23 Mar 2009

Senate Standing Committee recommendations on PPS reform

The exposure draft of the Personal Property Securities Bill 2008 was referred to the Senate Standing Committee on Legal and Constitutional Affairs in November 2008. The Senate Standing Committee was due to report by 24 February 2009. That reporting date was delayed, with the report finally tabled on 19 March 2009.

Although the Senate Standing Committee recommended that PPS reform legislation should be enacted, a number of significant changes to the Exposure Draft were recommended. The recommendations included incorporating a conflict of laws regime, addressing the significant number of privacy concerns that had been raised by the Office of the Privacy Commissioner and others and adopting simpler drafting. It is not surprising, in light of the significant recommendations that were made that the Committee also recommended a delay in the commencement date of the legislation.

It remains to be seen what the Government's response to the recommendations of the Senate Standing Committee will be.

Detailed comments

The Report contains 11 key recommendations.

The Committee also commented that, had it had more time, it would have looked more closely at a number of other issues. These included purchase money security interests, the provisions in the Exposure Draft dealing with "all present and after acquired property", the interaction of the Exposure Draft with the Consumer Credit Code and the transitional provisions which will apply during the firsttwo years of operation of the new regime. Given the recommendation for an extension of time before the legislation commences, the Committee is of the view that these issues should be considered in more detail.

The key recommendations are:

Extension of time for commencement of legislation

A number of the submissions made to it expressed concern with the proposed May 2010 implementation date. For example, the Australian Bankers' Association, which is generally supportive of the reform process, commented that its members would find it extremely difficult to put in place the systems, compliance arrangements and documentation etc necessary to comply with the new regime by May 2010. Other submissions expressed the view that, although there has been extensive consultation by Government since 2006, given the significant changes to the current law that are proposed under the new regime, there had not been sufficient time to consider all of the ramifications of the draft legislation.

In light of these concerns, and given the amendments that the Committee suggested to the Exposure Draft, it was recommended that the implementation date be extended by at least 12 months.

Adoption of internationally accepted conflict of laws provisions

Importantly, the Committee recommended the adoption of a full set of conflict of laws rules. It is unfortunate that the Exposure Draft did not include a full set of rules and that the only rules available for public comment were the draft conflict of laws rules proposed in the submission of the Attorney-General's Department to the Committee. Those draft rules were made publicly available much later than the Exposure Draft. This meant that others making submissions to the Committee had insufficient time to consider the Attorney-General's Department's suggested rules or provide significant comments to the Committee on those rules.

The Committee recommended that a set of rules already applying in another jurisdiction be adopted, such as those used in New Zealand, unless there are particular reasons for departing from that international model. Interestingly, it appears that, in proposing its draft rules, the Attorney-General's Department in fact started with the New Zealand conflicts model. Accordingly, it is unclear whether there will be much change to these provisions in the next version of the legislation.

Address privacy concerns

Privacy concerns centring on the new PPS register were a key issue in a number of submissions made to the Committee. For example, submissions were made by the Australian Privacy Foundation, the Office of the Privacy Commissioner and the Office of the Victorian Privacy Commissioner (as well as others) which focused exclusively on privacy.

Four of the key recommendations of the Committee addressed privacy issues. These were:

  • That key privacy issues are dealt with in the legislation itself, not the regulations. For example, the requirement that address details are not included for searching on the PPS register is currently in the proposed regulations, not the Exposure Draft, and should be relocated.
  • Either a new Privacy Impact Assessment should be undertaken by an independent experienced organisation or the Privacy Impact Assessment carried out by the Attorney-General's Department should be reviewed by such an organisation. In either case, the results should be made public.
  • If a new Privacy Impact Assessment does not consider the submissions of the Office of the Privacy Commissioner, a separate review of that submission should be undertaken by the Attorney-General's Department and made public.
  • There should be a reconsideration of enforcement issues. For example, the Government should put in place satisfactory arrangements to ensure information held in the PPS register is not obtained for an improper purpose (and appropriate penalties should be imposed for improper use).

Reconsider the drafting style of the legislation

The Committee believed the drafting style of the Exposure Draft was overly complex and confusing. The Committee recommended simplification, in terms of language, structure and use of terms. The drafting in overseas legislation was suggested for use, wherever possible. The Committee recommended that the legislation is limited to dealing only with "common circumstances" to aid in simplifying the legislation. It was acknowledged that the trade-off would be that there will be a greater need for judicial interpretation of the legislation over time.

It is arguable that this is not an entirely sensible suggestion. It is true that the Exposure Draft is long and there are certainly a number of changes that could be easily made to improve the comprehensibility and structure of the Exposure Draft. However, the PPS legislation will have a substantial impact on the law of personal property securities in Australia, in many circumstances introducing concepts previously unknown to Australian law (for example, purchase money security interests and commingling). Therefore certainty should be seen as more important than simplicity. Those looking at the legislation should be able to apply the legislation to their particular circumstances without the need to seek guidance from the courts.

Review the operation of the legislation in three years

The "Personal Properties Securities Law Agreement 2008" sets out the agreement reached between the Commonwealth, the States and the Territories in relation to PPS reform at the 2 October 2008 COAG meeting. That Agreement provides for the review of the legislation withinfive years of the date that it commences. Although this review requirement is included in that Agreement, it is not provided for in the Exposure Draft.

The Committee, very sensibly, has recommended that a review process is incorporated in the legislation itself and that a review occurs withinthree years, not five. Three years of practical operation of the legislation would, it seems, be ample time to allow problems and issues to be identified and dealt with in such a review.

Other recommendations

  • One of the controversial provisions of the Exposure Draft is a statutory duty imposed on parties to a security agreement to act "in a commercially reasonable manner". This will impose a statutory duty currently unknown to Australian law. The inclusion of this provision does not promote certainty in the law. Unfortunately the Committee recommended the retention of this provision.
  • The Committee recommended that consideration be given to protecting the rights of unperfected lessors against unsecured creditors of an insolvent lessee. This recommendation was made in response to concerns the Exposure Draft provides an unperfected lessor will lose title to its goods even if there is no competing security interest claimed in respect of those goods on the insolvency of the lessee.
  • Further education in respect of the intellectual property provisions of the legislation, together with a more detailed explanation of those provisions in the explanatory memorandum, was recommended.
  • Although not elevated to the level of a recommendation, the Report supported the removal of the chattel paper provisions included in the Exposure Draft.

The Liberal senators on the Committee issued a dissenting report, which agreed with a number of the key recommendations though disagreed with some (for example, the dissenting report recommended the proposed new statutory test of acting "in a commercially reasonable manner" is removed from the legislation).

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.