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Discussion Paper 28 (1992) - Personal Property Securities

4. Proposals

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History of this Reference (Digest)

Introduction

4.1 In this chapter the Commissions provisionally propose the adoption of a single legal regime, which includes registration, for all personal property securities. The chapter goes on to discuss the coverage of this regime in greater detail by looking at the types of property, the types of security and the types of borrowing arrangements that will be subject to the proposed regime. The chapter also discusses the priority rules which should be applied in the event that a number of securities are taken over the same piece of property. The position of purchasers who take for value without notice of prior encumbrances is also addressed. The final chapter considers how to bring existing registers within the new regime and what to do about company charges.

A single national legal regime

4.2 Existing personal property securities laws are inconsistent and cause confusion for prudent potential lenders and other persons interested to determine whether a piece of personal property over which it is intended to take security is already encumbered. Each jurisdiction has a number of regimes and each regime has different rules. Lenders and other interested parties should have the opportunity to determine once and for all, without the need for searches to be made in every jurisdiction in Australia, whether a piece of personal property is already encumbered. They should also be able to determine quickly and easily what priority any particular security will have. In preceding chapters the Commissions identified the need for reform of existing Australian personal property securities law. It concluded that the Article 9 approach is a suitable principle to guide reform. The principal reason for favouring this approach is that it incorporates a functional definition of a security within a single legal regime. If a similar approach were embodied in the law in Australia, it would help to resolve difficulties that arise through the use of often vastly different systems of regulation between and within Australian jurisdictions. To achieve this uniformity there should be a single comprehensive legal regime which covers all interests that are in substance personal property securities, which enables priorities to be determined between competing interests and which includes a system of registration.

Proposal 1
There should be a single comprehensive legal regime for all Australian jurisdictions covering all types of personal property securities. The regime should make provision for the priority of competing securities and the priority of purchasers of secured property and should provide for the registration of securities.¹

Types of property to be covered

Introduction

4.3 One of the principal defects of the current law is that it applies differently to different kinds of property. The types of property covered by each of the bills of sale registers, for example, differs between each jurisdiction.² There is also a lack of uniformity in relation to the types of ‘goods’ covered by each jurisdiction’s chattel securities legislation.³

Provisional proposal

4.4 To achieve the goals of a single, comprehensive regime and to dispel confusion created by a multiplicity of registration systems, the new regime should apply to all types of personal property - both tangible and intangible.⁴

Proposal 2

The new regime should apply to all types of personal property.

Regime to apply to functional securities only

Functional definition

4.5 Under the current law, registration requirements often regulate instruments rather than security transactions. The approaches adopted by the laws of the various Australian jurisdictions lack direction and uniformity. At present, instruments are registered not because they are necessarily associated with a security purpose but because legislation requires instruments of that type to be registered. Conversely, the legislation excludes other types of instrument from the requirement to register because the instrument fails to meet the formal require-ments for registrable instruments. The present laws’ deficiencies can be overcome by establishing a new legislative regime which applies to security transactions on the basis of the purpose of the transaction rather than the form or kind of the instrument. This would ensure that lenders can be certain of their priority through notice of all encumbrances over personal property which may affect them. This approach is taken in Article 9 of the US Uniform Commercial Code, the various Canadian models, and the New Zealand and United Kingdom proposals, all of which apply a purposive or functional definition to determine what should be classified as a security.

Form not conclusive

4.6 Provided that a security purpose is evident in a transaction and a security interest is created the regime should apply and registration should be possible, regardless of the form of the instrument creating the security interests. This is the effect of the functional approach. The intention of the parties to the security arrangement is what is important. The form of the transaction may be of assistance in determining the intention of the parties but it is not conclusive. For example, it is hard to imagine a fixed or floating charge, a mortgage, an unpaid vendor’s lien, a conditional sale agreement (including an agreement to sell subject to retention of title), a hire-purchase agreement or a pledge not having a security purpose but the form which these instruments take may not be definitive of their purpose. The proposals are not aimed at discouraging or limiting the kinds of transactions which are currently in use or which may be invented in the future; they are designed only to regulate the legal consequences of security transactions.

Overseas models

4.7 This approach is consistent with the approaches adopted in overseas jurisdictions. Professor Diamond, for instance, notes in relation to the reforms suggested for the United Kingdom that

... the intention to create a security interest is all-important ... [I]t does not matter what form of agreement is used provided that the intention is manifested.

I would not envisage the legislation as prohibiting any form of agreement the parties wish to use, and the interference with the form of agreement chosen should be kept to a minimum.⁵

Proposal 3

The regime should apply to arrangements which are intended to create securities. That is to say, if the transaction is one that creates an interest in, or enables a person to exercise a right over, personal property, and the purpose of the arrangement is to secure the performance of an obligation, the transaction should be subject to the new regime.

The form which the transaction takes and its legal character (for example, as a mortgage, charge or lien) should be relevant to determining the purpose of the transaction but should not be conclusive.

Kinds of borrowing arrangements to be covered

Introduction

4.8 Some types of borrowing arrangements⁶ are either specifically included or specifically excluded from overseas personal property security models even though they have a security purpose. One rationale for these exceptions from the general rule is a desire to maintain some degree of certainty about the scope of operation of the regimes set up by these models since creating statutory exceptions avoids the need to determine the more fundamental issue of whether the transaction does in fact have a security purpose. Many of the transactions which are specifically excluded from a regime are very common transactions. Thus, another reason for excluding these transactions from a regime involves a desire to avoid the cost and delay associated with many transactions which may not have any commercial significance whatsoever. This section briefly examines the scope of each overseas model. It points out where these models diverge and concludes with provisional proposals for the type of borrowing arrangements that should be included within and excluded from the proposed regime.

The United States

4.9 Inclusions. Article 9 applies to

any transaction (regardless of its form) which is intended to create a security interest in personal property or fixtures including goods, documents, instruments, general intangibles, chattel paper or accounts⁷
any sale of accounts or chattel paper⁸
security interests created by pledges, assignments, chattels mortgages, chattel trusts, trust deeds, factor’s liens, conditional sales, trust receipts, other lien or title retention devices and leases or consignments intended as security⁹.

4.10 Exclusions. The following interests are excluded from the Article 9 system and therefore cannot be registered

security interests which are subject to any statute of the United States which governs the rights of parties to and third parties affected by transactions in particular types of property
interests in sales of accounts or chattel paper which form part of the assets of a business which is up for sale¹⁰
transfers of an interest in, or a claim in or under, any policy of insurance transfers of an interest in a deposit account
a landlord’s lien
any other lien given by statute or rule of law except as provided by section 9-310 (priority of certain liens arising by operation of law)¹¹
transfer of a claim for wages, salary or other compensation of an employee
transfer by a government or governmental subdivision or agency
right represented by a judgment (other than a judgment taken on a right to payment which was collateral)
rights to set-off
except as provided in section 9-313 (fixtures),¹² the creation or transfer of a real interest
transfer in whole or in part of any claim arising out of tort.¹³

The general pattern of these provisions would seem to be the exclusion of non-consensual security interests in contingent or non-vested property.

Canada

4.11 Inclusions. Ontario and the Western Provinces have each adopted Article 9 type personal property security regimes. Subject to some exceptions, transactions are registrable, and therefore subject to the rights and duties imposed by the regimes, if they have a security purpose.

Ontario. In relation to the Ontario Act Professor McLaren notes that

... the Act applies to every transaction

¹⁴

that in substance creates a security interest, without regard to title or to form. The concept eliminates the former need to categorise security devices by the form of the transaction. It is designed to remain flexible and clearly reproduces the conventional understanding of a security interest in personal property that is at the heart of every secured transaction.

¹⁵

This logic is applied to assignments, leases and consignments.

... all transactions that are given the legal clothing of an assignment, lease or consignment, but are actually a disguise for a transaction that is in substance a security assignment or purchase-money transaction, are to be considered within the scope of the Act.

The issue is whether the transaction was ‘intended as security’.

¹⁶

Manitoba. In Manitoba, mortgages, leases and charges come within the operation of the Act notwithstanding that the collateral is real property. The rationale for this policy is that these types of instruments have dual characters. For example, a lease of land is an interest in real property from the point of view of the lessee who acquires exclusive possession of the leased property. From the lessor’s point of view the lease agreement creates personal property: the right to receive rent. In practice, the Manitoba Act only requires that these types of interest be subject to the regime established by the Act if the assignment is for the purpose of securing an obligation. Therefore a lease, for example, will only have to be registered when it is assigned for the purposes of securing a loan; it need not be registered where it is an absolute assignment. A lessor’s right to be paid rent is not secured by the tenant’s occupation. However, if the lessor took a loan from a bank and produced as collateral its right to receive rent then the bank’s interest in the lease is a security interest for the purposes of the Act.

Saskatchewan, Alberta and British Columbia. Saskatchewan’s Act was a forerunner to the Western Canada Model Act. The latter has been adopted by Alberta and British Columbia. The regimes set up under Saskatchewan’s Act and the Western Canada Model Act are fundamentally different from the Ontario Act in that the former regimes specifically include commercial consignments, leases for more than one year and interests arising from an assignment of accounts or a transfer of chattel paper whether or not they have a security purpose.¹⁷ They opt for certainty over the functional approach.

4.12 Exclusions

Ontario. The Ontario Act excludes the following types of interests from the operation of its personal property securities regime

Manitoba. The Manitoba Act excludes the same types of interests as those listed above for Ontario with the exception of corporate securities - these are included in the Manitoba regime. The latter regime also adds to this list of exclusions the following

Saskatchewan, Alberta and British Columbia. The type of transactions excluded from the Saskatchewan Act are largely the same as in the Ontario Act. The only difference is that insurance proceeds, which are excluded from the Ontario Act, are covered by the Saskatchewan Act.

New Zealand

4.13 Inclusions. The New Zealand Law Commission proposals were modelled upon the Western Canada Model. It is therefore hardly surprising that they specifically include

assignments of accounts receivable or chattel paper²⁰
leases for more than one year and
commercial consignments²¹

even if the assignment, lease or transfer does not secure the payment or performance of an obligation. The functional approach otherwise applies.

4.14 Exclusions. The personal property securities regime which the New Zealand Law Commission proposes specifically excludes the following interests

a lien, charge or other interest created by any other Act or rule of law
a transfer of an interest or a claim in or under a contract of annuity or policy of insurance, except as provided by the Act with respect to proceeds and priorities in proceeds
interests in sales of accounts or chattel paper which form part of the assets of a business which is up for sale unless the vendor remains in apparent control after the sale (emphasis added)
the assignment of an accounts receivable made solely to facilitate the collection of the accounts receivable on behalf of the person making the assignment (the assignor) (emphasis added)
transfers of present or future wages, salary, pay, commission or any other compensation for labour or personal services
a transfer of an unearned right to payment under a contract to a person who is to perform the transferor’s obligation under the contract
assignments for the general benefit of creditors of the person making the assignment
a transfer, or assignment, or mortgage, or assignment of a mortgage, of any ship or vessel or any share of any ship or vessel if at the time of execution of the instrument the ship or vessel is registered or is required to be registered under the provisions of Part XII of the Shipping and Seamen Act 1952 (NZ)
the creation or transfer of an interest in land
a transfer of a right to payment that arises in connection with an interest in land, including a transfer of rental payments under a lease of, or licence to occupy, land unless the right to payment is evidenced by a security
a transfer of a right to damages in tort.²²

United Kingdom

4.15 Inclusions. Professor Diamond argues that any new legislation governing personal property securities should be based closely on the models set out above. He concurs that only consensual security interests should be subject to the operation of any new regime and defines security interests as

mortgages, charges and security in the strict sense but also any other transfer or retention of any interest in or rights over property other than land which secures the payment of money or the performance of any other obligation.

²³

Title retention contracts, possessory security rights, corporate securities and consumer transactions should all come within the scope of the regime in the United Kingdom, according to Professor Diamond, notwithstanding that the interests created by these types of transactions may not need to be registered. Professor Diamond’s proposal concerning possessory security rights is consistent with other overseas models: security rights acquired by virtue of possession need not be registered to ensure priority because possession itself confers sufficient rights on the secured party without the need for statutory protections. Notwithstanding this Professor Diamond maintains that possessory security rights should be registrable and able to be brought within the scope of the regime if so desired

... so that future generations of lawyers would have to learn and apply just one law of security interests and not two or three different sets of laws ....

