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Review of the Personal Property Securities Act 2009

Consultation Response Template

Consultation Paper 2

Instructions:

Please use the form below to provide feedback with respect to the proposed recommendations and issues listed in each section of the form. Please refer and respond to the proposed recommendation or issue as set out in Consultation Paper 2. The heading and paragraph number of the relevant sections of the consultation paper are included to help guide you.

Please note your agreement or disagreement with the proposed recommendation by deleting either ‘Yes’ or ‘No’ where indicated. Comments can be provided in the box below each proposition. There is no word limit for comments but succinct responses clearly setting out the reasons for agreement or disagreement with the proposed recommendation will be of most use for the purposes of the review.

You may respond to as many or as few propositions as you wish.

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Name: Steve Pemberton Organisation: Lawyer (formerly a partner with Allens, now in sole practice) Background/Expertise/Interest in PPSA Review: I have advised a range of banking, mining and industrial companies on the impact of the PPSA on their businesses and transactions, and have authored an online guide to registration on the PPS Register (LexisNexis, Personal Property Securities Practical Guidance) and other materials. Contact Details: email steve.pemberton@mail.com ; tel +61 420 937 159

2.2 Rights in the collateral

Should bare possession constitute sufficient rights in collateral to support attachment of a security interest and, if so, on what basis? Comments: It seems to me that bare possession constitutes sufficient rights to support attachment of a security interest, on the basis of the normal meaning of the word ‘right’. However, the grant of a security interest by the person with possession does not change the general legal possession as between the true owner and the person with possession, or as between the true owner and another person depriving rights through that person (such as a bank which is the secured party under a security interest granted by that person), unless the PPSA says that it does. If the arrangement under which possession is granted is a security interest – for example, retention of title or a PPS lease – then the PPSA has plenty to say on the subject of the position as between the true owner, and the person with possession or another secured party. The security interest can lose priority, or can vest. But if the arrangement is not a security interest – for instance, a gratuitous bailment at will – then generally nothing in the PPSA subordinates the true owner’s right to terminate the bailment to the rights of the bailee or a secured party deriving title through it. If this is thought to be a matter requiring clarification, I would see it as preferable to clarify it by amendment to the Act rather than by extrinsic material.

2.2 Rights in the collateral Proposed recommendation 2.1: That s 19(5) be amended to clarify that it applies to all security interests in favour of a secured party that owns the collateral, where the security interest is founded on the grantor's possession of the collateral. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons given in the paper. I’m not sure whether the amendment would also, by implication, clarify whether or not bare possession supports grant of a security interest to another secured party - as indicated above, I think it would also be useful that any clarification of that issue be express rather than implicit.

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2.3 The power to transfer rights in the collateral to the secured party Proposed recommendation 2.2: That s 19(2)(a) be amended to read:

"(a) the grantor has rights in the collateral; and" Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

2.4 The need for a security agreement Should s 19 make explicit that a security interest can only attach if there is a security agreement? Comments: I don’t see the need for any such requirement.

3.1 Section 18 - general rules about security agreements Proposed recommendation 2.4: That ss 18(2) and (4), and the definition of "future advance" in s 10, be deleted. Do you agree with the proposed recommendation? No Comments: I don’t see any harm in setting out general principles even if they are not areas of doubt. And I quite like the way these simple statements sweep away areas of prior complexity (such as the former prospective advances regime under the Corporations Act and the discussion of tacking rules in any text on pre-PPSA securities law). Having said that, I don’t see any particular problems that would arise if the recommendation were implemented and these provisions deleted.

3.5 Proposed recommendation - Sections 3.2 to 3.4 Proposed recommendation 2.5: That s 20(2) be recast along the lines set out above, and that ss 20(4) and (5) be deleted. Do you agree with the proposed recommendation? Yes (partly) Comments: I support the deletion of ss 20(4) and (5), which (as noted in the paper) seem unnecessary. The addition in proposed new s 20(2)(b) to specify ‘the terms of the security interest’ may be problematic. It may not be clear what ‘terms’ cover and whether, for instance, they include enforcement terms. Sometimes the terms of a security interest may be split between several documents –for example where parties execute several specific short charging documents, all of which also draw on general terms contained in a security trust deed or common terms deed. Possibly s 20(2)(b) could be omitted, or else the concept of ‘terms’ confined to the ‘creation’ of the security interest.

