House of Representatives

Personal Property Securities (Corporations and Other Amendments) Bill 2010

Explanatory Memorandum

Circulated By the Authority of the Attorney-General, the Honourable Robert Mcclelland MP

SCHEDULE 1 - AMENDING TERMINOLOGY TO INCORPORATE THE FUNCTIONAL APPROACH

4.1 Under existing Personal Property Securities and Corporations law, transactions creating security interests are treated differently depending on the legal form of the transaction concerned. However, under the functional approach of the PPS Act, they will all be treated as security transactions where they perform the same function of securing payment or performance of an obligation.

4.2 The existing terminology of the CA, including charges, mortgages, liens, pledges and floating charges and fixed charges is based on the form of the transaction which creates the security interest. Schedule 1 would therefore, where appropriate, replace this terminology with terminology based on the functional approach of the PPS Act.

4.3 To harmonise the CA and the PPS Act:

a.
all references to charge and chargee would be replaced with security interest and secured party (items 28-39 and 42-84);
b.
all references to mortgage and mortgagee would be replaced with security interest and secured party (items 116-124);
c.
all references to floating charges would be replaced with circulating security interests and fixed charges with non-circulating security interests (items 86-87 and 89-100);
d.
all references to security would be replaced with security interests (items 101-114);
e.
all references to chargee, lienee and pledgee (or holder of lien or pledge ) would be replaced with secured party and all references to charge, lien and pledge with security interest (items 125-134, and 136-137);

4.4 Schedule 1 would also introduce the concepts described in paragraphs 4.5-4.9 below.

4.5 A new omnibus concept of security interest (items 9-10) would include the concept of PPSA security interests (items 4 and 10) in personal property together with the existing CA concepts of charges, mortgages, liens and pledges ; (items 56; 85; 115 and 143-5 replace charge with security interest ).

Example: Under subsection 442CB(1), an administrator only has a duty to act reasonably in exercising a power of sale over property that is subject to a pledge or a lien. This obligation to act reasonably would be extended to all secured property (item 135).

Example: Under subsection 443F(2), an administrator's lien has priority over any charges in so far as the administrator's indemnity has priority over the debts. This priority would be extended to all secured property (items 138-139).

4.6 A new omnibus concept of secured creditor (items 7 and 10) which would include PPSA secured creditors under the PPS Act and secured creditors under the Corporations Act;

4.7 A new omnibus concept of secured party (items 8 and 10) which would include PPSA secured parties and the existing concepts of chargees, mortgagees, lienees and pledgees in the Corporations Act as they apply to property to which the PPS Act does not apply (items 148-151 replace chargee with secured party );

Example: The disqualification of mortgagees under section 448C, would apply to all secured parties and not only to mortgagees (item 117).

4.8 A new omnibus concept of circulating security interest (items 1 and 10) which would include the PPS Act concept of circulating security interest together with the existing CA concept of floating charge;

Example: Under section 442B, administrators would continue to have the power to treat property, subject to a non-circulating security interest (previously a fixed charge), as subject to a circulating security interest (previously a floating charge) (item 88).

4.9 A new omnibus concept of possessory security interest (items 9-10) which would include PPSA security interests perfected by possession or control together with the existing concepts of liens and pledges in the Corporations Act.

Example: Where the company is under administration and the administrator is entitled to dispose of the property, the pledgee, lienee or secured party in possession or control ( possessory secured parties ) would all have to allow potential purchasers to inspect the property (items 133-134).

Example: Where the company is under administration and the pledgee, lienee or secured party in possession or control ( possessory secured parties ) have possession of the property, they would all be permitted to continue in possession of the property (item 156).

Example: The rules for the distribution of proceeds would be the same for all possessory security interests where the original property was subject to a lien, a pledge or a security interest perfected by possession or control (items 136-137).

Example: Section 441JA currently makes provision for the sale of property subject to a lien or pledge. Section 441JA would be replaced with proposed section 441EA which refers to the sale of property subject to possessory security interests (proposed section 441EA would also amend the Corporations Act in line with the PPS Act to remove the requirement that the security interest can only be enforced if there is no higher-priority security interest in the same property) (items 40-41).