²⁴

Encouraging holders of possessory security rights to register their interests also benefits potential creditors and other interested parties since the register becomes a more complete record of all securities over a particular piece of property. The register is therefore able to serve much better as a notice device. Similarly, he suggests that a number of other types of interests should be included in the scope of the Act but excluded from the requirement to file. Presumably these interests are then perfected without registration. These interests are as follows

interests in consumer goods (other than interests in motor vehicles, caravans, trailers and vessels not registered under the Merchant Shipping Act 1894 (UK))�interests in small transactions
purchase money security interests and
transfers in the ordinary course of business.²⁵

4.16 Exclusions. Professor Diamond’s functional definition of security interests is carefully qualified to

exclude

obligations

which could be said to ‘secure’ payment or performance such as guarantees, indemnity policies or performance bonds, for these do not involve an interest in or right over property.

²⁶

Application of the proposed regime to specific forms of transaction

Introduction

4.17 The intention to create a security interest is the touchstone for determining whether an interest is registrable under Article 9 and is the basis of the’ proposed regime. This approach differs from the traditional definition of a security which is dependent upon the form of the transaction. Implicit in the functional approach is a requirement that the parties intend to create a security. In this section specific types of transaction are considered to determine whether any specific rule is necessary in addition to the functional definition or purposive approach.

Overseas models

4.18 The overseas models which have adopted the functional approach have not held consistently to it but have departed from it by making specific exceptions. Each, at times, deems certain transactions to be, or not to be, subject to the regime on the basis of their form whether or not they have the effect of creating securities. These deeming provisions most often relate to transfers of accounts receivable and chattel paper, leases for more than one year and commercial consignments. Article 9, the Western Canada Model Act and the New Zealand proposals all make provision for these interests to be specifically included in their personal property security regimes even if they do not secure the payment or performance of an obligation. These deeming provisions are intended to cover transactions which to a third party look like securities even if they do not secure the payment or performance of an obligation. The Ontario Act compounds the inconsistency by following the other overseas models in part only. Assignments of book debts are brought within the regime but commercial consignments and leases are not. This inconsistency has drawn criticism from a number of quarters. It extends, however, to various types of arrangement in different rnodels.²⁷

Accounts receivable and chattel paper

4.19 Overseas models.

United States. Chattel paper and accounts are included in section 9-102(1)(a) and (2) of Article 9 as assignment interests unless they

Canada and New Zealand. There are similar exceptions in the Ontario and Western Canada Model Acts and the New Zealand proposals.

4.20 Provisional proposal. The deeming provision in the overseas models is a departure from the functional basis of the regime. Its complexity and detail reflect the fact that assignments of accounts receivable and chattel paper may create securities but need not. The overseas desire for certainty is a legitimate policy consideration but it is pursued at the cost of consistency and compromises the effectiveness of the proposed regime. It appears to be both unnecessary and undesirable.

Proposal 4

There should be no provision deeming sales of accounts receivable or of chattel paper to be, or not to be, subject to the regime. The functional definition should be applied.

Leases

4.21 Overseas models.

United States and Canada. Equipment leases, referred to in section 9-102(2), have always proved to be somewhat of a thorn in the side of the Article 9 system since

... the line separating a functional security from a short term rental is peculiarly difficult to discover.

³⁰

There are three options available for remedying this problem.

The matter can be left open to be determined by [the] courts on a case-by-case basis, which is the position in Ontario [PPSA 1989 s 2(a)(ii)(“a lease ... that secures payment or performance of an obligation”)]. Or the distinction can be based on a sophisticated list of criteria including the life expectancy of the goods and the existence of an option or of an obligation to renew, which may be seen in the 1988 edition of the Uniform Commercial Code [Section 1-201(37)]. Thirdly, an arbitrary period in excess of which a transaction is deemed to be a security lease may be enacted. The period of more than one year was chosen by Saskatchewan [Personal Property Security Act 1979-80 (SS) c P-6.1 ss 2(y), 3(a)]

³¹

though Professor Diamond thought that too short and recommended instead a term of between three and five years [Professor AL Diamond, A Review of Security Interests in Property, 1989, Department of Trade and Industry, London, 38-42].

³²

New Zealand. Interests created under lease agreements, the duration of which is more than one year, are specifically included in the proposals of the New Zealand Law Commission,³³ even though the actual interests pursuant to the individual agreements may create no security rights. The New Zealand Law Commission reasons that

[i]n practical and legal effect many commercial leases are indistin-guishable from hire-purchase agreements. They create the same degree of apparent ownership which justifies the traditional regulation of chattel mortgages and charges as well as the proposed regulation of title-based securities and assignments . . .

In the interests of certainty ... [l]eases for more than one year serve as devices for financing acquisition of effective ownership of an asset [and therefore should be] ... automatically subject to the statute ... Such a lease will seldom be attractive, for tax or accounting purposes, unless it extends over a period longer than one year computed by reference to the original term plus the possibility of renewal or de facto extension. The one year requirement will also exclude most operating leases the terms of which are usually measured in days or weeks . . . [This] automatic treatment applies only to those recurring situations where leases are employed by suppliers and acquirers of goods as an alternative to hire-purchase or conditional sale agreements . . .

Where a lease outside this definition serves as a means for financing acquisition of goods, it remains potentially subject to the statute. . .

³⁴

4.22 Discussion. The New Zealand Law Commission recommendation for the inclusion of leases for more than one year appears to hinge upon a desire to avoid uncertainty in the application of the substantive approach. The New Zealand proposals are largely modelled upon the Western Provinces Model Act³⁵ which also specifically includes leases for more than one year - even if they do not have a security purpose. However, it is important to note that the protections offered by the legislation do not apply in their entirety to these leasehold interests. Those parts of the legislation that deal with priorities, including registration, are applicable to these types of interest but the provisions that deal with rights and remedies upon default only apply to security interests. Leases which do not secure payment or performance of an obligation therefore cannot attract the rights offered by these provisions in spite of the fact that they do attract other rights given in the legislation. In order to place emphasis on the importance of the definition of security, Professor Diamond states that he was initially inclined not to include leases expressly in the UK regime. However, this would leave the courts to decide whether or not a lease was in fact a security, without legislative guidance. He proposes therefore that leases should be included. Professor Diamond would not, however, follow the Canadian example strictly. He considers that one year is too short, making too many leases registrable. Instead, he recommends that those parts of the legislation which deal with priorities, including registration, should be applied to leases of three years or more. Whether a lease has a security purpose sufficient to attract the remedies provisions is a question which would still require resolution by reference to the definition of security interest and factors including whether the lease was a long term arrangement with an option to purchase. An option to purchase may attract the title-retention provisions. (Professor Diamond is of the view that all title-retention agreements should be subject to the regime since they do in fact create security interests.³⁶)

4.23 Provisional proposal. The Canadian model and the Diamond recommendations therefore deem certain leases to be securities and others not to be securities but only for certain specified purposes. Other provisions still depend on the application of the functional definition. This approach may be founded in business practice and in the desire for certainty. However, it introduces artificial distinctions while still leaving the fundamental question (that is, whether the lease is in fact a security) to be determined for a number of purposes. The basis of the regime should be maintained: agreements should not be included in or excluded from the regime simply because of their form.

Proposal 5

There should be no provision deeming leases to be, or not to be, subject to the regime. The functional definition should be applied.

Consignments

4.24 Introduction. A consignment is traditionally an arrangement whereby goods are supplied, say, by a producer to a retailer on the condition that the producer retains title in the goods until they are sold or otherwise disposed of in a way which is authorised by the producer. When the goods are sold by the retailer the producer’s title in the goods continues into the proceeds. If the goods are not sold, title in the goods remains with the producer. Therefore, under the traditional or /pure’ consignment arrangement, the retailer acts as the producer’s agent. Technically, this relationship does not give rise to a security but to all the world, which sees the stock-in-trade in the retailer’s possession, the producer’s title is not evident. The question therefore arises whether the consignment should be deemed to be a security for the purposes of the notice provision of the regime.

4.25 Overseas models.

United States. Under section 9-102(2) of Article 9 consignment agreements which are intended to create a security interest are registrable. Consignment agreements which are not intended to create security agreements are subject to other provisions in Article 9 which in fact impose the same or similar requirements for notice and registration if their priority is to be protected.³⁷
New Zealand. The New Zealand Law Commission’s proposals follow the Article 9 approach and deem commercial consignments to be subject to the regime even if they do not have a security purpose.³⁸ The only exception is where the interest is the interest of a seller or a seller’s agent who has shipped goods to a buyer under a negotiable bill of lading or its equivalent and the parties have evidenced an intention to create or provide a security interest in the goods other than by way of the bill of lading agreement.³⁹ The New Zealand Law Commission reasoned that commercial consignments should be specifically included in the regime on the basis that a retailer’s ostensible ownership of goods which are taken on consigrument may mislead subsequent creditors in their evaluation of the credit worthiness of the retailer if this interest is not registered.
Canada. Unlike Article 9 the Ontario Act does not make express provision for consignments, leaving their inclusion or exclusion to be determined by the functional definition. Saunders J of the Ontario Supreme Court has proposed a two-stage test in keeping with the purposive approach for determining whether a commercial consignment creates a registrable security right. The first leg of this test is whether the transaction in dispute is a sale or a consignment; the second leg poses the question whether, if the transaction is a consignment, it was intended to create a security interest. If the transaction is a sale or conditional sale it is, by definition, a security transaction since the supplier has an interest (often a purchase money security interest) in the goods if the debtor defaults or otherwise fails to comply with its obligations under the contract of sale. If, however, the transaction is treated as a consignment, the consignee has the option to return the goods supplied by the consignor if they are not used or disposed of. True consignment agreements are not security agreements since there is no obligation on the consignee to pay for unsold items. Speaking of the Personal Property Security Act 1973 (Ont) Saunders J notes that

[i]n order for a consignment arrangement to come within the [Act], it must create a security interest within the meaning of s 1(y) and, in my view, in the context of the statute, such an agreement must be intended to secure the payment or performance of an obligation on the part of the consignee.

⁴⁰

4.26 Provisional proposal. Clearly there are quite distinct consequences flowing from whether a consignment is or is not a security. The distinction is not insignifi-cant or artificial. Under conventional “pure’ consignment agreements the consignee is not obligated to pay the consignor for unsold items but can instead return them. A consignor in this situation may have no security interest if it retains title to the goods on consignment and re-taking possession is not likely to be associated with profound difficulties. There is no basis therefore for the introduction of deeming provisions to include or exclude all consignment agreements from the regime on the basis of their form. This approach is consistent with the provisions about consignments adopted in the Ontario Act. In this context, Saunders J’s test provides a suitable means of determining whether a consignment creates a security.

Proposal 6

There should be no provision deeming consignments to be, or not to be, subject to the regime. The functional definition should be applied.

Title retention arrangements (including Romalpa clauses)

4.27 Introduction. Title-retention arrangements are contractual provisions which permit the seller under a commercial contract for the sale of goods and the creditor under a hire-purchase agreement to retain title in the goods sold or hired until such time as the conditions of the sale are complied with by the buyer or the hirer completes payment of all hire-purchase instalments.⁴¹ Professor Diamond considers that conditional sales and hire-purchase agreements do in fact create security interests within the terms of his definition⁴² where they are arrangements which secure payment of the purchase money. On this basis, he proposes that title-retention agreements should be subject to the regime.

4.28 Purchase money securities. In these two examples (conditional sales and hire-purchase agreements) the vendor retains title only until such time as the debtor’s obligations have been met. The title retention device may therefore be characterised as a purchase money security interest, that is, an interest taken by the seller of goods to secure payment of their price or by a lender of money used to pay for them.⁴³ Title-retention clauses may also have another effect, giving the vendor a claim to receive the price to which it is entitled where this claim is to be met out of the proceeds of the good’s resale by the buyer. A more difficult issue arises from claims arising out of so-called “all-monies” clauses where title does not pass until all outstanding monies have been received by the vendor irrespective of the source of the debt.⁴⁴ Professor Diamond notes that in Scotland these all-monies clauses do not create a security and go beyond a mere retention of title.⁴⁵ Insofar as the position in England and Wales is concerned, Professor Diamond notes that their status is ‘uncertain’ though

[u]nder the proposed new legislation it would of course be a valid security interest, but would clearly go beyond a purchase money security interest: it appears on the face of the clause that title is retained until money other than the price of the particular goods is paid.

⁴⁶

4.29 Other title retention transactions. Another type of title-retention clause is that which purports to claim title in respect of goods or materials which the vendor did not supply or which it no longer supplies. Professor Diamond applies similar reasoning to this situation as to that for all-monies clauses, while noting that they are not in fact purchase money security interests.

4.30 Provisional proposal. Title-retention arrangements are not intrinsically different from other forms of borrowing arrangements which are capable of being used as security. The regime should apply to them without specific provision being made for the inclusion or exclusion of particular types of title-arrangements. This ensures that exceptions are not created on the basis of the form of the transaction.