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3.6 Situation where collateral is transferred Proposed recommendation 2.6: That s 20 be amended to make it clear that only the original grantor of a security interest over collateral needs to comply with s 20(2), not a person who becomes the grantor as the result of the collateral being transferred to it. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

4.2.1 Seizure or repossession Proposed recommendation 2.7: That the language "(other than possession as a result of seizure or repossession)" be deleted from s 21(2)(b). Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

4.2.2 Bearer investment instruments Proposed recommendation 2.8: That s 24(6) be amended to clarify that it only applies to a security interest over registrable investment instruments. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

4.3.2.2 Have we jumped the gun? Should the Act make specific provision for intermediated securities despite the issues identified in the discussion? Comments: I don’t have a strong view either way as to whether the Act should deal specifically with intermediated securities. However, I do find the comments in the paper, to the effect that they do not mesh well with other Australian law, persuasive, and would not mourn them if they were deleted. I do think, though, that CHESS securities should not be dealt with as intermediated securities (that is, I agree with recommendation 2.12). They are in fact securities held under a direct relationship between the holder and the issuer, rather than held in the name of an intermediary. CHESS securities are an important enough feature of the Australian financial landscape that, if a security interest over them is to be capable of being perfected by control, it should be via a clearly specified mechanism rather than through being shoehorned into a test designed primarily for securities that are actually registered in an intermediary’s name.

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4.3.2.3 Are the options for perfecting by control appropriate? Should the options for perfecting by control over an intermediated security be tightened, as identified in the discussion? Comments: I agree these would be sensible improvements. One difficulty is that s26 currently prescribes several options for obtaining control in generic terms, not all of which will work for all kinds of intermediated securities, but in terms where sometimes more than one may apply to some intermediated securities, leading to the outcome that more than one person may obtain control. A good starting point would be to disentangle the control tests for CHESS securities on the one hand, and securities actually held in the name of an intermediary on the other. Control for CHESS securities should be through an agreement with the sponsoring broker.

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4.3.2.4 Can the concept of an intermediated security be simplified? Are there suggestions for simplifying the concept of an intermediated security?

Comments: First (as mentioned above, and as per recommendation 1.12) I would suggest separating CHESS securities from the concept of intermediated security; and then I would suggest giving them their own tailored control test, by reference to an agreement with the sponsoring broker. Second, I am inclined to support removing the requirement that an intermediary be licensed and focus instead on the nominee’s function. New Zealand’s control test (though they call it possession) refers just to function: “a person takes possession of an investment security … if … in the case of an investment security that is held by a nominee, the records of the nominee record the interest of the person in the investment security” (s18(1)(d)). It is possible that the New Zealand test is referring only to the situation of a nominee who holds specific shares on trust for the grantor, so that the grantor has a beneficial interest in the specific underlying shares, rather than to an intermediary, where the grantor has only rights against an intermediary who holds (or should hold) a fluctuating pool of shares with the grantor possibly having no rights to specific shares. The difference between these scenarios highlights a question: if the holder of rights against an intermediary gives security, is the collateral (a) the underlying shares, or is it only (b) the rights against the intermediary? If the grantor’s rights against the intermediary are merely contractual and do not include any kind of property right in the pool of securities held by the intermediary, then the collateral cannot include the underlying shares, as the grantor has no rights in them. On the other hand, if the grantor’s rights do include rights in the underlying securities, then the grantor has rights in them and it follows that the underlying securities are the ‘collateral’ for the purposes of the Act – just as the Act can treat as collateral goods in which the grantor has rights that are less than full ownership. This raises the spectre of multiple clients of the intermediary granting security, all of which might notionally be security interests for which the ‘collateral’ is the entire pool of securities held by the intermediary. I don’t see that as a huge problem. I don’t believe that situation would result in the priority rules in the Act being used to resolve disputes between the secured parties of the clients, so that one secured party who happened to register first could claim the entire pool. The reason is that, as I see it, merely defining the entire pool as ‘collateral’ does not subordinate the rights of the intermediary (who actually holds the entire pool) to the rights of a client, whose rights are limited to specific quantities of securities, or to the secured party of that specific client, whose rights are limited in the same way: there is nothing in the Act that subordinates the rights of the intermediary to them. And if the client’s secured party tried to assert a first priority right to the entire pool on the basis that it was all ‘collateral’, then the intermediary – and any person claiming through the intermediary, including all its other clients and their secured parties – could defeat the claim by asserting against it the limitations on these rights arising under the client’s agreement with the intermediary, which are untrammelled by the Act.