5. EXTENDING THE CA CONCEPT OF PROPERTY TO INCLUDE PPSA RETENTION OF TITLE PROPERTY

5.1 The PPS Act concept of security interests includes transactions where the secured party, not the grantor, retains title over the property. This includes:

a.
agreements to sell subject to retention of title;
b.
romalpa clause agreements;
c.
conditional sale agreements;
d.
hire-purchase agreements; and
e.
leases and consignments that secure the payment or performance of an obligation.

5.2 Some transactions which do not secure the payment or performance of an obligation, but which have that effect, are deemed to be security interest under the PPS Act. These include:

a.
commercial consignments; and
b.
leases and bailments of greater than one year (or ninety days in the case of serial numbered goods) (i.e. PPS leases).

5.3 In order to align the Corporations Act with the PPS Act, property subject to these new PPSA security interests would be included in the Corporations Act as PPSA retention of title property (items 3 and 10) (the existing definition of lease in the Corporations Act would, however, exclude PPSA security interests (item 2) except in subsection 419(1) (item 151).

5.4 The Corporations Act currently defines retention of title clause property. This definition would be retained to account for any existing retention of title property but qualified to exclude PPSA retention of title property (items 3 and 10).

5.5 Therefore, there would be two classes of retention of title property:

a.
PPSA retention of title property (which includes most personal property that is subject to a retention of title clause) (items 3 and 10); and
b.
Retention of title clause property as defined in the Corporations Act (to the extent that it is not PPSA retention of title property ). This could include retention of title property:

i)
that is not personal property within the meaning of the PPS Act;
ii)
where the retention of title clause does not secure payment or performance of an obligation; or
iii)
where the relevant property interest is excluded by PPS Act, section

5.6 In those cases where it would not prejudice existing rights, property of the company for the purposes of the Corporations Act would include PPSA retention of title property so that PPSA retention of title secured parties could enforce their security interests as secured parties.

5.7 CA, Part 5.2 would not apply to PPSA retention of title property and therefore under subsection 419A(1), a controller would not be liable for PPSA retention of title property (item 152).

5.8 A secured party with a security interest over substantially the whole of the property would be able to appoint an administrator to enforce their security interest (CA, section 436C) (item 142, definition of enforce, item 154, definition of property in Part 5.3).

5.9 CA, subsection 441A(3) enables a chargee or receiver with a charge in the whole or substantially the whole of the property to enforce the charge. Property in this context would include PPSA retention of title property and where a company is under administration, the chargee with a charge over the whole or substantially the whole of a company's property could enforce the security interest before or after the decision period (items 140-141, definition of decision period, item 154, definition of property in Part 5.3).

5.10 Where an administrator incurs debts in the exercise of his or her duties, the administrator is personally liable for the debts (CA, section 443A), and this would include for property hired, leased, used or occupied that gives rise to PPSA security interests (item 162).

5.11 An administrator may only withdraw from security agreements, entered into prior to the administration, where the property is owned or leased from another person (CA, section 443B) but this would exclude property giving rise to PPSA retention of title security interests (items 164-165). An administrator would therefore only be able to withdraw from transactions involving true operational leases or real property.

5.12 Currently, under the CA, sections 443D-E, an administrator is indemnified and has a lien over all property of the company for debts arising during the administration. The administrator's lien would not have priority over PPSA retention of title because it is not company property (items 162-165). In future, an administrator would be indemnified out of, and have a lien over, all property of the company including unperfected PPSA retention of title property but excluding non-PPSA retention of title property (item 166).

5.13 CA, subsection 444D(1) provides that a deed of company arrangement binds secured creditors but that this does not affect their rights to realise their collateral except to the extent that they voted for the deed and the deed stops them doing so. In future, PPSA retention of title property holders would be subject to CA, section 444D(2) and would therefore be able to deal in the PPSA retention of title property unless they voted in favour of a deed of company arrangement which prevents them from dealing in the property (items 167-8).

5.14 However, there would be circumstances where it would be important to preserve existing rights by not including PPSA retention of title property within the definition of company property . Where a company is insolvent and the property of the company is insufficient to meet the payment of unsecured creditors, employee entitlements would have preference over floating charges (CA, section 561). If PPSA retention of title property were included as company property, it would be subordinate to employee preferences and PPSA retention of title property holders would lose their property. Therefore, property of the company would exclude PPSA retention of title property in this context.

5.15 In the following situations, property of the company would only include PPSA retention of title property where those security interests are vested in the company through either PPS Act, sections 267 or 267A or proposed section 588FL (items 171, 174 182).