Proposal 7

The new regime should make it clear that title-retention agreements, including those involving Romalpa clauses, are subject to the regime if the functional definition is satisfied.

Bills of Wing and other documents of title

4.31 Introduction. Bills of lading are documents of title in the same way as ‘ ... warehouse receipts, dock warrants and any other writing which specifically states the bailee’s obligation to deliver to a named person or its transferee’.⁴⁷ In other words, bills of lading and other documents of title are proxies for the goods which appear on the bill. They are as capable of being secured as the property itself.⁴⁸ One type of title-retention device which, in Professor Diamond’s opinion, should be excluded from the regime is that where

... the seller of goods ships goods to the buyer under a bill of lading and either has the bill of lading made out to the seller or order

(Sale of Goods Act 1989

(UK) s 19(2)) or has the bill of lading made out to the buyer but retains the right to possession of it until payment, perhaps by means of a documentary bill of exchange

(Sale of Goods Act

1979 s 19(3)) or by using the machinery of a banker’s commercial credit. These all involve the retention of title by the seller, but are such well-established types of commercial transactions that it would be unwise to interfere with them.

⁴⁹

4.32 Overseas models. Both the Saskatchewan reforms⁵⁰ and the New Zealand proposed reforms adopt the same approach in respect of title-retention devices pursuant to bills of lading. Bills of lading are excluded from both regimes.

4.33 Provisional proposal. There is no good reason to exclude bills of lading and other documents of title from the regime. If there is a security in the bill it should be subject to the regime; if there is no security it is unnecessary to explicitly exclude it.

Proposal 8

There should be no provision deeming bills of lading and other documents of title to be, or not to be, subject to the regime. The functional definition should apply.

Factoring agreements

4.34 Introduction. Professor Goode describes a true factoring agreement as a sale of an accounts receivable or a debt.⁵¹ This type of transaction attracts the purchaser priority rules.⁵² For the most part factoring agreements will not be security transactions but there may be situations where the agreement does secure the performance of obligations.

4.35 Overseas models.

United States, Canada and the United Kingdom. Both Article 9 and the Canadian Uniform Personal Property Security Act apply to assignments and sales of accounts receivable even if they are not for a security purpose.⁵³ As Professor Diamond notes,⁵⁴ the explanation for this is given in the Official Comment to Section 9-102 of the Uniform Commercial Code, which says that

Commercial financing on the basis of accounts ... is often so conducted that the distinction between a security transfer and a sale is blurred, and a sale of such property is therefore covered ... whether intended for security or not ... The buyer is then treated as a secured party, and his interest as a security interest.

Professor Diamond concludes that a factoring agreement would be treated as a security by these regimes even if it was not for a security purpose. He notes the difficulty of distinguishing between an assignment of accounts receivable and a secured loan of accounts receivable “which contemplates an outright assignment for cash coupled with an obligation to repurchase the account if the debtor whose debt was assigned fails to pay the assignee”.

⁵⁵

Added to this difficulty is the fact that it is an expensive and time-consuming process for debtors to determine whether their debt has been assigned. For these reasons, Professor Diamond prefers the Article 9 approach.

New Zealand. The New Zealand Law Commission’s proposal excludes factoring agreements⁵⁶ upon the basis that a true factoring agreement is not a security transaction within the meaning of the draft legislation since it does not create an interest in property conferring rights exercisable for a security purpose.

4.36 Provisional proposal. The regime should not deem a transfer of property to be a security if the instrument does not, in fact, secure the performance of consensual obligations, even where there is some confusion as to how to distinguish an assignment from a factor. If a factoring agreement involves recourse to the original assignor, it may in reality be a security device, in which case it should be registered; if it does not create security it should not be subject to the regime. The functional definition should apply.

Proposal 9

There should be no provision deeming factoring agreements to be, or not to be, subject to the regime. The functional definition should be applied.

Assignments of debt and declarations of trust

4.37 The New Zealand Law Commission also specifically excludes assignments given for the general benefit of the creditors of the assignor.⁵⁷ The New Zealand Law Commission reasons that, although these assignments do create rights, they are not ‘created ... to secure the performance of a specified obligation’. Rather, the assignment is a means of enforcing rights. Again, the determining factor should not be what form the transaction takes but what rights are derived from the interests created by the transaction. Similar issues arise in respect of declarations of trust.

Proposal 10

There should be no provision deeming assignments of debt or declarations of trust to be, or not to be, subject to the regime. The functional definition should be applied.

Rental bond money for residential premises

4.38 Both Article 9⁵⁸ and the New Zealand Law Commission’s proposals⁵⁹ exclude from their respective regimes a lessor’s right to rent for residential premises. No proposal is made at this stage in relation to a lessor’s right to rent on residential premises. However, the Commission has considered the right of a lessor to rental bond money. This right is a non-possessory security right in the sense that the money is held not by the lessors themselves but the Rental Bond Board or equivalent authority or another as stakeholder on trust for the parties. The money is in fact accumulated with other bond moneys and held in a trust account. A lessor has an absolute right to claim an amount equivalent to the amount paid as bond should a tenant breach the tenancy agreement in any of the ways prescribed by the agreement. This conditional right combined with the fact that the moneys are already allocated - they do not have to be claimed from the tenant upon default - means that the interests in the bond would be unlikely to come within the functional definition for the purposes of the regime. In any event, in this case, for the sake of certainty there is sufficient justification for specifically excluding the interest from the regime.

Proposal 11

The right of a lessor of residential premises to rental bond money should be expressly excluded from the regime.

Statutory securities

4.39 Article 9⁶⁰ and the approaches adopted or proposed in Canada, the United Kingdom and New Zealand⁶¹ specifically exclude rights created by operation of law, on the grounds that these interests are non-consensual and that holders of these types of securities are already given sufficient protection. These rights fall into two general groups: those which concern private interests and those which concern public moneys. The former are securities created by law and often enhanced by statute to protect certain categories of business from defaulting customers. An example of such a right is a lien. The ALRC sees no reason to exclude such private rights from the regime: the priorities of these creditors should be determined on the same basis as other creditors. As the holders of these kinds of securities are usually in possession of the property they will already benefit from the priority given to possessory rights.⁶² Statutory securities which concern public moneys, on the other hand, are created to ensure the payment to the State or to public authorities of duties, taxes, charges and other levies pursuant to public policy requirements. The ALRC considers that these securities should be exempted from the regime and be accorded such priority as the Parliament may determine in the legislation in question. The NSWLRC, in line with the approaches of overseas regimes, considers that all securities arising by law should be excluded from the regime because they are non-consensual.

Proposal 12

ALRC: Securities created by statutes to secure the payment of duties, taxes or other charges to public authorities should be expressly excluded from the regime. Other securities created by operation of law, however, should not be expressly excluded but the functional definition and the usual rules should be applied.

NSWLRC: Securities arising by law should be excluded from the regime.

Creation and enforcement

Security agreements to be in writing

4.40 Introduction. An agreement which creates security rights may be an oral or a written agreement. Should securities be included in the proposed regime regardless of whether the agreement was written or oral? There seems little need for writing where the property secured is in the possession of the creditor since possession itself is evidence of the creditor’s interest in the property. That kind of evidence may not be available, however, where the security is non-possessory unless the agreement is in writing.

4.41 Overseas models. In all major overseas models a security agreement falling within the regimes is not enforceable as against third parties unless it is in writing. Article 9, the New Zealand proposals and the United Kingdom proposals require that the agreement be in writing for all purposes, even for enforcement as between the parties. Canadian legislation, however, does not require that the agreement be in writing for validity as between the creditor and the debtor. Professor Diamond presents a number of reasons for requiring a security agreement to be in writing

writing is evidentiary in nature and therefore minimises the opportunities for dispute as to whether a security was created and what property is affected by the security, and the potential for fraud⁶³
writing imports a solemnity to what is essentially a property transaction and not a mere contract
in a commercial environment individual consumers may have little bargaining power. Writing therefore helps to protect less powerful parties to the transaction.⁶⁴

4.42 Provisional proposal. The giving and taking of security over property is a contractual arrangement that has consequences for the parties to the transaction and third parties. For a creditor it provides protection for the performance of obligations. For a debtor it places at risk the debtor’s interest in the property secured. It can also affect a third party’s interest in or claim to the same property. To avoid fraud and promote certainty existing legislation requires that interests in and transfers of real property be evidenced by writing. A degree of formality is also appropriate and necessary when dealing with personal property, especially in relation to secured debts, for the same purposes - to avoid fraud and to promote certainty. A written security arrangement protects the parties to the transaction and interested third parties.

Proposal 13

The new regime should require that the creation of a non-possessory security be by writing and signed by the debtor. The consequence of non-compliance should be that the debt becomes unsecured (that is, the security fails but the debt remains valid) and is not enforceable against secured third parties.⁶⁵

Enforceability

4.43 Enforceability as between the parties. The existing law governing enforceability of security agreements as between the parties is inconsistent and confusing. Some statutes⁶⁶ require registration for validity, making unregistered agreements void and unenforceable as between the parties - but for the registration and form provisions in these statutes, these security arrangements would be enforceable as between the parties under the common law. Other statutes⁶⁷ provide for registration but do not require it for validity. The effect of failure to register is loss of priority. In the absence of statutory provision the general law applies to the validity and enforceability of concluded agreements as between the parties. Under Article 9 the security interest is said to ‘attach’ once it becomes enforceable as between the parties. The general law - common law and the rules of equity -governs the validity of the agreement as between the parties. The proposed regime is not the vehicle to re-define rules of enforceability between the parties. Where a security is not registered or is unable to be registered, the general law should apply: if the security agreement is not valid as between the parties then it will not be enforceable as between the parties except where the rules of equity provide otherwise.

4.44 Enforceability as against third parties. If a similar arrangement were adopted, agreements not enforceable between the parties would not be enforceable against third parties. Under the existing law, where the security is registrable and has, in fact, been registered, it will be enforceable against third parties provided it complies with relevant statutory requirements as to form.⁶⁸ A failure to comply with other legislative requirements regarding the formalities for a security agreement should not defeat the validity of the security - and the priority it acquires - as against third parties where the security is registered and the third party, which has an interest in the same property, has registered its interest later in time or not at all. The new regime should let the general law determine validity and should allow for securities to be provisionally registered where the agreements are incomplete as to a matter of form.⁶⁹

4.45 Enforceability as against a liquidator or trustee in bankruptcy. The New Zealand Law Commission has proposed that a secured creditor whose security was not registered should be able to enforce this security against a liquidator or trustee in bankruptcy on insolvency. The Commissions disagree with this approach. In keeping with the policy that the regime should make no exceptions about the validity of a security, a failure to register should render a security unenforceable not only against third parties but against a liquidator and trustee in bankruptcy as well. The priority rules, dealt with at paragraphs 4.46 - 4.85, are based upon the policy that, so far as those searching or relying upon the register are concerned, a secured creditor who could have registered the security but chose not to is in the same position as an unsecured creditor. On an insolvency, its access to the debtor’s property should therefore be the same as the access of an unsecured creditor.⁷⁰ It is therefore provisionally proposed that a security should not be enforceable against a liquidator, official trustee in bankruptcy or official manager of a company if it is unregistered. It is further proposed that in the case of a possessory security right⁷¹ the security should only be enforceable by a liquidator, official trustee in bankruptcy or official manager if possession was not obtained within 28 days after the relevant security transaction occurred.

Proposal 14

The new regime should make no provision about the validity of a security agreement - the general law should apply. Where a security is a valid security the general law should also apply to the enforceability of this security as between the parties. Where a security is a valid security the regime should determine the enforceability of this security as against third parties. There should be no special exception to the rule for non-possessory securities where the debtor has been declared bankrupt or has gone into liquidation: securities should not be enforceable against liquidators, trustees in bankruptcy or official managers where they would be otherwise unenforceable because they are not registered. For possessory securities, the security should only be enforceable against a liquidator, trustee in bankruptcy or official manager if possession was not obtained within 28 days after the security transaction took place.

Priorities

Introduction

4.46 A clear, simple and rational priority order, which accords with and supports sound commercial practice, is essential when there is more than one secured creditor with a claim over a debtor’s assets. The establishment of clear priority rules is a primary objective of reform of personal property securities laws.

General rules

4.47 Overseas models. Overseas models and, to some extent, the Corporations Law provide a number of special rules to cover particular types of security arrangements as well as a series of general rules. The special rules are applied first if appropriate, for example, if fixtures are involved.⁷² If the special rules are inapplicable because the regime makes no provision for the security arrangement under consideration, the general priority rules are applied. For this reason the general priority rules are sometimes referred to as residual priority rules. The following residual rules apply or are proposed in the United States, Canada, New Zealand and the United Kingdom

a perfected security⁷³ interest ranks ahead of an unperfected security interest
a perfected security interest which is perfected earlier in time prevails over a perfected security interest perfected later in time
an unperfected security interest which attaches⁷⁴ earlier in time prevails over an unperfected security interest which attaches later in time.⁷⁵

These rules replace the common law principle that a security acquired in good faith and without notice of existing encumbrances has priority. Under the Article 9 approach only bona fide purchasers for value without notice - those to whom title in the goods is transferred and not simply a security interest⁷⁶ - are able to make use of the ‘for value without notice’ principle in relation to personal property.