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4.3.2.5 What if the intermediary is itself the secured party? Proposed recommendation 2.11: That it be made clear, if the concept of perfection by control over intermediated securities is retained, that the intermediary itself can also perfect a security interest by control over intermediated securities held with it. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

4.3.2.6 CHESS securities Proposed recommendation 2.12: That the Act be amended so that shares or other securities listed on the Australian Stock Exchange and held through the CHESS system are investment instruments, rather than intermediated securities. Do you agree with the proposed recommendation? Yes Comments: Yes, but then a specific control test for CHESS securities should be provided.

4.3.2.7 Cash Proposed recommendation 2.13: If the concept of perfection by control over intermediated securities is retained, that the Act be amended to allow a secured party to perfect by control over cash that is held via a custodian in the same way as it can perfect by control over other financial assets. Do you agree with the proposed recommendation? Yes Comments: Yes, but this should be limited to ‘cash’ in the sense of the grantor’s rights to receive cash from the intermediary. It shouldn’t be a way of broadly allowing perfection by control over assets such as the bank accounts, merely because the proceeds of intermediated securities happen to be paid into them, so as to subvert the publicity objective of perfection.

4.3.3.1 Scope of the concept Should the definition of "investment instrument" be simplified, and if so, how? Should perfection by control be available in all such cases?

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Comments: It would be preferable to define the concept of investment instrument more generically, without reference to definitions in other statutes and in particular without reference to whether or not the instrument happens to fall within a particular statutory regulatory scheme. This would enhance usability and consistency of the Act. I agree that the categories of investment instruments that are susceptible to control could be narrowed. The wider the categories, the greater the list of inspections of documents and enquiries of third parties that a diligent financier intending to take first-ranking security must make, over and above a search of the register. Access to secured finance may be more efficient if the list is confined to a tighter list of investment instruments – such as shares – for which specific enquiries outside the register must be made. 4.3.3.2 The options for perfecting by control over an investment instrument Should the options for perfecting by control over an investment instrument be simplified? Comments: Generally I would support the proposals for tightening outlined in the paper.

4.3.4 Intermediated securities and investment instruments – greater consistency? Proposed recommendation 2.16: That the mechanisms for perfection by control in ss 26 and 27 be made more consistent. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons given in the paper.

4.3.5.1 Is the definition too narrow? Is the term "ADI account" too narrow in some contexts? Comments: Yes – it should be broadened as suggested in the submission referred to in the paper.

4.3.5.2 Should a secured party other than the ADI itself be able to perfect by control? Should a secured party other than the ADI itself be able to perfect over an ADI account by control, e.g. by entering into a control agreement with the ADI or by taking over the account? Comments: No. The balance of convenience favours parties having to consult the register if they want to find out who has security over an ADI account, other than the ADI itself. Allowing parties other than the ADI to perfect by control will not meet the publicity objective. A third party wanting to know whether anyone other than the ADI had obtained control would only be able to find out by asking the ADI – but the systems of ADIs are unlikely to permit them to give a definitive answer, even if they were willing to assume the risk of doing so.

4.3.5.3 Should perfection by control be automatic?

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Should an ADI’s security interest over an ADI account held with it be automatically perfected by control? Comments: I agree that automatic perfection is appropriate, for the reasons given in the paper, particularly the fact that perfection is functionally equivalent to set-off.

4.3.6 Negotiable instruments that are not evidenced by a certificate Proposed recommendation 2.18: That ss 21(2)(c)(iv) and 29 be deleted Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

