Introduction

3.1 This chapter examines the way forward. The need for reform in Australia is set against a background of personal property securities law reform in a number of overseas common law jurisdictions - notably the United States, Canada, the United Kingdom and New Zealand. They have all encountered similar problems and have found similar solutions. The essence of all of the reforms proposed or enacted in these jurisdictions involves the establishment of a single personal property securities regime to determine priorities and the use of a functional definition of a security. Under a functional approach, transactions come within the regime only if they are for a security purpose. Where a transaction is for a security purpose - that is, it does purport to give the secured party rights over the goods secured - the secured party may perfect the security. This is ordinarily achieved by registering the security on the appropriate register or by taking possession of it. Perfection gives the secured party priority as against all unregistered securities as well as securities registered later in time. Examining overseas regimes contributes to an understanding of what might meet policy goals and needs in Australia - of what might work.

Policy goals

3.2 The objects of personal property security law reform should be

• to overcome the present difficulties of complex laws which are at times inconsistent and inadequate by providing a single legal regime for the regulation of personal property securities in Australia
• to provide a regime which is able to apply to all kinds of transactions intended to create security but which does not regulate other kinds of transactions
• to provide a regime which resolves priority disputes as between competing secured parties equitably, easily and efficiently
• to provide a regime which protects innocent purchasers of encumbered property
• to provide a system of notice of encumbrances over personal property to provide a regime which is readily accessible, simple to apply and cheap to use.

Overseas models

United States versions

3.3 The Uniform Commercial Code. The commercial laws of the United States governing personal property securities contained deficiencies not dissimilar to those which continue to persist in Australia. This first prompted reform efforts in North America in the early 1940s. In 1951 the National Conference of Commissioners on Uniform State Laws and the American Law Institute published the United States Uniform Commercial Code (the ‘Code’) as model legislation to be enacted by individual States. The Code was first enacted in 1953 by Pennsylvania as a law of its own jurisdiction. Since then all States have adopted the Code¹ though minor differences exist between each State’s laws.

3.4 Article 9. Article 9 of the Uniform Commercial Code regulates secured transactions where the security is taken over items of personal property. The personal property which is the subject of the agreement² giving rise to the security interest is defined for the purposes of the Code as ‘collateral’. Collateral³ may include tangible and intangible property.⁴ The point at which the collateral becomes subject to a security interest is the point of attachment. It occurs when a security interest becomes enforceable against a debtor or a party to the security transaction. A security interest is not enforceable against a debtor, and therefore does not attach, unless

• the secured party has possession of the collateral, or the debtor has signed a security agreement which contains a description of the collateral and, in addition, when the security covers crops growing or to be grown or timber to be cut, a description of the land concerned
• value has been given and
• the debtor has rights in the collateral.⁵

3.5 Functional definition. The Code takes a functional approach to determining whether a transaction creates a security. The Code defines a security interest as ... an interest in personal property or fixtures which secures payment or performance of an obligation’.⁶ If a transaction does have a security purpose, the secured party - that is, the party which, as a result of the transaction, acquires rights over the goods secured - may elect to perfect this security thereby acquiring the protections afforded by the regime. A security interest becomes ‘perfected’ when it has attached and the secured party has taken all the steps required by the Article.⁷ This is generally accomplished either by possession (when the secured party obtains or retains possession of the collateral⁸, such as in the case of a pledge or lien) or by registration (when a written notice of the security interest is filed).⁹ This registrable written notice is referred to as a financing statement.¹⁰ If any of these steps are taken before the security attaches, the security is perfected at the time when it attaches. A perfected security is enforceable against all third parties who have not registered. Perfected security interests are notice to all the world¹¹ of an encumbrance in the secured property. This necessarily implies that secret security interests - which are, by definition, not perfected - cannot defeat perfected securities or unperfected securities which attached earlier in time.