4.48 Provisional Proposal. An alternative and simpler approach discussed in the following paragraphs is to use only one set of rules. This has the advantage of negating the need to determine whether a special rule has to be applied first. The provisional proposals concerning special types of security arrangements (for example, floating charges) or special types of property (for example, commingled goods) should be considered as rules about when to apply the general priority rules rather than as special priority rules.

Proposal 15

The new regime should provide three general rules to determine priority as between competing creditors

a registered security prevails over an unregistered one
a security which is registered earlier in time prevails over a security which is registered later in time
an unregistered security which is created earlier in time prevails over an unregistered security created later in time.

Possession of secured property

4.49 Overseas models. Under Article 9 a security attracts the protections (and obligations) of the regime if it has been perfected. Perfection is achieved either by filing or, in the case of possessory securities, by possession. Some property (for example, money and negotiable instruments such as cheques) cannot be perfected by filing and therefore can only be perfected by possession. A secured party normally only has possession of the secured property in the case of a pledge (or pawn) or a lien. A creditor in possession of secured property acquires the rights and obligations accorded by the regime automatically. The stated reason for the possessory security being exempted from the normal filing requirement is that possession is considered sufficient notice to all the world that a security exists over the possessed property. The Halliday and Crowther Reports have affirmed the Article 9 approach: a notice of a possessory security should not have to be filed. Professor Diamond also agrees that this is the correct approach but adds the proviso that filing is not necessary so long as the goods remain with the secured party. The argument for holders of possessory securities having to file is that there is a need for a public record of all financial dealings. That is to say, the register should be a complete source of information. Professor Diamond does not find this argument terribly convincing.

4.50 Provisional proposal. The question which therefore arises is whether persons in possession of secured property acquire all the benefits of the regime (for example, priority) automatically without having to register or should they also have to register if they want priority status. In keeping with the overseas models, it is provisionally proposed that persons in possession of secured property should acquire all the benefits of the regime automatically without having to register. Persons not in possession of secured property, even if they have a possessory security, should not acquire priority without registration. (For example, this may occur where the secured party releases the goods to the custody of the debtor for a temporary purpose.) The proposed regime is not designed to establish a public record of all financial dealings. Such a goal may contravene privacy considerations where individuals are concerned. The primary goal of the register is to establish priority between competing security interests. There are, however, two conditions

the possession must be an essential part of the security arrangement, as, for example, in a pledge
possession gained as the result of enforcing a security is not included as it is a result of the failure to perform an obligation under a security right.

Proposal 16

Provided that the goods are in the possession of the secured party, a possessory security prevails over a non-possessory security unless the non-possessory security is registered before possession is acquired.

Notice is irrelevant

4.51 Under the existing law, a secured party is not deemed to have notice of securities registered earlier in time. The doctrine of constructive notice therefore has no application to registrable securities which have in fact been registered.⁷⁷ However, existing personal property security regimes continue to rely upon the doctrine of actual notice - a security will be subordinated to an earlier security if the secured party has notice of the earlier security at the time the later security was created. This encourages potential lenders not to check whether property is already encumbered. The concept of notice - whether actual or constructive -should be irrelevant, in the absence of fraud, in relation to security interests under the proposed regime. Under the provisional proposals a registered security interest will prevail over an unregistered security interest whether or not the holder of the registered security interest had actual or constructive notice of the earlier unregistered interest. The proposed regime therefore continues to exclude the operation of the doctrine of constructive notice in relation to personal property securities. As well, it provides that holders of later registered security interests will not be prejudiced by actual notice of any unfiled security interest created earlier in time.

Proposal 17

The new regime should make it clear that notice (actual or constructive) is irrelevant, in the absence of fraud, to the determination of priorities between creditors.

Relevant date

4.52 The proposed general rules determine priority according to a relevant date. That date will differ according to whether the security is registered or unregistered. For a registered security the relevant date is the date of registration. When attachment occurs after registration, the relevant date is the date of attachment. For an unregistered security the relevant date is the date on which the security was created and for a possessory security the relevant date is the date on which possession is acquired.

Proposal 18

For a registered security the relevant date is the date of registration. When attachment occurs after registration, the relevant date is the date of attachment. For an unregistered security the relevant date is the date on which the security was created and for a possessory security the relevant date is the date on which possession is acquired.

Floating charges and after acquired property

4.53 Introduction. A floating charge is a security taken over a debtor’s present and future property that

..... creates an immediate security interest but until crystallisation no specific asset is appropriated to the security and the debtor company is therefore free to deal with the asset in the ordinary course of business ....

⁷⁸

by, for example, selling or charging the asset. The point at which the charge is activated, or crystallised, depends upon the terms of the contract creating the charge but ordinarily

... the charge will crystallise if the company ceases to trade, whether it does so voluntarily or in response to a winding-up petition or other external cause. The fact that the directors retain theoretical powers of management does not prevent crystallisation.

⁷⁹

The exercise of a chargee’s power to appoint a receiver, external borrowing which exceeds a stated figure or judgment against the debtor may also cause a floating charge to crystallise. A charge may crystallise over the entire assets of the debtor or may be confined to assets named in the agreement creating or defining the charge. Often, the charge agreement will contain a negative pledge clause. This clause has the effect of limiting the extent to which the chargor can deal with the assets over which the floating charge is taken by preventing the chargor from charging the assets in the future without the authority of the floating chargee.

4.54 Overseas models

United States. Under the UCC section 9-204 security agreements may provide that any or all of the obligations covered by the agreement are to be secured by property acquired by the debtor after the security agreement is made.⁸⁰ The security interests of creditors with floating charges are then ranked ahead of those of later creditors including creditors with a direct interest in the after-acquired property, for example, a creditor with a fixed charge.

United Kingdom. Professor Diamond points out that

... the really important difference between the British floating charge and the security interest on shifting assets under the Uniform Commercial Code is that the latter does not use the concept of ‘crystallisation’. Under an American-style security agreement a time may come when the debtor is no longer free to dispose of the property which is subject to the security interest, but that time does not determine the priority position of the secured party. His priority will depend on the ordinary rules in Article 9, and will normally date from the filing of the financing statement.

This may put the American holder of a security interest on floating assets in a stronger position than his British counterpart, but these days a British-style floating charge usually contains a ‘negative pledge clause’ - a provision which prohibits or restricts the company’s power to grant further charges, mortgages or other securities ranking in priority to, or

pari passu

with, the floating charge. If that charge is effective as against subsequent secured parties it effectively gives priority to the floating charge long before it crystallises.

Under the new scheme, the essence of what is now referred to as a floating charge would be preserved. The security agreement, whether expressly or by using the term ‘floating charge’, would permit the debtor to dispose of the property in the ordinary course of business and would attach to after-acquired property which falls within the description of the property in the agreement. Perfection in accordance with the new scheme will be required, which means filing in the new register of security interests. For the purposes of priorities the important date would be the date of filing and the notion of crystallisation would lose all or most of its importance.

.... [T]he time of filing of a financing statement [in relation to a floating charge] will not interfere with the special priority to be granted to later purchase money security interests. Their special priority is justified on policy grounds.

⁸¹

Canada and New Zealand. Canadian and New Zealand regimes also allow for the registration of floating charges and future advances in such a way that the concept of crystallisation is made redundant and the charge is, for the purposes of the regime, effectively made fixed once perfected by registration.

4.55 The Corporations Law. The Corporations Law provides a different approach to determining priorities when there is a floating charge. The floating chargee is deemed to have consented to postponing its priority unless the charge makes specific provision to the contrary (in which case the charge has priority from the date of registration).⁸² If the floating charge does restrict or prohibit further charging of the property, there is no policy reason to favour later chargees. The situation is only a problem if the property is not worth enough to satisfy both debts, and if the debtor cannot satisfy them out of other assets. Because the Corporations Law requires the earlier charge to be registered, the later lender will be aware of its existence and its terms, in particular the term precluding later borrowings. In those circumstances, the later lender has made a commercial decision to take the risk of not being repaid and has taken it with the knowledge needed to assess the risk properly. Some submissions⁸³ have cautioned against allowing a floating chargee to have priority from the time of registration of the charge. They argue that to do so would tend to place debtors under the control of the floating chargee - the debtor would be locked into a single source of finance. Others see no problem in this, arguing that the only borrowers who should find their access to finance restricted will be those whose credit worthiness is less reliable in the sense that lenders who require security on credit grounds will not be satisfied that the debtor’s security is adequate.

4.56 Provisional proposal. The overseas models provide special rules for floating charges rather than subjecting them to the general rules of the regime. They introduce unnecessary complications and detract from the simplicity that is a major objective of the proposed regime. The approach taken by the overseas models should not be adopted. The approach of the Corporations Law is preferable but its use of deeming provisions is contrary to the basic proposition of the proposed regime that the regime should be applied on a functional basis. Deeming provisions should be avoided. It is artificial and very often contrary to the intention of the arrangement to presume consent to the postponement of a security on the part of the earlier creditor. In keeping with the functional approach of the proposed regime, it is proposed that if the agreement between the parties is such that the floating charge should be postponed then the regime should reflect this intention. Similarly, if the debtor agrees not to create further securities over the property then that obligation should also be reflected. The important issue in the application of the rules then becomes the relevant date.

Proposal 19

In the case of a floating charge which is registered before it crystallises, the relevant date for the purpose of applying the general rules should be the date upon which the charge crystallises.
In the case of a floating charge which is registered after it crystallises, the relevant date for the purpose of applying the general rules is the date of registration.
In the case of a registered floating charge to which a negative pledge applies, the relevant date for the purposes of applying the general rules should be the date of registration.
In the case of a floating charge which is not registered, the relevant date for the purposes of applying the general rules is the date of crystallisation.
In the case of an unregistered floating charge to which a negative pledge applies, the relevant date for the purposes of applying the general rules in relation to unregistered securities should be the date of creation.

Future advances

4.57 Introduction. Security can be taken - in the form of a floating charge - over property to be acquired at some time in the future by the debtor from a person other than the creditor or supplier in whose favour the floating charge is held. Security can also be taken to secure repayment of money to be advanced or payment for goods to be supplied by the supplier or creditor at some stage in the future. Thus, a single security agreement can, for example, cover many loans or advances made to a debtor in the future.

4.58 Overseas models

United States. Section 9-204 of Article 9 specifically provides that a security agreement may include provisions with respect to future advances of finance by the lender.⁸⁴ The Article provides that, if future advances are made while a security interest is perfected by filing or taking possession, the security interest has the same priority with respect to the future advance as it does with respect to the first advance.⁸⁵

Canada. In relation to the position of future advances in Saskatchewan, lenders with a perfected security interest in future advances (where perfection was effected before any subsequent security interest was perfected) enjoy priority status ahead of other secured parties which have perfected between advances.

New Zealand. The New Zealand Law Commission’s proposals contemplate the concept of future advances within the more general notion of a floating security interest.

The priority determined by the date of registration will extend to future advances even where those advances are made with knowledge that other creditors have provided credit or acquired interests in the debtor’s property.

⁸⁸

4.59 Provisional proposal. There are two ways in which a security arrangement could address future advances. It could provide that moneys are to be advanced up to a specified maximum or it could provide generally for future advances without any limit. Different provisions will be needed in each case to protect both the original lender and future lenders. Where the agreement sets a maximum amount to be secured, the lender should have priority from the time of registration according to the general rules for whatever amount may be outstanding from time to time up to that maximum. Where the agreement does not set a maximum, the lender should have the priority it would have had up to the amount outstanding at the date any later security was arranged.

Proposal 20

The new regime should provide that, if a security transaction makes provision for future advances, it should take priority as follows

if the instrument creating the security provides a maximum on the amount to be advanced - the security takes priority for the amount outstanding up to that amount
if the instrument creating the security does not so provide - the security takes priority for the amount outstanding at the time of the creation of the subordinate security.