4.3.7 Letters of credit Should ss 21(2)(c)(v) and 28 be deleted?

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Comments: I would support deleting ss 21(2)(c)(v) and 28, for the reasons referred to in the paper. A further reason for deletion is that the concept of a letter of credit stating that the letter of credit itself must be presented is sufficiently unusual not to merit specific coverage in the Act. In my experience letters of credit require presentation of documents, but the documents to be presented do not usually include the letter of credit itself. And this is particularly so, now that letters of credit are usually issued electronically. A related comment is that it is not clear why the definition of ‘negotiable instrument’ includes paragraph (e) – ‘a letter of credit that states that it must be presented on claiming payment’ – and perhaps paragraph (e) could be deleted. Letters of credit are not what would normally be considered negotiable instruments: negotiability is usually conceived as involving transferability by delivery, or by delivery and endorsement; and letters of credit are not usually transferable without consent of the issuing bank (UCP 600, article 38). So labelling any letters of credit as ‘negotiable instruments’ seems unexpected and unnecessary; and it seems particularly odd that the categorisation should turn on whether or not they contain the unusual term of requiring presentation on claiming payment. If, contrary to the above, both paragraph (e) of the definition of ‘negotiable instrument’ and s 21(2)(c)(v) are retained, it might be asked why one refers to presentation ‘on claiming payment’ and the other ‘on claiming payment or requiring the performance of an obligation’, and whether the two should be conformed. Further, it may be noted that the inclusion of some letters of credit in the definition of ‘negotiable instrument’ creates some confusion in ss 239 and 240. Since some letters of credit are ‘negotiable instruments’, and therefore are financial property, while others are not, and therefore are intangible property, the governing law rules for letters of credit are split between s239 (intangible property) and s240 (financial property). And it is odd that s240(2) refers to letters of credit that must be presented on claiming payment or requiring the performance of an obligation, even though letters of credit that must be presented on requiring the performance of an obligation are not covered by the definition of ‘negotiable instrument’ and so, one would have thought, should not be covered by s240 (financial property) at all. Finally, s 240(7) contains a specific governing law rule for negotiable instruments that are not evidenced by a certificate. Letters of credit are not usually evidenced by a certificate, but it is not clear whether those letters of credit that do fall under s 240 are meant to be covered by the specific letter of credit rules in s 240(1) to (5) or by the general non-certificate rule in s 240(7). It would be very inconvenient if s 240(7) did apply to letters of credit (which, by its terms, seems to be the case), as the governing law rule that it mandates is ‘the law of the jurisdiction that governs the negotiable instrument’ – and it is very common for letters of credit to specify that they are subject to UCP 500 or 600, but not to specify the law of a particular jurisdiction as the governing law at all.

4.3.8 Satellites and other space objects Proposed recommendation 2.20: That s 20(2)(c)(vi) be deleted. Do you agree with the proposed recommendation? Yes

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Comments: Yes, for the reasons stated in the paper. In any case, the concept of ‘control’ for satellites and space objects is a curious one. In its ordinary meaning, one might imagine that it would be possible to give a secured financier ‘control ‘of a space object by handing over the device that can be used to manoeuver that space object to and from the Earth’s surface and around in space – though (without casting aspersions on any particular financiers) one might also question whether that would be a prudent thing to do.

4.3.9 Performance bonds and bank guarantees? Should the ability to perfect by control be extended to performance bonds and bank guarantees? Comments: No. The publicity objective of perfection by control suggests that the concept should only apply where:

• there is a unique document, such as a share certificate, without which a party should not expect to have first-ranking security; or

• there is a unique party, such as an intermediary, without enquiry of whom a party should not expect to have first-ranking security.

Although there may still be some element of a practice of presenting a physical performance bond or bank guarantee when making demand on them, this is not usually required by the terms of the documents themselves and increasingly parties would rely on electronic copies of the documents and on the issuer’s own records of their issue. Accordingly performance bonds and guarantees should no longer be considered sufficiently ‘unique’ to qualify for perfection by control. In any case, expanding the categories of control results in an expansion of the inspections of documents and enquiries of third parties that a diligent financier intending to take first-ranking security must make, over and above a search of the register. It is difficult to see how this expansion enhances the efficiency of access to secured finance.

4.4.2.1 Five business days Proposed recommendation 2.22: That the references in ss 22(2), 33(2), 34(1), 35, 36, 38, 39 and 40 to "five business days" be replaced with "10 business days". Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

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4.4.2.2 56 days Proposed recommendation 2.23: That the references in ss 39 and 40 to "56 days" be replaced with "60 days". Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

4.4.2.3 The effect of expiry of a period of temporary perfection Proposed recommendation 2.24: That ss 22, 39 and 40 be amended to provide that temporary perfection simply expires at the end of the period provided for in the section. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

4.5 Other methods of perfection Should a transfer of an account or chattel paper also be able to be perfected by notice to the obligor, or by taking control of payments? Comments: No, for the reasons stated in the paper.

4.6.1 Section 56 Proposed recommendation 2.25: That s 56 be amended to reflect the language of s 23(1) of the Sask PPSA. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

4.6.2 Re-perfection Should a version of Sask PPSA s 35(7) be included in the Act? Comments: No, for the reasons stated in the paper. While considering this issue, it is also worth noting the decision in SFS Project Australia Pty Ltd v Registrar of Personal Property Securities [2014] FCA 846, which authorises the Registrar to reinstate a registration removed in error, without a 30 day (or any other) time limit. The case does not seem to discuss the position of parties who may have dealt with the grantor on the faith of the register before the registration was reinstated.

