Introduction

1.1 This paper is being circulated by the Australian Law Reform Commission (ALRC) and the New South Wales Law Reform Commission (NSWLRC) as part of a project that aims to rationalise and reform the law about taking security over personal property.¹ The views and provisional proposals presented here do not represent the Commissions’ final views. They are designed to stimulate comment and debate. The Commissions will reconsider the provisional proposals in the light of submissions and consultations.

Scope of the project - what are personal property securities?

1.2 Anyone who lends money takes a risk that it will not be repaid. To reduce that risk, lenders often take security over some asset belonging to or controlled by the borrower. The most common form of security is the house mortgage. Here, the bank or building society advances money to the purchaser in return for which the purchaser agrees that, if the money is not repaid in accordance with the agreement, the lender can sell the house to recover its money. The house is security. Personal property, such as cars, industrial equipment, shares, crops, aircraft, ships, copyright and stock-in-trade, may all be taken as security. There is a wide variety of security arrangements used with personal property. They are all characterised by a transfer of possession or ownership rights. A creditor may, for example, take a security by keeping possession of the property concerned, under a lien or pledge. Possession gives a measure of protection. Alternatively, the borrower may have possession of the goods, but give a security over them to the lender, by way of mortgage or charge. Repayment of a loan is not the only obligation that can be secured in these ways. Security is often demanded to ensure payment of the purchase price when goods are sold. The borrower may be a trader in the goods which are the security or may borrow to become the owner of the goods. Other examples in which a security can be given include securing compliance with a trust deed, guarantee or indemnity. When the borrower has possession the security interest is not obvious and questions of protection and priority arise. These issues are central to this discussion paper.

Present laws complex and different

1.3 Existing Australian law about taking security over personal property is difficult, complex and cumbersome. It is a mixture of common law, State and Territory legislation and federal legislation. It varies widely from jurisdiction to jurisdiction and is considered by many to be out of touch with commercial reality.² The common law in particular draws fine legal distinctions between different kinds of borrowing and security arrangements. Priority rights between lenders depend on the intricacies and technicalities of these distinctions. These distinctions have little commercial justification and fail to reflect the purpose or intention of the security arrangements. The result is that

• lenders who lend nationally have to contend with nine different sets of laws
• the priority that a lender has under the law of one jurisdiction may be different from the priority that it has for the same security under the law of another jurisdiction
• borrowers that are corporations are subject to different requirements from those that are not
• borrowers have to pay the increased costs associated with lenders having to follow these inconsistent and sometimes overlapping laws
• there is no easy way for a prospective lender to find out whether particular property is free of earlier securities
• people who want to purchase personal property may not be adequately protected if the property is already being used as security.

The uncertainties and complexities of the law add to the risks and the costs of lending thereby impeding commercial activity.

Overseas experience

1.4 These difficulties are not peculiar to Australia. New Zealand has a similar patchwork quilt arrangement of common law and statute on these questions, as does the United Kingdom. But the problems are particularly acute here because Australia is a federation with nine separate jurisdictions. As federations, Canada and the United States have experienced the same types of problems as Australia. Changes have been made to the law in each of these jurisdictions. Similar proposals for reform have been advanced in New Zealand and the United Kingdom. The philosophy of each of these overseas models is a desire for the law to reflect the purpose of the security arrangement. Each of these models is discussed in greater detail in chapter 3.

This paper - call for submissions

The Commissions ‘approach

1.5 In May 1991 a set of draft proposals for reform of the law relating to personal property securities (including draft legislation) was circulated among the consultants and other interested parties with a view to obtaining advice on the proposed reforms. Submissions were received in response to these draft proposals. Based upon an assessment of these submissions, other consultations and the Commissions’ own research, the draft proposals have been re-cast in the form of the provisional proposals for reform contained in this discussion paper.

Submissions sought

1.6 The Commissions seeks submissions in relation to the provisional proposals contained in this discussion paper. The Commissions will also undertake further consultation.

FOOTNOTES

1. The Victorian Law Reform Commission (VLRC) and the Queensland Law Reform Commission (QLRC) also have references on personal property security law and have been in consultation with the ALRC and the NSWLRC. The views and proposals put forward here, however, are those of the ALRC and the NSWLRC.

2. State Bank Tasmania Submission 30 July 1990; State Bank Victoria Submission 29 August 1990; Australian Federation of Credit Unions Limited Submission 7 September 1990; St George Building Society Submission 14 January 1991; Ministry of Consumer Affairs (Victoria) Submission 17 July 1991; S Begg Submission 13 May 1992.