3.6 Exceptions. If the transaction does not have a security purpose then it cannot be registered or, if registered, registration has no effect. The Code creates a number of exceptions to the functional definition by exempting specific types of transactions from the regime even though they do have a security purpose. The rationale for these exceptions would seem to be based upon practicalities, as it is considered too cumbersome to have to register certain types of commonly created securities.¹² The exceptions to the Article 9 regime are discussed in chapter 4.¹³

3.7 Priority rules. Where a security is not exempted and can be registered, the decision to register is entirely voluntary. However, there is an incentive to register. This incentive is the priority which the secured party’s interest acquires as against other lenders which have an interest in the debtor’s assets. The priority given to a perfected security is determined according to a set of special and residuary or general rules. The special rules apply to specific types of transactions. They are applied first, if appropriate, while the general rules serve as the fallback position and are to be applied where the circumstances are not otherwise regulated by the special rules. The effect of each of the special rules is dealt with in the next chapter in the context of the types of instruments and property to which they are applied.¹⁴ An example of a special rule is the rule which applies to purchasers: bona fide purchasers of encumbered property who take for value without notice have priority even as against securities which have been perfected earlier in time. The general rules provide that

• all perfected securities have priority over all unperfected securities
• securities perfected earlier in time prevail over securities perfected later in time
• securities which attach earlier in time prevail over securities which attach later in time.

Canadian versions

3.8 Ontario. Ontario was the first Canadian province to adopt an Article 9 approach to personal property security law reform. Following an inquiry and report by the Catzman Committee, Ontario enacted its Personal Property Security Act¹⁵ (PPSA 1967) in 1967 but the law did not come into full force until 1 April 1976. The Act distinguished between corporate and non-corporate securities, excluding corporate securities from its scope of operation. Professor Jacob Ziegal writes that

[t]his exclusion was based on a recommendation of the Ontario Law Reform Commission and resulted from trust company concerns that the inclusion of corporate securities would create difficulties for them as trustees under bond and debenture issues that had not been properly addressed in the Act.¹⁶

Corporate securities were regulated by a separate law - the Corporations Securities Registration Act¹⁷ (CSRA). Difficulties were encountered because the definition of chattels in the CSRA did not cover certain types of corporate securities. These particular securities therefore did not come within the scope of either regime. This lacuna led to a practice of dual registration. These inadequacies created sufficient controversy to persuade the Ontario Government in 1976 to revive the Catzman Committee. Legislation amending the PPSA was then introduced. It was designed to encourage registration solely under the PPSA. However, these piecemeal reform efforts were clearly not achieving their policy objectives.¹⁸ In 1983 the Committee recommended that the PPSA and the CSRA be completely repealed and that a single regime replace these dual registers. These recommendations were put into effect by the Personal Property Security Act 1989 (Ont)¹⁹ (the PPSA 1989). This Act commenced operation on 9 October 1991.

3.9 The Western Provinces. Canada’s four western provinces - Manitoba, Saskatchewan, Alberta and British Columbia - have also each enacted personal property security legislation along the lines of Article 9. The Manitoba legislation²⁰ - which commenced operation on 1 September 1978 - was principally based upon the Model Uniform Personal Property Security Act adopted by the Canadian Bar Association in 1970 although it contains elements of the original Ontario Act. The Conference of Commissioners for Uniformity of Legislation in Canada adopted a similar draft Act in 1971 - the Uniform Personal Property Security Act (UPPSA). The Saskatchewan Act²¹ is also a blend of the Model Act and the original Ontario Act but differs insofar as it incorporates many of the amendments which were made to Article 9 in 1972. The Manitoba Act does not reflect these amendments. The personal property security legislation which has been adopted by Alberta and British Columbia is even more recent than the Saskatchewan Act. These Acts²² are based upon a relatively new Model Western Canada Personal Property Security Act (WCPPSA). The WCPPSA is in turn based upon the Saskatchewan Act and the revised Ontario Act. Like the revised Ontario Act, the Western Province regimes²³ regulate corporate and non-corporate securities.²⁴ Remarking generally about personal property security law reform in Canada, Professor Mclaren notes that

[t]he primary aim of the [legislation] is to provide rules under which commercial transactions can be concluded with reasonable simplicity and certainty. It achieves this objective by recognising that all security devices regardless of form have the purpose of securing payment of a debt. This common objective then leads to the creation of precise rights and obligations all within the concept of a security interest ... [T]he [legislation] abolishes the multiplicity of former devices and registration systems. The single notion of a security interest will enable new security devices to emerge as quickly and easily as businessmen can conceive them. It will forever free security devices from having to be poured into restrictive statutory moulds in order to obtain legal sanction.²⁵