Accessioned, commingled and processed goods

4.60 What are accessioned, commingled and processed goods? Accessioned goods are goods which are comprised of smaller goods, each of which is individually recognisable. An example of accessioned goods is a motor vehicle. It is comprised of components, the natures of which do not change after attachment or accessioning. Commingled and processed goods, unlike accessioned goods, are chattels which are comprised of unrecognisable individual parts - the identity of the original goods is lost in the mass or product. An example of commingled goods is the grain held in a silo which is owned by a farmers’ co-operative. The silo may contain grain harvested from many different farms. Once each of the individual portions from each farm is put into the silo, it is impossible to differentiate precisely one grower’s grain from that of another. However, providing that the silo is used to store only one type of grain, each farmer at least has the opportunity to recover an amount of grain equivalent to that which was put into the silo. Processed goods differ from commingled goods insofar as the individual parts of the whole can never be recovered. An example of processed goods is a milkshake: the individual ingredients (milk, ice cream and flavouring) lose their individual identities and take on an entirely new identity through processing.

4.61 The problem. The problem with accessioned, processed and commingled goods arises when property over which a security has been taken later becomes accessioned, processed or commingled and the security has not been discharged at the time of accessioning, processing or commingling.

4.62 Accessioned goods - overseas models. Under Article 9⁸⁹ and each of the Canadian Acts, a holder of a security interest in property (such as a component) which is used in the composition of accessioned goods has priority over the claims of all persons who have interests in the whole⁹⁰ unless there is an interest in the whole accessioned property held by

subsequent purchasers for value⁹¹
a creditor with a lien as a result of judicial proceedings⁹²
a creditor with a prior perfected security interest in the whole to the extent that the creditor makes subsequent advances.⁹³

The holder of the security interest in the component may, upon the borrower’s default (and subject to other provisions of the Code), remove its collateral from the whole providing it makes good any damage to other parts of the property or provides compensation for that damage to owners of the whole who are not debtors and to any others who hold securities over the whole or any other part of the whole, unless they have otherwise agreed for the cost of repair.⁹⁴ A person entitled to reimbursement may refuse permission to remove until the secured party gives adequate security for the performance of this obligation.⁹⁵ The New Zealand Law Commission recommends that the holder of a security over a component must give at least 10 working days notice to the possessor of the whole accessioned property that it is intends to remove the individual secured part.

4.63 Accessions - provisional proposal. The provisions in the overseas models are not satisfactory. It is likely that the removal of individual components will devalue the whole more than proportionately. This loss cannot be compensated under the terms of the overseas legislation. The legislation also has the disadvantage that it impliedly condones unauthorised dealings with property owned by others. In one sense, it does no more than authorise secured parties to take the law into their own hands and seek their own remedies at the expense of owners and other interested parties. An alternative approach is for the security in the part to be transposed into a security in the whole. This approach ensures that property is not damaged or devalued to the detriment of owners and other secured parties. Maintaining the property as a whole will assist to maximise its value for the benefit of all with an interest in it. This approach also encourages secured parties with interests in parts of the whole to seek a remedy amenable to all other interested parties.

Proposal 21

The new regime should provide that a security over property that becomes a component of accessioned goods (that is, is attached to other goods without losing its separate identity), by force of the regime, becomes a security over the whole and that the priority of competing securities over the whole is then determined by the general rules. However, if the component part in question is subsequently detached, the original security in it should revive and the security over the whole be extinguished.

4.64 Commingled goods - overseas models.

United States. Under Article 9, a perfected security interest in uncommingled goods (for example, crops which have just been harvested but not yet added to the silo) continues even though the goods are commingled with others. Where the goods are commingled with others, the security interests in the mass rank equally: each security interest holder shares in the mass according to the proportion of the cost of the goods contributed.
Canada. Ontario, Manitoba and Saskatchewan generally adopt the same approach to commingled goods, as well as accessioned goods, as that taken by Article 9. The Canadian Acts further provide that, where a competition develops between a purchase money security and a security in a fixture or in an accessioned or commingled good, the latter shall prevail unless the parties otherwise decide.
New Zealand. The New Zealand proposals are generally the same as the American and Canadian regimes. They provide that

[a] perfected security interest in goods that subsequently become part of a product or mass continues in the product or mass if the goods are so manufactured, processed, assembled or commingled that their identity is lost in the product or the mass

⁹⁶

[i]f more than one perfected security interest continues in the product or mass ... the security interests rank equally according to the ratio that the cost of the goods to which each interest originally attached bears to the cost of the total product or mass.

⁹⁷

4.65 Commingled goods - provisional proposal. Unlike accessioned goods, commingled goods are composed of parts which resemble each other. The value of each part is proportional to the percentage volume which the part occupies in the whole. Accordingly, where the value of the whole is insufficient to satisfy all interests in it, the value of the security is the proportion of the value of the whole equal to the proportion that the volume of the good bears to the volume or quantity of the whole.

Proposal 22

The new regime should provide that, if the goods over which there is a security are commingled with like goods so as to lose their separate identity, the security, by force of the regime, becomes a security to the same value over the whole. Where the value of the whole is insufficient to satisfy all interests in it, the value of each security is the proportion of the value of the whole equal to the proportion that the volume of the goods subject to that security bears to the volume or quantity of the whole.

4.66 Processed goods. Once goods are mixed with other goods and processed, they not only lose their separate identities but they are inseparable. The final product is distinct from all the goods that went to make it. There is therefore no question of detaching or otherwise separating out the original or equivalent goods. Further, as the goods mixed were themselves different there is no easy way to rank competing securities according to proportional contributions to the product. An accessions-type approach - where a security in the part is extended to a security in the whole -seems most appropriate. Priorities among the securities in the whole are then determined according to the general rules. The overseas models treat processed goods as commingled goods and accordingly apply the relevant priority rule governing commingled goods.⁹⁸

Proposal 23

The new regime should provide that a security over property that is processed into other goods, by force of the regime, becomes a security over the whole product processed and that the priorities of competing securities over the same product then are to be determined by the general rules.

Fixtures

4.67 Why fixtures present difficulties. Fixtures are (originally moveable) items of personal property which are attached or affixed to land or buildings. Fixtures may, for example, include light fittings and bathroom taps. The common law is somewhat ambivalent about the definition it prescribes for fixtures. Fixtures may constitute real property or personal property depending upon the circumstances. Where real property including fixtures is transferred or mortgaged without specific agreement in respect of the fixtures, the assignee, transferee or mortgagee obtains, as if by default, absolute rights over the fixtures, including the right to sever them. Where, however, the fixtures are attached by a tenant, and the tenancy agreement specifically provides for the tenant to affix and remove fixtures, a mortgagee acquires no rights in respect of the fixtures. They remain the property of the tenant. Ex parte Daglish⁹⁹ affirmed that

... a mortgage deed is registrable as a bill of sale if it gives the mortgagee a power to realize separately on the fixtures, ie, if it gives him power to sever the fixtures and sell them separately from the freehold.

¹⁰⁰

However, the mere fact that fixtures can be sold by the mortgagee as part and parcel of the power to sell land is not sufficient in itself to classify the mortgage deed as a bill of sale.¹⁰¹ The question which arises in the personal property security context is whether a security over property which becomes a fixture before the security is discharged entitles the secured party to an interest in the realty equal to the value of the security.

4.68 Overseas models.

United States. Section 9-313 of the Uniform Commercial Code provides that

... a security interest may be created in goods which are fixtures or may continue in goods which become fixtures, but no security interest exists under this Article in ordinary building materials incorporated into an improvement on land.

¹⁰²

It further provides that

... the creation of a security interest does not prevent creation of an encumbrance upon fixtures pursuant to real estate law

¹⁰³

that is, the creation of a caveatable real interest. The remainder of the section provides rules whereby security interests take priority over real interests and vice-versa.

Canada. Canadian legislation, by and large, reflects the same approach.

United Kingdom. Professor Diamond favours the Article 9-Canadian approach. He notes the analysis by Professors Cuming and Wood of the Saskatchewan Act s36 that this approach has two primary functions, namely

(1) it reverses the common law principle that chattels affixed to realty lose their separate identity as personal property and become part of the realty to which they are affixed; and (2) it provides a system through which persons acquiring interests in realty can be forewarned of the existence of a chattel security interest in goods affixed to realty in which they are acquiring an interest.

¹⁰⁴

New Zealand. At first glance, the New Zealand Law Commission’s propo-sals go beyond the ambit of the rules contained in the Article 9 approach insofar as they provide that, even if personalty in which a security interest is held is fixed to any land or building, the secured party retains the right to remove the secured items, providing that

- the owner or other person in possession of the land or building is given not less than 10 working days notice of the secured party’s intention to remove the goods and

- in removing the goods the secured party causes no greater damage or injury to the land or building or other property situated on the land, and that he or she puts the owner or occupier to no greater inconvenience, than is necessarily incidental to the removal of the goods.¹⁰⁵

4.69 Provisional proposal. The right to remove is not inconsistent with the existing common law in Australia. A tenancy agreement, for example, can specifically provide that the tenant has the right to affix and remove fixtures and that the landlord or mortgagee may not sever and realise these assets. The New Zealand approach may simply be reflecting this position, in which case it fails to provide for situations where there is no specific agreement about removal of the fixtures in question. Alternatively the New Zealand Commission may be proposing a new rule to cover the field, which would remove the existing common law rights of transferees, assignees and mortgagees to sever and realise the fixtures where the tenant or previous occupier did not otherwise make provision for their disposal. There is no convincing need to remove existing common law rights. On the contrary, specific provisions on fixtures in the new regime may restrict the ability of the parties to make such provision as to fixtures as they wish. It is therefore proposed that the new regime not apply to fixtures.

Proposal 24

The new regime should not make any special provision in relation to fixtures. The common law and the general rules should be applied. Accordingly, when secured property becomes a fixture, the security is extinguished. However, if the property is subsequently detached the security should revive.

Crops

4.70 Introduction. Growing crops are treated by the common law as fixtures. In many jurisdictions, including Australian jurisdictions, statutes provide for the taking of security over growing crops as if they were personal property. The ability of farmers to give such security has been important for financing the rural sector. It has enabled farmers to raise necessary capital on future yields of unrealised assets.

4.71 Overseas models.

United States. Article 9 makes special provision for the giving and taking of security over growing crops. It also makes other changes to common law rules. Generally speaking, purchasers in the ordinary course of business who take goods for value without notice take free of encumbrances in the goods existing at the time of purchase. Under Article 9,¹⁰⁶ ‘ . . . a person buying farm products from a person engaged in farming operations . . . ‘ does not have the benefit of the operation of this general rule. That is to say, holders of securities in a crop which, since the taking of security, has been harvested and sold, retain these interests even though the purchaser may have had no knowledge of the securities at the time of the purchase.¹⁰⁷ Crops are therefore treated as an exception to the purchasers’ rule.¹⁰⁸
Canada. The Article 9 approach to securities taken over crops differs from the Canadian approach insofar as the latter treats these securities not as an exception to the purchasers’ rule but as a species of purchase money security interest rule. This is done to ensure that a secured party who gives consideration for the purpose of enabling the farmer (debtor) to produce his or her crops is rewarded with a special priority over the secured assets.¹⁰⁹ Therefore, under both the Canadian and United States models, a security over growing crops is given super-priority.
New Zealand. The approach to crop securities adopted by the New Zealand Law Commission is similar to the Canadian approach. The essence of the Draft Personal Property Securities Act 1989 (NZ) s 30 is that a security which is taken over a growing crop continues in respect of that crop even though the land upon which the crop is being grown is assigned, transferred or mortgaged. The draft legislation further provides that a security will be invalid if it is taken over a crop which is to be harvested more than a year after the date upon which the security is taken. It is therefore only a partial reform of the common law.

4.72 Provisional proposal. The ability to give and take security over growing crops is an important part of rural financing arrangements in Australia. This is reflected in the crop mortgage legislation enacted in all Australian jurisdictions. Personal property security laws should not restrict the ability of farmers to raise money. It is therefore proposed that the new regime provide the greatest possible scope for including growing crops. To this end, growing crops over which security is taken should be considered as personal property for the purposes of the regime.

Proposal 25

Growing crops should be regarded as personal property for the purposes of the regime.

Returned, repossessed or detached goods

4.73 Introduction. When secured goods are sold and subsequently returned to, or repossessed by, the vendor, the questions naturally arise whether the security (or that portion thereof) which is outstanding upon its return or repossession revives and, if so, what priority status it acquires. Motor vehicle trading provides a good example of the problem. Assume that a motor vehicle dealer receives a vehicle from the manufacturer on consignment. The dealer becomes liable to the manufacturer for the wholesale value of the motor vehicle once it is sold. The vehicle is sold by the dealer to a bona fide purchaser for value in the ordinary course of business thereby acquiring an unencumbered title in the vehicle. Assume that this purchase is made on credit and the dealer sells or factors the debt to a third party (transferee of accounts receivable¹¹⁰). If the vehicle is later returned by the purchaser, or repossessed by the vendor following a default upon loan repayments, which security interest is to be satisfied first - the consignor’s or that of the transferee of accounts receivable? Similar issues arise in relation to accessioned goods or goods which become fixtures, in the event that they are detached.

