more.  The Explanatory Memorandum states that the hire industry has advised that less than 1% of its leases are for a period of more than one year so a great many are caught by the PPSA due to the 90 day rule. The Bill proposes to amend the PPSA so that leases and bailments of serial numbered goods of 90 days or more (but less than one year) fall outside the PPSA’s scope.      

The Explanatory Memorandum also states that a significant proportion of goods leased by small and medium hire businesses are serial numbered goods falling within the definition of motor vehicle.  The definition of motor vehicle covers a wide variety of items beyond what is normally considered to be a motor vehicle.  Peak bodies representing the equipment hire industry estimate that less than 5% of all stock available for lease is non-serial numbered goods.  The Bill, therefore, proposes to reduce registration and compliance costs even further by narrowing the definition of motor vehicle thereby removing even more leases and bailments from the PPSA’s scope. 

The Personal Property Securities Regulations 2010 currently defines motor vehicle to include personal property that is built to be propelled, wholly on land, by a motor that forms part of the property and is either capable of a speed of at least 10 km/h or has 1 or more motors that have a total power greater than 200 W.  The proposed amendment will combine the speed and power part of the definition so that a motor vehicle for purposes of the PPSA must both be capable of speeds of at least 10 km/h and have motor(s) with power greater than 200 W. 

The Bill’s red tape solution, therefore, is to reduce the number of leases that fall within the scope of the PPSA.  The Attorney-General supports this approach by indicating that the amendments bring the PPSA into alignment with the PPSA regimes in New Zealand and Canada.  We submit that red tape could be reduced even further by adopting other features of the Canadian and New Zealand PPSA regimes.  These features would benefit all users of the PPSR (not just hirers) without adversely impacting the utility of the PPSR or conflicting with the PPSA’s policy. 

For instance, the Explanatory Memorandum contains an example to demonstrate the compliance costs faced by small and medium equipment hire businesses.  In the scenario, Business A leases two serial numbered goods to Business B – one for an indefinite term and one for a term between 90 days and one year.  In order for A to protect itself against both B’s insolvency and B on-selling the leased goods, the example indicates three registrations are necessary.  One registration against the name of B to protect against B’s insolvency and two further registrations against each serial numbered good to protect against B selling the goods to a third party.  Three registration fees are incurred along with internal administration costs of performing three registrations.  In the example, removing leases with terms between 90 days and one year from the scope of the PPSA will reduce compliance costs by removing the need for one registration. 

If, however, both leases in the example were for a term of more than one year, three registrations are still required which, in our view, continues to be an unacceptable and unnecessary burden.  If this example arose in Canada, only one registration would be required with a commensurate reduction in PPSR fees and administrative costs.  The PPSRs in Canada are programmed so that serial numbered goods can be included in the same registration as the general registration against B’s business name.  This not only cuts compliance costs for the hiring industry but for any secured party who takes security interests over serial numbered goods.  This approach does not seem to conflict with the policy of Australia’s PPSA to the extent that commercial property is involved which requires grantor details to be included for registrations against serial numbered goods.    

Our suggested approach also produces efficiencies beyond registration compliance costs.  Currently a search on a grantor’s details in Australia can produce a myriad of registrations, clusters of which often belong to the same secured party.  In Canada, however, since one secured party needs only one registration against each grantor, a search result against the grantor details will bring up fewer hits and is, therefore, easier to interpret.  In addition, a search by serial number on one serial numbered good included in the registration will bring up the entire registration disclosing not only that serial numbered good, but all serial numbered goods financed by that secured party and all other collateral as well.  The search result is much more streamlined and comprehensive.

If the Attorney-General is serious about cutting red tape created by the PPSA, the next step should be assessing whether the programming of the PPSR adequately promotes the objectives of the legislation.  In our view, several PPSR programming changes are warranted and should be fully canvassed in the three year review of the operation of the PPSA mandated by s 343.