United Kingdom proposed versions

3.10 England. In 1968, just after the first version of Ontario’s personal property security legislation was enacted, the Crowther Committee was established. Its terms of reference principally involved recommendations for reforms to the consumer credit laws existing at the time. However, this task also necessitated an examination of English chattel security law. The Committee recommended the adoption of an Article 9 type regime but its recommendations²⁶ were never acted upon. More recently Professor Aubrey Diamond, in a report comn-tissioned by the Department of Trade and Industry, has again advanced the need for similar reforms.²⁷ Professor Diamond advocates the need for a single register of personal property security interests as the centrepiece of a regime which determines priority of interests by registration. He recommends, in keeping with earlier reforms in overseas jurisdictions, that the new regime should apply to security interests ‘. . . created by companies, partnerships and individuals in the course of their businessl.²⁸ The British Parliament has not yet acted upon Professor Diamond’s recommendations.

3.11 Scotland. The Crowther Report prompted a similar investigation by the Scottish Law Commission under the auspices of Professor J M Halliday. The Halliday Working Party reported in 1983. This report was published by the Scottish Law Commission in 1986. The Working Party recommended that

[t]here should be a new system of security over moveable property based upon the establishment of a register of security interests with notice filing. There would be no requirement of possession of the security subjects by the creditor.²⁹

However, the Working Party also formed the view that much of the existing law at the time was adequate and therefore did not require amendment. In particular it proposed to exclude from the new regime consumer goods, small amounts of credit, assets with existing registers, corporate securities, commercial paper, non-commercial assets, floating charges and pledges. In contrast to Article 9 and the recommendations of the Crowther Committee, the Halliday Working Party was of the view that the purposive approach - which gave recognition to the intention of the parties to the security arrangement despite the form which the transaction took - should be tempered against a desire to have standard form loan agreements wherever appropriate. The Working Party also took the view, contrary to Crowther and Article 9, that financing statements which did not comply with all requirements of form should not be able to be registered. The Scottish Law Commission has suspended its reference on taking security over personal property until such time as the British Government decides what is to be done about Professor Diamond’s recommendations.

New Zealand proposed version

3.12 In 1988 the New Zealand Law Commission released a preliminary paper proposing the reform of New Zealand’s personal property securities law along similar lines to the United States and Canada.³⁰ These reforms are most closely modelled upon the British Columbia Act - a version of the Western Canada Model Act.³¹ This paper was followed in 1989 by a report recommending the enactment of a Personal Property Securities Act.³² The draft legislation contained in this report has not yet been enacted.

Principles to guide reform

3.13 Does Article 9 meet policy objectives? The Article 9 approach is attractive in its simplicity and almost universal applicability. Its use of a functional definition - which looks to the purpose of the transaction and not the form -negates the need to set up complicated and confusing definitions of security transactions. By establishing a single regime for personal property securities, archaic common law priority rules can be dispensed with in favour of a more streamlined set of priority rules. Perfection is a voluntary act but there is incentive to register since priority as against third parties cannot be assured without perfection. A single regime overcomes the difficulties which currently persist as between the States and Territories associated with searching many different registers in many different jurisdictions. This helps to prevent further unaffordable commitment by debtors whose property is already secured. Debtors should also benefit from lower credit costs achieved through reduced costs of searching and perfecting. It is also arguable that, if they feel safe in the knowledge that their investment is secured and recognised as such, creditors will become more confident about lending and the pool of funds available for investment will increase.³³ The Article 9 approach would also seem to provide a regime which

• is able to apply to all kinds of security without regulating other kinds of transactions
• resolves priority disputes as between competing secured parties equitably, efficiently and easily
• protects innocent purchasers of encumbered property and
• is readily accessible, simple to apply and cheap to use.

In short, the Article 9 approach would seem to satisfy all of the policy objectives for reform set out in paragraph 3.2.

3.14 Meeting policy objectives in an Australian context. The Article 9 approach, then, seems likely to meet the needs of Australian personal property securities law and to correct the deficiencies in existing law. The following chapters develop a regime based on the Article 9 approach but adapted to meet the particular needs of Australian jurisdictions. Some specific issues are discussed³⁴ and provisional proposals made in relation to registration and priorities.

FOOTNOTES

1. Louisiana has adopted the Code but, unlike the other States, it is a civil law jurisdiction.

2. ‘Security agreement’ is defined in s 9-105.

3. See s 9-105.

4. Tangibles are classified into four categories, namely consumer goods. inventory. farm equipment and equipment. Intangibles are classified into five categories, namely instruments, documents, chattel paper. accounts receivable and general intangibles.