4.74 Overseas models.

Canada. Under the law of Ontario, where the interests of the consignor (inventory financier) and the chattel paper assignee are both perfected (ie financing statements are filed) the inventory financier’s security prevails. This happens in spite of the fact that the inventory financier’s interest has been extinguished by the sale in the ordinary course of business to the bona fide purchaser for value without notice. The law provides that return or repossession revives or reattaches the interest.¹¹¹ Where the inventory financier’s security has not been perfected but the security of the chattel paper assignee has, the latter interest will prevail according to the general priority rules: perfected interests prevail over unperfected interests even if the unperfected interest was acquired earlier in time. The interest of the chattel paper assignee prevails over the interest of the vendor without any action on the assignee’s part. Manitoba¹¹² and Saskatchewan¹¹³ provide similar special priority rules.
New Zealand. Section 23 of the Draft Personal Property Securities Act 1989 (NZ) establishes the same priority rules as the Canadian legislation. Subsection 1 applies the purchasers’ rule: a buyer or lessee in good faith for value without notice takes free of securities incumbent at the time of sale. However, these securities will re-attach if the goods are returned or repossessed at a time when the obligation secured remains unpaid. A security interest in returned or repossessed goods which re-attaches in this way, or a security acquired by a transferee of chattel paper, has priority over a perfected security interest in those goods acquired by a transferee of an accounts receivable.¹¹⁴ Moreover, a security given by a purchaser or lessee prior to the return or repossession has priority over any of the security interests held by either the inventory financier, the vendor or the assignee of chattel paper or accounts receivable if the security attached while the goods were in possession of the buyer and the interest was perfected at the time of the return or repossession.¹¹⁵
United States. Article 9 makes no provision for a secured party’s priority in relation to returned, repossessed or seised goods.

4.75 Provisional proposal. The approaches adopted by the overseas models which allow securities to revive where the secured property is returned or repossessed are fair and reasonable and should be followed in the proposed regime. This provisional proposal does not affect the protection of bona fide purchasers who take for value without notice or in the ordinary course of business. For similar reasons, the New Zealand model should be followed. This would give priority over any security created before the purchase to a security created by a purchaser or lessee prior to the return or repossession of the goods provided that the later security became enforceable against third parties while the goods were in the possession of the purchaser or lessee. Similar considerations lead to similar provisions to revive securities in goods which become accessions or fixtures and are later detached.

Proposal 26

When goods are returned to or repossessed by a debtor from a bona fide purchaser from the debtor without notice or when goods which become accessions or fixtures are detached, any security in the goods given by the debtor prior to purchase, accessioning or attaching should revive. Where a purchaser, while in possession of the goods, gives a security over those goods and the secured party has the benefit of possession or registration, that security will have priority, if the goods are returned or repossessed over any security created before their original sale.

Proceeds

4.76 What are proceeds? For policy reasons, bona fide purchasers who take for value without notice or in the ordinary course of business acquire good title even though the property may have been already encumbered at the time of sale.¹¹⁶ The questions which arise here are whether the secured party has any claim on the collateral received as the proceeds of the sale and, if so, to what priority the secured party becomes entitled. Ordinarily, these proceeds will be cash proceeds, for example, money or cheques. However, sometimes the proceeds will not be in the form of cash, as in the case of a motor vehicle trade-in.

4.77 Overseas models.

United States. Section 9-306 of the Uniform Commercial Code provides that the holder of the security will not have an interest in the proceeds of a disposition if the disposition was authorised by the secured party in the security agreement.¹¹⁷ Where the disposition was not authorised but the proceeds are identifiable cash, including money, cheques and bank accounts, provided the original property was covered by a registered financing statement, the security interest in the original collateral remains continuously perfected in the cash proceeds. A security interest also remains continuously perfected where the collateral described in the original filed financing statement indicates the type of property which has been purchased with any cash proceeds. Where the disposition was not authorised and the proceeds are either non-identifiable cash or not cash at all, a security interest in the original collateral will continue but, if perfected, it will become unperfected if after 10 days a new financing statement describing the proceeds in which an interest continues is not filed.¹¹⁸ Special rules apply where goods are disposed of as a result of insolvency proceedings instituted by or against the debtor.¹¹⁹ If a sale of goods results in the transfer of an account or chattel paper from the seller to a secured party, and if the goods are returned to or are repossessed by the seller or the secured party, sub-section (5) determines priorities.
Canada. The Canadian legislation is, generally speaking, in line with the Article 9 approach: a security interest in original collateral is continuously perfected if the interest in the proceeds of an unauthorised disposition is registrable and registered within 10 days¹²⁰ (15 days in the Saskatchewan Act¹²¹) of the disposal of the original collateral and the reaping of the pro-ceeds therefrom. Between the date of disposal or destruction and the expiry of the statutory time limit 10 days later, the security in the proceeds is deemed to be perfected by operation of law, not by registration. A security interest in proceeds that allegedly arises from a security interest in the original collateral will not be registrable (and therefore not be able to be perfected) if the proceeds are not identifiable within the terms of the Acts. This condition also applies in Article 9. In Ontario, Manitoba and Saskatchewan, proceeds, for the purposes of each of the respective personal property security Acts, are defined to include personal property in any form or fixtures and any other payments as indemnity or compensation for loss of or damage to the collateral. Saskatchewan expressly also includes in the definition money, cheques and deposit accounts.¹²² The Canadian legislation similarly adopts the position that an interest in proceeds will not arise from an interest in the original collateral if the disposal was authorised by the security holder.
New Zealand. Like the American and Canadian regimes, the Draft Personal Property Security Act 1989 (NZ)¹²³ provides for an interest in the proceeds of the disposition of an asset to be continued if the disposal is not authorised by the security holder. The interest is similarly continuously perfected if a financing statement describing the interest in the proceeds is registered within 10 days of the disposal of the original collateral. If the interest is not registered by lodging a financing statement within 10 days then the interest becomes unperfected at the end of this period. The interest that remains is the same as the interest which would remain in the same circumstances in the other jurisdictions already referred to: the security is unperfected but remains attached. It is therefore enforceable under the general law (for example, the law of contract) as between the parties.
United Kingdom. Professor Diamond prefers the approach contained in the Canadian Uniform Personal Property Security Act. He argues that the Article 9 model

4.78 Provisional proposal. The approach taken by the overseas models is consistent with the policy objectives of the proposed regime. It is therefore provisionally proposed that similar provisions should be adopted in the new regime. The proposal relates in particular to situations where the disposition occurs without the consent of the holder of the security. In those cases the security would continue in the proceeds of the sale or other disposition. The proposal makes allowance for other arrangements by agreement between the parties and for the consent not to be unreasonably withheld.

Proposal 27

The new regime should provide that, when a debtor disposes of property without the consent of the secured party, a security to the same value as the security in the property attaches automatically to the proceeds in the hands of the debtor. A registered security in the original collateral should continue as a registered security in the proceeds. A registered security continues provided that a new financing statement is lodged within a prescribed period.

Purchase money securities

4.79 What are purchase money securities? When a vendor supplies goods to a retailer the vendor may take a security over the goods to ensure payment of the purchase price. The interest acquired in the goods supplied by the vendor is called a purchase money security because it secures the payment of the purchase price. A purchase money security may be created in respect of a single sale or in relation to a continuing series of transactions by which goods are supplied on a regular basis. It may apply to property supplied in the past and to future advances. Purchase money securities are, in this respect, a type of after-acquired property arrangement, with the distinctive feature that they apply only to specific property supplied by the secured financier or vendor. A purchase money security may therefore be created notwithstanding the existence of other prior security interests over property not supplied by the vendor or financier who holds the purchase money security.

4.80 The problem. A simple application of the general priority rules to purchase money securities would conceivably result in vendors being compelled to refuse further supply of goods to debtors on credit until such time as all previous obligations had been satisfied. One commentator notes that the policy behind a rule giving priority to purchase money securities is one of ensuring that the debtor is always able to obtain credit from a new financier if it wishes to make additional purchases of property.¹²⁵ Another policy objective involves a need to overcome the impracticality caused if regular suppliers are forced to register a new security every time a new shipment is delivered.

4.81 Overseas models.

The United States. Under Article 9, providing

the purchase money security interest is perfected at the time the debtor receives possession of the inventory¹²⁶ and
notification is given by the holder of the purchase money security interest to the holder of the conflicting registered security interest in accordance with the requirements set out in section 9-312(3)(b)-(d)

the holder of the purchase money security interest has priority over any other party who may claim a non-purchase money security interest in the same property pursuant to an after-acquired property clause in a preexisting security transaction.

¹²⁷

Canada. The Ontario, Manitoba and Saskatchewan Acts give the holder of a purchase money security a priority over any party who may claim an interest in the secured collateral by operation of an after-acquired property clause. Professor McLaren describes the rationale for this special priority rule as follows.

The purchase money financier is adding to the debtor’s pool of assets in which the earlier secured parties have an interest ... [A]t the time [the loans were given by these earlier secured parties, they were] satisfied with the security base without the inclusion of any after-acquired (new) collateral. Thus, the new financier is given priority in recognition of the fact that it is his money which has enabled the debtor to increase his pool of assets. The special rule then enables the creditor to look to the collateral which he has financed as security for his loan before anyone else’s claim to that collateral.

¹²⁸

New Zealand. The New Zealand Law Commission’s Draft Personal Property Securities Act 1989 (NZ) s27 adopts the same approach as that taken in the United States and Canada. Holders of purchase money security interests - whether they are sellers, lessors or consignors of the collateral - are given priority over other security interests in the same collateral if, in the case of inventory, the purchase money security interest is perfected and a financing statement is filed before the debtor or another person at the request of the debtor first obtains possession of the collateral. In the case of intangibles, a purchase money security interest is given priority over any other security interest in the intangible given by the debtor if the purchase money security interest is perfected not later than 10 working days after the day on which it attaches to the intangible. The general priority rules are applied in combination with these rules to determine the priority of two competing security interests.

United Kingdom. Professor Diamond agrees with the need to give purchase money securities special priority but diverges from the approaches adopted by the other overseas models. He says that, while such interests ought to be registrable and covered by the regime, there ought to be no requirement mandating their registration nor presumably should any penalties be imposed for failure to register.¹²⁹ It seems that under the United Kingdom approach purchase money securities would gain their special status even without the need to perfect by registration.

4.82 Provisional proposal. The special rules adopted in overseas models effectively give purchase money securities a ‘super priority’ over all other securities with which they conflict. This does not seem desirable or even necessary. The regime proposed already has provisions which apply to floating charges¹³⁰ and to after-acquired property. These are the most common forms of transaction which create purchase money securities. The proposals for these kinds of securities are different from the provisions in the overseas models and remove the need for any special priority for purchase money securities. They are sufficient to resolve, within the context of the general rules, any difficulties which may arise in relation to further advances of goods subject to a security.

Proposal 28

The new regime need make no special provisions for purchase money securities.

Transfers and variations of priority of security rights

4.83 Introduction. There is no policy reason why the priority order advanced above should be immutable. In fact, a legislative direction that the priority order was immutable is likely to offend against the principle of freedom to contract. Parties may wish to vary the order, either by modifying it in some way or by substituting an entirely new order, where the circumstances demand and there is agreement as to the variations.

4.84 Overseas models. Each of the overseas models contains provisions allowing the parties to consensually vary the statutory priority order. Article 9 refers to these agreements as subordination agreements.¹³¹ The draft New Zealand Act provides that a transfer of a security interest, once registered, gives the transferee the same right as the original secured party (the transferor) in relation to the collateral (or part thereof) which is the subject of the security agreement. It further provides that, where two or more secured parties agree to vary their respective priorities, this will only be effective as between the parties if a financing statement is registered recording the agreed order of priorities and, if relevant, the duration of the agreement.¹³²

4.85 Provisional proposal. Parties should, by consent, be able to vary the order of priorities provided by statute as between the parties themselves. A consensual instrument out of which security rights arise need not be registered for the purposes of resolving a conflict in priorities as between these parties. It may be argued on this basis that an instrument which varies priority rights as between the parties should not have to be in writing, nor should it have to be registered. Even if there should be no compulsion for the instrument to be in writing and registered, it would nonetheless be prudent to do so. On balance, the instrument effecting this variation of priority of security rights should have to be in writing. It should also have to be registered. The instrument effecting this variation of priority of security rights should only be enforceable as between the consenting parties; it should not be enforceable as against third parties. Finally, as the agreement to alter priorities may be made between two competing creditors without the involvement of the debtor, it should also be necessary for the debtor to be notified of any such variation.