5.16 Where a company is being wound up, a person cannot proceed against the company's property (CA, section 471B). This would include PPSA retention of title property vested in the company (item 171).

5.17 In determining the remuneration for a liquidator, the Court is required to take into account, among other things, the value and nature of the property which the liquidator was required to deal with (CA, section 473(10)). This would include PPSA retention of title property vested in the company (item 171).

5.18 When a company is being wound up, the liquidator is required to take custody of the property to which the company is entitled (CA, section 474). This would include PPSA retention of title property vested in the company (item 172).

5.19 The liquidator can commission a report on the affairs of the company (CA, section 53) and property of the company (CA, section 475(8)). This would include PPSA retention of title property vested in the company (item 171).

5.20 The powers of the liquidator include selling or disposing of property and doing all things necessary for the winding up of the company and distributing its property (CA, section 477). This would include PPSA retention of title property (item 171).

5.21 After the Court orders a company to be wound up, the liquidator must collect the company's property (CA, section 478). The Court may also require a person to deliver property, (item 171), to which the company is prima facie entitled, to the liquidator (CA, section 483). This would include PPSA retention of title property vested in the company (item 171).

5.22 Where the property is insufficient to satisfy all creditors, the Court may make an order on the priority of payments from the property (CA, section 485(3)). This would include PPSA retention of title property vested in the company (item 171).

5.23 In reviewing the liquidator's remuneration, the Court must take into account, the value and nature of the property, dealt with by the liquidator (CA, section 504(2)). This would include PPSA retention of title property vested in the company (item 174).

6. REPEAL CHAPTER 2K (REGISTRATION OF COMPANY CHARGES) BUT RETAIN THE EFFECT OF SECTIONS 266 AND 267

6.1 Most charges currently subject to the registration requirements of Chapter 2K would be covered by the PPS Act. These existing charges would be migrated to the PPS Register to be established by the PPS Act and in future such charges would be registered on the PPS Register. Chapter 2K would be repealed (item 18) and consequential amendments would be made throughout the Corporations Act (items 11-17 and 19-27) with effect from the time the PPS Act comes into effect (expected to be May 2011).

6.2 Although Chapter 2K would be repealed, section 266 would be retained to prevent security interests being granted fraudulently with knowledge of an imminent administration, liquidation or deed of company arrangement and to avoid property falling into the trustee's or administrator's estate or being claimed by unsecured creditors.

6.3 For security interests entered into after the commencement time, the proposed section 588FL (item 183) would replace section 266. Section 588FL would provide that where a company is being wound up, an administrator appointed, or a deed of company arrangement executed:

a.
any PPSA security interest which was not continuously perfected for six months prior to that event; or
b.
any PPSA security interest not continuously perfected at 20 days (or a later day ordered by the Court) after the agreement was made until the day the winding up or the administration begins, would vest in the company and the secured party would be unable to enforce the security agreement (item 183).

6.4 Despite the operation of proposed new provisions replacing sections 266 and 267, a transferee of property which was subject to a security interest to which the new provisions apply, would take the property free of the security interest provided that they had no knowledge of the security interest (item 54). However, the onus of proving this lack of knowledge would be with the transferee. This reversal of onus is required because the relevant matters requiring proof would usually be within the knowledge of the transferee and it would be unduly onerous to require the secured party to prove the transferee's state of mind. This provision would protect bona fide purchasers for value and render ineffective fraudulent transactions designed to frustrate payments to creditors.

6.5 Proposed section 588FL would vary section 266, which requires that a security interest be registered within 45 days of being created or registered within 6 months of the administration, liquidation, or deed of company arrangement. Section 588FL(2) would instead provide that when a company is being wound up, an administrator appointed, or a deed of company arrangement executed (the critical time), any PPSA security interest which was perfected, registered or enforceable against a third party after the latest of:

a.
six months before the critical time; or
b.
20 days after the security agreement came into force;
c.
a later time ordered by the Court under proposed section 588FM; would vest in the company (item 183, proposed section 588FL(4)). Proposed section 588FL(4) would only apply if a security interest is perfected at the specified times by registration and it would not apply if the security interest is perfected by possession, control or temporary perfection (even if the security interest is also perfected by registration).