5. Section 9-203(1).

6. Section 1-201.

7. Section 9-303.

8. Where the collateral consists of goods, money, documents, instruments or chattel paper which is in the possession of the secured party (the creditor): Section 9-305. Where the collateral consists of accounts receivable and general intangibles, possession will generally not achieve perfection since these assets are regarded as non-possessable.

9. A security may also be perfected where, for example

• a security interest is created by an assignment of a bemficial interest in a trust or deceased’s estate - section 9-302(1)(c).
• a purchase money security interest is created over consumer goods - except for motor vehicles where notice filing is required: section 9-302(1)(d).
• an assignment of accounts does not transfer a significant part of the outstanding accounts of the assignor - section 9-302(1)(e).
• it is deemed to be temporarily perfected - section 9-304 instruments or documents without delivery; section 9-306 proceeds for a 10 day period: section 9-302(1)(b).
• it is deemed to be continuously perfected - section 9-303(2).

10. Section 9-302.

11. Except bona fide purchasers for value without notice: see section 9-307. This exception highlights the fact that the common law doctrine of constructive notice is no longer applicable in relation to public chattel registers of this nature. In relation to Australian law, Professor Sykes notes that ‘ ... it seems that the doctrine of constructive notice does not apply to chattels, insofar as such notice is alleged to arise from failure to search a register where such a register exists.’ (EI Sykes. op cit, 735.) The policy behind this rule is summed up by the New Zealand Law Commission when it notes that ‘[t]o introduce doctrines whose implications are unclear runs the risk of jeopardising the whole system’. (New Zealand Law Commission PP6, op cit, 67.) See paragraphs 4.86-4.90. 12. eg leases for less than one year.

13. See paragraph 4.10.

14. See paragraphs 4.46-4.48.

15. 1976 (50) c73.

16. Professor J S Ziegal, The New Provincial Chattel Securities Regimes, (1991) 70 Canadian Bar Review 704-705.

17. 1980 (RSO) c 94.

18. Professor J S Ziegal, op cit,,687.

19. 1989 (SO) c 16.

20. Personal Property Security Act 1973 (Man) c 102.

21. Personal Property Security Act 1979-80 (SS) c P-6.1.

22. Personal Property Security Act 1988 (SA) c P-4.05 and Personal Property Security Act 1989 (SBC) c 36.

23. Except Manitoba.

24. The Ontario and Western Province regimes diverge on the issue of whether commercial consignments and leases for more than one year should be included in the regime. The Western Canada Model Act includes these instruments if they are for a specific purpose; the 1989 Ontario Act specifically excludes them. Professor Ziegal points out that ‘[t]here is no evidence that Ontario is ready to fall into line with the Western Canada version’ (Professor J S Ziegal, op cit, 720). This will be discussed in greater detail at paragraphs 4.21-4.26.

25. Professor RH McLaren, Secured Transactions in Personal Property in Canada, 1979, Carswell Co, Toronto, Vol 1, 1-3.

26. Report of the Committee on Consumer Credit (Cmnd 4596, 1971), Her Majesty’s Stationery Office.

27. Professor A L Diamond, A Review of Security Interests in Property, Department of Trade and Industry, 1989, London, Her Majesty’s Stationery Office.

28. Ibid paragraph 1.12.

29. Scottish Law Commission, Report by Working Party on Security over Moveable Property, (1986), 93.

30. New Zealand Law Commission, Preliminary Paper No 6 (NZLC PP6), Reform of Personal Property Security Law, 1988, Wellington.

31. The New Zealand proposals along with the Uniform Commercial Code, Western Canada Model Act (WCMA), and the Saskatchewan Act (the basis for the WCMA) also provide for registration of security interests in negotiable instruments such as bills of exchange. It would seem that these instruments need to be registered to acquire priority status and that possession alone is insufficient except where the assignment is absolute and not made conditional upon the assignor retaining control over the intangible: see Draft Personal Property Securities Act 1989 (NZ) s 4(5)(b)(iv). See footnote 8 in relation to the definition of collateral under Article 9.

32. New Zealand Law Commission, Report No 8, A Personal Property Securities Act for New Zealand (NZLC R8), 1989, Wellington.

33. See Professor J S Ziegal (1991), op cit, 701-702 and Professor AL Diamond, op cit, paragraph 8.1.6

34. eg the use of special priority rules for particular types of property and particular types of security.