Proposal 29

The new regime should provide that secured parties should be able to vary by consent the order of priorities provided by the new regime as between the parties themselves. The instrument effecting this variation of priority of security rights should have to be in writing and registered.¹³³ It should only be enforceable as between the consenting parties; it should not be enforceable against third parties. The debtor should have to be notified.

Purchasers

Introduction

4.86 The priority rules advanced above for the proposed regime are designed to resolve competitions which develop between competing securities. Where, however, title in secured property is transferred (that is, the property is sold), other considerations apply. An old common law rule holds that a person cannot transfer to another a better title to property than he or she in fact has.¹³⁴ However, in equity a bona fide purchaser for value without notice is able to take a good title, irrespective of whether the vendor is competent at common law to dispose of the property. In the context of personal property securities, this means that purchasers who take for value and in good faith should take free of all existing security interests (whether perfected or not) of which they have no notice. Under the rule, the purchaser will not get good title if he or she is aware of the existing security (that is, has actual notice) or does not give reasonable consideration for the property. Where the purchase is made in the ordinary course of business, however, even if the purchaser does have notice of a prior interest, the sale will give the purchaser valid title since the dealer has actual - or at the minimum ostensible - authority to sell.

Overseas models

4.87 The common law rule has been incorporated, wholly or partially, into the legislation in each of the overseas jurisdictions.

United States and New Zealand. Article 9 and the New Zealand Law Commission’s proposals significantly modify the rule, however, by introducing a provision for constructive notice affecting buyers of consumer goods from a seller who is not a trader. These buyers only take free of existing security interests if they buy
Under these models, buyers of consumer goods from private sellers are not protected if they have actual knowledge of an existing security interest, whether perfected or unperfected, or if they purchase after a financing statement is filed (that is, they are deemed to have constructive notice of a registered security). When the purchase is made in the ordinary course of business, the protection only extends to securities created by the seller who sold the secured property in the ordinary course of business.

United Kingdom. The Crowther Committee and Diamond proposals prefer a purchasers’ rule which protects innocent purchasers not only against securities created by the seller in the ordinary course of business, but securities created by others as well. In fact, Professor Diamond would like to see even more far-reaching proposals to protect innocent purchasers. He proposes that the protection currently given to purchasers in the ordinary course of business be extended to other purchasers.¹³⁶ He argues that innocent (bona fide) purchasers, if they are truly innocent, will not become guilty simply because their purchase was not made in the ordinary course of business. Where there is competition between an innocent purchaser who takes for value without notice and another person who retains title pursuant to some form of title-retention clause, Professor Diamond’s approach favours the innocent purchaser.

4.88 Provisional proposal. The new regime, like the present law and the overseas models, should give protection to purchasers in good faith who buy in the ordinary course of business from a dealer. The protection should extend not only to securities created by the seller but to securities created by others as well. Such a purchaser should not need to make further enquiries, such as searching any register. For other purchasers, the position is different. Where a unique identifier has been developed for the kind of property concerned (as has been done with motor vehicles), an asset-based index can be used. This is particularly helpful where the vendor is not a dealer in the goods being purchased. In those circumstances it is not unreasonable to expect a purchaser to search the asset register before completing a private purchase. A clear search result will be conclusive evidence that the property is unaffected by a registered security right and will enable the purchaser to take good title. In other cases, that is where there is no register for uniquely identifiable property, the purchaser should be protected whether or not the purchase was from a dealer in the ordinary course of business.

Proposal 30

The new regime should provide that purchasers who

take for value in good faith and without notice or
take for value in good faith and in the ordinary course of business from a person who, in the ordinary course of his or her business, sells property of the relevant kind

should take free of a security, whether or not it is registered. Purchasers who take for value in good faith and without notice but not in the ordinary course of business should not, however, take free of encumbrances where these encumbrances are registered upon a uniquely identifiable asset-based register.

4.89 Effect of purchasers’ rule. The interest acquired by a purchaser who takes in accordance with the provisions as set out above should have the effect of extinguishing any securities over the property itself at the time the purchase was made. This does not mean, however, that secured creditors lose their interests. The effect of the proceeds rule¹³⁷ is to ensure that their interest in the original collateral continues in the proceeds received from the sale by the debtor. If the property is returned to or repossessed by the debtor, the creditor’s security interest will revive in accordance with the proposal made earlier.¹³⁸

4.90 Valuable property. One submission¹³⁹ received by the ALRC argues that there should be an exception to the purchasers’ rule where the property secured is ‘valuable property’. The submission defines ‘valuable property’ by use of an arbitrary monetary amount, for example, $40 000. It is argued that such an exception would give the holder of an existing security over ‘valuable property’ priority as against a bona fide purchaser who takes the encumbered property for value either without notice or in the ordinary course of business. Since as many as 90% of security agreements are drafted in a commercial environment and therefore are often associated with large amounts of money, imposing a threshold of, for example, $40 000 may have the effect, in practice, of making the exception to the rule the rule in more cases than not. It is difficult to support proposals which have the effect of, by and large, displacing the operation of the head rule. No proposal is made in relation to the suggestion of a ‘valuable property’ exception at this stage. Submissions are invited in respect of whether there should be such an exception to the purchasers’ rule and, if so, what should be the threshold definition of “valuable property’.

Consumer goods and transactions involving small amounts of credit

Consumer goods

4.91 The problem. Consumer goods may be goods used or acquired primarily for personal, family or household purposes, such as fridges, washing machines and stereo systems. Goods which are subject to registration under the chattel securities or registration of interests in goods legislation may also be acquired in a consumer context. If the priority of a security interest in consumer goods depended upon registration, while there may be many creditors who perhaps would not avail themselves of the opportunity to do so, it could lead to a large number of entries in the register with no useful purpose being served. In addition, customers of retail stores who are not party to any consensual agreements for security in relation to the goods purchased (for example, consumer credit transactions) may object if they were required by the retailer to sign financing statements.¹⁴⁰ The NSWLRC takes the view that the registration of security interests in consumer goods other than those which are subject to chattel securities or registration of interests in goods legislation should not be necessary to ensure priority. The fact that the sums of money normally involved in consumer transactions are relatively small is another persuasive reason for not encouraging registration.

4.92 Provisional proposal. The NSWLRC provisionally proposes that the priority scheme outlined in this paper should apply to security interests in consumer goods (other than those the subject of registration under the chattel securities legislation and registration of interests in motor vehicles) on the basis that a security over goods in a consumer transaction has the same effect as a possessory security or a registered security for the purpose of determining priorities. Whether goods are consumer goods would depend not on the nature of the goods but on the purpose for which they were used or acquired: goods would be consumer goods if they were used or acquired primarily for personal, family or household purposes. Thus, the same goods in the hands of the retailer would not be consumer goods.¹⁴¹ Submissions are sought on how consumer goods and consumer transactions should be defined.

Proposal 31

NSWLRC: With the exception of securities registrable under the chattel securities legislation (for example, securities over motor vehicles) the regime should apply to securities taken over consumer goods. These securities should gain priority and become enforceable against third parties without a financing statement having to be filed in the same way that possessory securities acquire priority and become enforceable against third parties.

Transactions involving small amounts of credit

4.93 The problem. It can also be argued that transactions involving relatively small amounts of money (for example, $2 000 or less) should not need to be registered. This helps to avoid cluttering up the register.¹⁴² If the scheme were nevertheless able to apply to small transactions, the issue seems to be why a security interest other than in consumer goods should be valid in bankruptcy or liquidation if no publicity has been given to it. Further, although the ‘cut-off’, whatever the chosen sum is, may be said to be ‘small’, it may represent a significant proportion of the total assets, particularly if there are frequent “small’ transactions.¹⁴³ Since registration is not compulsory, there may be creditors who would not bother to file a one-off transaction if a small amount is involved. This may reduce the incidence of filing. These creditors would consequently lose priority in the event of the bankruptcy or liquidation of the debtor. It would be a commercial decision whether registration would be justified. The NSWLRC is of the tentative view that if security interests in consumer goods are not able to be registered, it may be necessary to allow ‘small’ transactions to be similarly treated. The Commissions make no proposal at present but seek submissions on whether there is a need to register ‘small’ transactions and, if so, what should be the appropriate ‘cut-off’ amount.

Rights and duties upon default

Introduction

4.94 Default occurs when the debtor fails to pay or otherwise perform the obligation secured when due or when any event takes place whereupon, under the terms of the security agreement, the security becomes enforceable.¹⁴⁴Where the debtor has possession of the secured property prior to default, it is incumbent upon the debtor to ensure that the property is not improperly disposed of. In this sense, the debtor owes a duty of care to the secured party. If the property is improperly disposed of (for example, disposed of without the knowledge of the secured party) the secured party’s interest in the original collateral is likely to continue in the proceeds reaped by the debtor from the disposition.¹⁴⁵ Upon default by the debtor, the secured party with first priority becomes entitled to deal with the secured property in the way provided for in the security agreement. Most often, the secured party will become entitled to sell the secured property in order to recoup its interest out of the proceeds of the sale. Generally speaking, in the overseas models, if the agreement does not prescribe rights, the law will. These statutory rights are examined below in the context of each jurisdiction.

Overseas models

4.95 United States and Canada. Article 9 and the Canadian Acts each provide for the following three basic remedies upon default

sale or other disposition of the collateral¹⁴⁶
retention of the collateral in full satisfaction of the debt¹⁴⁷ or
an action to recover the debt¹⁴⁸.

Saskatchewan adds another: the right to the appointment of a receiver. In most jurisdictions the exercise of these rights carries with it certain duties, for example, an obligation of commercial reasonableness, an obligation to give notice of the disposition and an obligation to care for the collateral. There is also a duty on the secured party to serve notice upon the debtor that the right is being exercised. The Saskatchewan, Ontario and Manitoba regimes each contain provisions requiring the secured party to give notice of the exercise of a security right upon a debtor’s default. For example, the Saskatchewan legislation provides that this notice is to be served upon

the debtor
any other person known by the secured party to be an owner of the collateral
secured creditors with subordinate security interests perfected by registration and
other persons with an interest in the collateral who have given the secured party notice of their interests.¹⁴⁹

4.96 New Zealand and United Kingdom. The New Zealand Law Commission’s proposals make provision for an entitlement to damages where a party fails to discharge any duty or obligation statutorily imposed upon it, the fulfilment of which another party could reasonably have been expected to have relied upon.¹⁵⁰ Neither the New Zealand draft legislation nor the United Kingdom proposals prescribe statutory rights upon default in the same way as the American and Canadian legislation.

Provisional proposal

4.97 The approach adopted by the United Kingdom and New Zealand - whereby rights are not conferred upon secured parties by statute - should be followed. This ensures that no restriction is imposed by the proposals upon the circumstances in which a secured party may exercise a security right. It should be up to the parties to the agreement which creates the security to determine when and how the rights which arise out of this security are to be exercised. Other laws, such as consumer credit laws, will impose their own restrictions. It is not intended that these proposals should affect these existing laws.

Proposal 32

The new regime should not confer rights and duties upon the secured party.

FOOTNOTES

1. See paragraph 5.38.

2. See paragraphs 2.14-2.21.

3. See paragraph 2.16.

4. The rule in Ex parte Daglish should still apply in relation to the difference between personal property and real property.

5. Professor AL Diamond, op cit, 52.

6. Mortgages, charges, pledges and liens are, by definition, securities although it is conceivable that an instrument which is called a mortgage may not, in fact, be a mortgage or have a security purpose. Conversely, an instrument may be a mortgage but be called something else. The term ‘borrowing arrangement’ refers to all types of instruments whether or not they are securities.

7. Section 9-102(1)(a).

8. Section 9-102(1)(b).

9. Section 9-102(2).

10. The purported reason for this exception lies in the fact that without it there would be a requirement on businesses to register all assignments upon transfer of ownership or being wound up. See paragraphs 4.17-4.20.

11. Article 9 does not apply to statutory liens except those acquired in the ordinary course of business: section 9-310. The policy behind this exclusion is that these security interests are possessory and therefore do not need to be registered to protect the holder’s interest.

12. See paragraphs 4.67-4.69.

13. Section 9-306.

14. It was held in Re Doxtater (1984) 3 PPSAC 246 (Ont SC) that the Act does not apply to the Crown.

15. Professor RH McLaren and K de Jong, op cit 1-4-1-4-1.

16. Professor RH McLaren and K de Jong, op dt, 1-9-1-10.

17. See paragraphs 4.17-4.20.

18. Interests in policies of insurance other than life insurance contracts can be brought within the regime if an insurance payout is subject to a proceeds clause.