Example: CompanyA grants FinanceA a security interest in its all present and after acquired property . FinanceA registers its security interest 15 days after the creation of the security interest. CompanyA becomes insolvent 30 days after the security interest is granted. FinanceA would retain their security interest, because FinanceA registered the security interest within the required 20 day period.

Example: CompanyA grants FinanceA a security interest in its all present and after acquired property . FinanceA registers its security interest 25 days after the creation of the security interest. CompanyA becomes insolvent 30 days after the security interest is granted. The security interest would vest in CompanyA because FinanceA did not register the security interest within the required 20 day period or within the six month period prior to the critical time.

Example: CompanyA grants FinanceA a security interest in its all present and after acquired property . FinanceA registers its security interest 25 days after the creation of the security interest. CompanyA becomes insolvent eight months after the security interest is granted. FinanceA would retain its security interest because it registered its security interests prior to the six month period before the critical time.

Example: CompanyA grants FinanceA a security interest in its all present and after acquired property . FinanceA registers its security interest 15 days after the creation of the security interest. CompanyA becomes insolvent 5 months and 25 days after the security interest is granted. The security interest would not vest in CompanyA because FinanceA registered the security interest within the required 20 day period (despite the fact that the registration was also made within 6 months before the insolvency).

6.6 If the law of another jurisdiction governs the enforceability of the security interest, and also provides for its registration, proposed subsection 588FL(3) would provide that the PPS Act security interest would vest in the company where the perfection, registration or enforceability against third parties occurs after the latest of:

a.
six months before the critical time; or
b.
20 days after the security agreement came into force;
c.
a later time ordered by the Court under proposed section 588FM.

6.7 As deemed security interests (transfers of accounts and chattel paper; PPS leases and commercial consignments) are not true security interests, it would operate unfairly to subject them to the rule in proposed subsection 588FL(4) and they are therefore excluded from this rule by proposed section 588FN) (item 183). Subordinated debts (turnover trusts) would also be excluded from this rule (proposed subsection 588FN(2)).

6.8 Proposed subsection 588FL(4) would also not apply if the secured party agreed to the transfer of the collateral and the PPSA security interest is perfected at the end of 5 business days after the transfer or where the secured party did not agree to the transfer, the PPSA security interest was continuously perfected until 5 business days after the day the secured party acquired the knowledge required to perfect their interest by registration (item 183, proposed subsection 588FN(3)).

6.9 Under PPS Act, section 266, an unperfected security interest will vest in the grantor and as a result, property that is currently exempt from liquidation would, if subject to an unperfected security interest, vest in the company and be available for distribution to unsecured creditors. The property could, however, subsequently be transferred free of the PPSA security interest , provided that the transferee provides new value for the property and has no actual or constructive knowledge of the winding up, deed of company arrangement or administration (item 183, proposed subsection 588FL(5)).

6.10 Existing section 267, which prevents the enforcement of a security interest granted by a company to a person associated with the company within six months after the granting of the interest, would be replaced by proposed section 588FP (item 183). The new provision would be designed to prevent a company granting security interests to persons associated with the company (which would enable those persons to appoint receivers and take control) and would apply to PPSA security interests and other charges to which section 267 currently applies.

6.11 Proposed section 588FP retains CA, section 267. Where a security interest was granted to an officer of a company and associated persons and the secured party purports to take steps to enforce the security interest, within six months after the security interest is created, without the leave of the Court, then the security interest would be void. The six month period after the security agreement refers to six months after the time the security agreement is made and not to six months after the attachment of the security interest.

6.12 This would not affect the title of a transferee who takes the personal property for value and without actual or constructive knowledge of the seller's security interest. Proposed section 588FN provides that a transferee of property, which was subject to a security interest in proposed sections 588FL and FM, takes the property free of the security interest provided that they had no knowledge of the security interest.

6.13 Proposed section 588FN would place the evidential burden on the defendant, who acquires property subject to a security interest under proposed sections 588FL and 588FM, to prove that the defendant had no actual or constructive knowledge of the matters set out in proposed sections 588FL and 588FM. The reason for reversing the onus is that the matters requiring proof would usually be peculiarly within the knowledge of the defendant and it would be unduly onerous to require the plaintiff to prove the state of the defendant's knowledge (item 183, proposed subsection 588FL(6)). This provision is intended to protect bona fide purchasers for value while ensuring that fraudulent transactions designed to frustrate the payment of funds to creditors are void.