19. These right are rights to take action in rem against the goods rather than suing for the contract price. They consist of (a) the unpaid seller’s lien when in possession of the goods; (b) the unpaid seller’s right to stoppage in transitu when the buyer has become insolvent; and (c) the seller’s right to dispose of goods when they have been shipped by a bill of lading indicating delivery is to be to the seller: Professor RH McLaren and K de Jong, op dt, 1-40.1.

20. This interest is a qualified inclusion. Where the assignment of accounts receivable or chattel paper forms part of the sale of a business, the assignment will only become subject to the regime provided the vendor remains in apparent control of the business after the transfer. Where the business does not remain in the apparent control of the vendor after the sale takes place the accounts receivable or chattel paper interest is deemed not to be a security and therefore cannot acquire the protections afforded by the regime. This qualification also applies under Article 9: s 9-306. From one point of view, this exception for assignments of accounts receivable and chattel paper that form part of the sale of a business might be more simply characterised as an example of the purchasers’ rule in action: a person taking the business for value acquires the purchaser protection in respect of all parts of that business, including accounts receivable and chattel paper that attach to the sale. The New Zealand proposals to deem transfers of accounts receivable and chattel paper as securities for the purpose of the regime is also qualified to the extent that, where the transfer is merely an assignment of accounts receivable made solely to facilitate their collection on behalf of the assignor, the assignment does not come within the scope of operation of the proposals.

21. Excluding the interest of a seller who has shipped goods to a buyer under a negotiable bill of lading (or the equivalent thereof) without other evidence of an intention to create or provide a security interest in the goods.

22. Draft Personal Property Securities Act 1989 (NZ) s 4(5).

23. Professor AL Diamond, op cit, 35.

24. Ibid 37.

25. Ibid 59-63.

26. Ibid 35.

27. Professor Ziegal, for example, notes that ‘ ... [t]hose who opposed the inclusion of one-year plus leases in Canada did so on the ground that it would convert the PPS Acts into “security and registration” Acts and thus muddy and confuse the purpose of the original legislation. This reasoning overlooked the fact that from the beginning the provincial Acts have applied to absolute as well as security assignments of receivables and that they now also apply to straight transfers of chattel paper. This shows that the legislation was never confined to “pure” security interests. The opponents also argued that lessors should be free to decide for themselves whether they wished to register a non-security lease and to suffer the consequences if they decide wrongly’: Professor J S Ziegal, The New Provincial Chattel Security Regimes, (1991) 70 Canadian Bar Review 706.

28. Section 9-104(f).

29. Section 9-102(2): see footnote 9.

30. Professor MC Bridge, Form, Substance and Innovation in Personal Property Security Law, in [1982] Journal of Business Law 11 (UK).

31. A period of more than one year was also chosen by the New Zealand Law Commission in their more recent Draft Personal Property Securities Act 1989 s 4(4)(c): see New , Zealand Law Commission, Report No 8 (NZLC R8), A Personal Property Securities Act for New Zealand, 1989, Wellington, 31.

32. Professor MC Bridge, op cit, 11.

33. See Draft Personal Property Securities Act 1989 (NZ) s 2(1). 34. New Zealand Law Commission, Report 8, op cit, 89-90. 35. Uniform Personal Property Security Act 1982.

34. New Zealand Law Commission, Report 8, op cit, 89-90.

35. Uniform Personal Property Security Act 1982.

36. See paragraphs 4.27-4.30.

37. Section 9-114. ‘[W]here goods are furnished to a merchant under the arrangement known as consignment rather than in a security transaction, the consignor must, in order to protect his position as against an inventory secured party of the consignee, give to that party the same notice and at the same time that he would give to that party if that party had filed first with respect to inventory and if the consignor were furnishing the goods under an inventory security agreement instead of under a consignment.’ -1972 Official Comment on Section 9-114 in 3 Uniform Laws Annotated: Uniform Commercial Code, 1981, West Publishing, Minnesota, 222.

38. See Draft Personal Property Securities Act 1989 (NZ) s 4(4)(c).

39. Draft Personal Property Securities Act 1989 (NZ) cl 4(4).

40. Re Stephenian’s Persian Carpets (1980) 1 PPSAC 119, 124 cited in Professor R H McLaren and K de Jong, op cit, 1-20.

41. A Romalpa clause is a special type of title-retention device. Where goods which are held subject to a Romalpa clause are sold, the owner of the goods continues as the owner of the proceeds received from the sale of the goods: Aluminium Industrie Vaasen BV v Romalpa Aluminium Ltd [1976] 1 WLR 676. The issue of interests in proceeds is discussed in paragraphs 4.76- 4.78.

42. See paragraph 4.28.

43. See paragraphs 4.79- 4.82 in relation to priority of purchase money security interests.

44. See Professor AL Diamond, op cit, 88-89.

45. Deutz Engines Ltd v Terex Ltd [1984] SLT 273; Emerald Stainless Steel Ltd v South Side Distribution Ltd [1983] SLT 162.

46. Professor AL Diamond, op cit, 89.

47. New Zealand Law Commission, Report 8, op cit, 85.

48. For discussion of status of transfer of documents of title, see El Sykes, op cit, 764-765.

49. Professor AL Diamond, op cit, 90.

50. See Professors RCC Cuming and RJ Wood, A Handbook on the Saskatchewan Personal Property Security Act, 1987, Law Reform Commission of Saskatchewan.

51. RM Goode, Commercial Law, 1982, Penguin, 858.

52. See paragraphs 4.86-4.90.

53. Article 9 also covers sales and assignments of chattel paper.

54. Professor AL Diamond, op cit, paragraph 18.2.3.

55. Professor AL Diamond, op cit, paragraph 18.2.4.

56. ‘An assignment of accounts receivable made solely to facilitate the collection of the accounts receivable on behalf of the person making the assignment’: Draft Personal Property Securities Act 1989 (NZ) s 4(5)(b)(iv); see also Section 9-104(f).

57. Draft Personal Property Securities Act 1989 (NZ) s 4(5)(v).

58. Section 9-104(b).

59. Draft Personal Property Securities Act 1989 (NZ) cl 4(5)(ix).

60. Section 9-303: see paragraph 4.10.

61. Draft Personal Property Securities Act 1989 (NZ) s 4(5)(a).

62. See paragraphs 4.49-4.50.

63. This would also appear to be the rationale behind the requirement under the Conveyancing Act 1919 (NSW) s 54A that all contracts dealing with land be in writing.

64. Professor AL Diamond, op cit, 43. Diamond also concludes that the absence of writing should make the security interest unenforceable: 46.

65. The Commissions seek submissions in relation to the stamp duty consequences of this proposal. See A J Duggan, S W Begg and E V Lanyon, Regulated Credit: The Credit and Security Aspects, 1989 Law Book Co, Sydney, paragraph 6.2.11 in relation to receivables.

66. eg Bills of Sale and Other Instruments Act 1955 (Qld); Instruments Act 1980 (NT).

67. eg Chattel Securities Act 1987 (WA).

68. Re Bauer Securities Pty Ltd & Anor; Austral Mining Construction Pty Ltd v NZI Capital Corporation Ltd & Anor (1991) 4 ACSR 328 (Sup Ct Qld) was a case which involved the registration of a deed of mortgage under the Bill of Sales and Other Instruments Act 1955 (Qld). The mortgage was also registered with the ASC on the ARCC. However, the mortgage did not comply with the formalities requirements of the Queensland Act. McPherson J ruled that the deed of mortgage was in fact a debenture and was therefore not an instrument within the meaning of the Act. Obiter dicta of Mc Pherson J suggested that even if the mortgage did fall within the category of instruments regulated by the State Act it would not be valid as against third parties, in spite of the fact that it was registered on the ARCC, because it did not comply with formalities requirements of the Act.

69. See paragraphs 5.5-5.8.

70. See New Zealand Law Commission, Report 8, op cit, 115. The Commissions’ provisional proposal is supported by the Insolvency and Trustee Service Australia Submission 15 April 1992.

71. See paragraphs 4.49- 4.50. 72. eg see Section 9-313.

72. eg. see Section 9-313.

73. See paragraph 3.5.

74. Ibid.

75. Section 9-312.

76. Chattel paper is a document of title in the property named thereon: see paragraphs 4.31-4.33. A transferee of chattel paper is therefore a purchaser for the purposes of the Article.

77. See chapter 3, footnote 11

78. Professor RM Goode, op cit, (1982), 789.

79. Ibid, 796.

80. Section 9-204(2).

81. Professor AL Diamond, op cit, 84-85.

82. Corporations Law s 279(3).

83. eg Professor RCC Cumming Submission 17 December 1990.

84. Section 9-204(3).

85. Section 9-312(7).

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

87. In spite of the fact that the Ontario and Manitoba Acts do not explicitly provide special priority for future advances: Prof RH McLaren and K de Jong, op cit, (1987), 6-52.

88. New Zealand Law Commission, Report 8, op cit, 87.

89. Section 9-314.

90. Sub-section (1).

91. Sub-section (3)(a).

92. Sub-section (3)(b).

93. Sub-section (3)(c).

94. Compensation relates to damage only and does not include any decrease in the value of the whole caused by the absence of the goods removed or any necessity for replacing them.

95. Sub-section (4).

96. s32(1).

97.s32(2).

98. See paragraphs 4.60-4.65.

99. (1873) LR 8 Ch 1072.

100. Professor El Sykes, op cit, 550.

101. Ibid.

102. Sub-section (2).

103. Sub-section (3).

104. Professors RCC Cuming and RJ Wood, A Handbook on the Saskatchewan Personal Property Security Act, 1987, Law Reform Commission of Saskatchewan, 207.

105. Draft Personal Property Securities Act 1989 (NZ) s 29.

106. Section 9-307(1).

107. A danger always exists with growing crops that there will be no yield if the crop is subjected, for instance, to hail damage, locusts or other natural catastrophe. Discharge of a security over a growing crop is therefore contingent upon a yield being produced. Harvested crops risk perishing before the vendor is able to recoup the cost of the crop and reimburse the grower. Therefore even discharge of a security over a harvested brut unsold crop is a contingent interest.

108. See paragraphs 4.86-4.90

109. eg Personal Property Security Act 1980 (RSO) c 94 s 34(1).

110. An accounts receivable represents a legal chose in action. Unlike an accounts receivable, chattel paper is a document of title: see paragraphs 4.19-4.20.

111. Ibid s 29.

112. Personal Property Security Act 1973 (Man) c 102 s 29.

113. Personal Property Security Act 1979-80 (SS) c P-6.1 s 29.

114. s23(6).

115. s 23(8).

116. See paragraphs 4.86- 4.90.

117. Sub-section (2).

118. Sub-section (3).

119. Sub-section (4).

120. Personal Property Security Act 1980 (RSO) c 94 ss 23, 27, 35: see Professor RH McLaren and K de jong, op cit 6-6.3.

121. Personal Property Security Act 1979-80 (SS) c P6.1 ss 28,35(3): see Professor RH McLaren and K de Jong op cit, 6-51.

122. See Central Refrigeration & Restaurant Services Inc (Trustee of) v CIBC (1986) 5 PPSAC 262 (Sask CA) discussed in McLaren RH and de Jong K, op cit, 4-11.

123. Draft Personal Property Securities Act 1989 (NZ) s 22.

124. Professor AL Diamond, op cit, 81.

125. Professor RH McLarm and K de Jong op cit, 1-34.

126. Section 9-312(3)(a).

127. Sub-sections 9-312(3) and (4).

128. McLaren RH and de Jong K, op cit, 6-11.

129. Professor AL Diamond, op cit, 90 (paragraph 17.17)

130. See paragraphs 4.53-4.56.

131. Section 9-316.

132. Draft Personal Property Securities Act 1989 (NZ) s39.

133. The Commissions seek submissions in relation to the sump duty consequences of this proposal.

134. The memo dat rule: see paragraph 2.23.

135. Sub-section (2). Buyers of consumer goods will not be subject to future advances under existing security interests at the time of purchase unless the secured party, without knowledge of the purchase, entered into an agreement providing for future advances within forty-five days from the date of purchase.

136. Professor AL Diamond op cit, 76-77 (paragraphs 13.6.1-13.6.10).

137. See paragraph 4.78.

138. See paragraph 4.75.

139. Simon Begg, Solicitor, Corrs Chambers Westgarth, Melbourne, Submission, 13 May 1992.

140. See paragraph 5.2.

141. See Professor AL Diamond, op cit, paragraph 6.9.

142. Ibid, paragraph 11.5.15.

143. Ibid, paragraph 11.5.16.

144. Personal Property Security Act 1980 (RSO) c94 s 1(h).

145. See paragraph 4.78.

146. Section 9-504.

147. Section 9-505.

148. Section 9-501(1).

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

150. Draft Personal Property Securities Act 1989 (NZ) s 52.

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