7. APPROPRIATE TRANSITIONAL AND APPLICATION ARRANGEMENTS

7.1 Schedule 1 would commence when the PPS Register starts to operate (that is, when the PPS Act starts to apply). Because most amendments require the alignment of existing categories of security interests in the Corporations Act and related concepts to the PPS Act, they would only apply to PPSA security interests that arise under agreements made after the new PPS Act scheme starts to operate.

7.2 Transitional provisions would be enacted to retain certain aspects of the registration scheme for existing registrable charges. At the commencement time, the ASIC Register would be closed to further registrations. However, ASIC would be required to retain existing records on its Register for seven years after the commencement time. This would enable chargees, lienees and pledgees of registrable charges to continue to obtain information relating to their charges, liens or pledges.

7.3 The repeal of CA, Chapter 2K (item 17) would not immediately apply to registrable charges under the CA (except to the extent necessary to close the CA register to new registrations, and to limit the effect of CA, section 266 (the voiding of registrable charges)). Despite the repeal of Chapter 2K, the following provisions would continue to apply after the commencement time for a period of seven years (item 187, proposed section 1502):

a.
CA, subsection 265(1), in relation to registrable charges entered on the Register before the commencement time (item 186, definition of commencement time);
b.
CA, subsection 266(4), in relation to notices that are required to be lodged before the commencement time;
c.
CA, section 272, in relation to registrable charges entered on the Register before the commencement time;
d.
CA, section 274, in relation to registrable charges arising before the commencement time;
e.
the existing exemptions from CA, sections 266 and 267 would continue to apply.

7.4 The priority rules for existing registrable charges would apply indefinitely (item 187, proposed section 1506).

7.5 It is also proposed that registrable charges, notified before the commencement time (including provisional charges), would be migrated across to the PPS Register and (as transitional security interests) would retain the priority they had prior to migration.

7.6 Registrable charges not notified before the commencement time, could be registered anytime on the PPS Register (but would have priority dating to that day), unless they obtain a Court order under CA, section 274 to retain their pre-commencement time priority (item 187, proposed section 1502).

7.7 CA, subsection 266(4) would continue to apply to registrable charges which became void under CA, section 266 before the commencement time. This would maintain the existing rights of secured creditors to apply to a court for relief and a declaration that the registrable charge never was void (item 187, proposed section 1504).

8. MAINTAIN EXISTING RIGHTS

8.1 Schedule 1 would maintain the status quo in a number of respects.

8.2 Firstly, Schedule 1 would amend CA, section 283BG and 283CD to exclude borrowers and guarantors respectively from the obligation to report to the Trustees on charges they create while under administration (items 146 and 147).

8.3 Schedule 1 would retain the restrictions on the exercise of third party rights under administration (items 156; 158-159).

8.4 PPS Act, s 140 specifies the order for the distribution of proceeds when enforcing security interests. Several provisions of the Corporations Act require certain payments to be made out of property that is subject to security interests. For example, CA, section 433 provides that a receiver who is appointed on behalf of the holders of debentures of a company that are secured by a floating charge, and who takes possession or control of property of the company that is secured by the floating charge, must pay certain debts in priority to any claim for debentures and CA, section 1311 makes it an offence for the receiver not to do so. Therefore, PPS Act, section 140 would not apply when a receiver has been appointed to property of the company (see PPS Act, section 116).

8.5 CA, section 443E provides that an administrator's right of indemnity under CA, section 443D has priority over certain debts of the company secured by a floating charge on property of the company. CA, section 443F provides that the administrator's indemnity is secured by a lien and that the lien has priority over a charge to the extent that the right of indemnity has priority over debts secured by the charge. It is proposed that the Minister would make a declaration under PPS Act, section 73(3) determining that the administrator's lien has priority over a security interest to the extent that the right of indemnity has priority over debts secured by the security interest.

8.6 CA, section 561 provides that if the property of a company available to pay unsecured creditors is insufficient to make certain payments, then the payment of those amounts must be made in priority to floating charges. PPS Act, section 254 provides that laws which are capable of operating concurrently with the PPS Act may do so. While the PPS Act, section 140 sets out the order for distributing proceeds to those with interests in the property, persons entitled to payments under CA, section 561 do not have interests in the property. Therefore, CA, section 561 and PPS Act, section 140 are capable of operating concurrently, because CA section 561 requires certain payments to be made before the property is put towards those with interests in the property.


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