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5.1 Terminology Proposed recommendation 2.26: That careful consideration be given to the ways in which the Act refers to dealings in collateral, that consistent terminology be used where appropriate, and that it be made clear, if different terms are used in different contexts, what the differences in meaning are as between those different terms. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.2.1 The effect of a lease on a security interest over the leased goods - Policy issues What should the implications be for a security interest if the collateral is dealt with in different ways, including by lease? What is the conceptual basis for this, and how does it impact on other aspects of the Act? Comments: The conceptual basis, as I see it, is as outlined in my comments above on section 2. That is, a dealing by the lessee does not (and, I think, should not) sacrifice or subordinate the interest of the Lessor or of Lessor SP to a subsequent dealing, except to the extent that this arises because of (a) a taking-free rule, or (b) the subsequent dealing being a security interest that is not perfected. In all of the Fact Patterns, I think it is correct to say that the Purchaser or Lessee ‘takes free’ of the security interest (because of s46), not that the security interest is extinguished, even if the effect may for some Fact Patters be substantially the same.

• In Fact Pattern 1, the Purchaser acquires absolute ownership, free of the security interest of Lessor SP. Notionally Lessor SP’s security interest continues, though that is of little or no practical relevance to the Purchaser or Purchaser SP, as the interest the Purchaser has obtained (absolute ownership) leaves no work for the continuing security interest to do.

• In Fact Pattern 2, the Lessee acquires rights under the short term rental agreement, and those rights prevail over (or can be enjoyed free of) the security interest of Lessor SP. But the security interest continues to apply to the collateral and to the Lessor’s rights in relation to it (eg the right of reversion), and Lessor SP may again enjoy its security interest free of the interest of Lessee (and, through it, Lessee SP) when the rental term ends.

• I would see Fact Pattern 3 the same as Fact Pattern 2, in that the Lessee acquires rights under the finance lease which prevail over (or can be enjoyed free of) the security interest of Lessor SP. Because those rights are significantly greater than those of a short term hirer, there is correspondingly less work for the continuing security interest to do, and if the Lessee ultimately buys the collateral, they may (as in Fact Pattern 1) have no work to do.

So, in Fact Pattern 3, I think the outcome is (and should be) that the interests of the Lessee and, through it, the Lessee SP prevail; but I think this arises because of the operation of s 46 and the meaning of ‘taking free’, and not because the finance lease is treated as a sale, or because a sale would result in the security interest of Lessor SP being ‘extinguished’. ‘Extinguishment’ is useful shorthand for the practical outcome when an absolute owner (or someone with nearly all the rights of an absolute owner) takes free of a security interest, but it isn’t what s 46 actually provides for.

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5.2.2 Fact pattern 3 – effect of s 267 As a subset of the question in Section 5.2.1, what should happen to a security interest over leased goods if s 267 applies to the lease? Comments: I don’t think the effect of Fact Pattern 3 is that Lessor SP’s security interest ‘detaches’ from the collateral. Rather, I think the effect is that while the finance lease remains on foot, Lessor SP’s security interest subsists but is subordinate to the interest of the Lessee (because the Lessee is ‘free’ fo the security interest). If 267 then applies to the lease because of the liquidation etc of the Lessee, the think that vests in the Lessee is ‘the security interest’ (s 267(2)), which is ‘the interest of [the Lessor] … under a PPS lease’ (s 13(2)(c)). That interest is ownership, but I think there are good grounds for arguing that the interest that vests in the Lessee is not absolute unencumbered ownership, but rather the ownership interest that the Lessor actually enjoyed, which is ownership subject to Lessor SP’s security interest. If that argument were correct, then the outcome would be that:

• the rights that Lessee originally enjoyed under the finance lease are untrammelled by Lessor SP’s security interest, because the Lessee took free of them, but

• the additional rights acquired under s267 are not free of Lessor SP’s security interest. If the Lessee is able to exercise its rights under the finance lease to buy the collateral, it will do so free of Lessor SP’s security interest (because those rights are free of it), and then will be able to deal with the collateral free of Lessor SP’s security interest altogether. If not (for example, if the dealing was actually a long-term operating lease rather than a finance lease), then it will not. That doesn’t seem to me an unreasonable outcome in circumstances where Lessor SP has perfected its security interest and Lessee SP could, if it had made enough investigations, have discovered that that by finding out who Lessee rented its equipment from.

5.3.2 The meaning of "continues in the collateral" Should "continues in" in s 32(1)(a) be replaced with "remains attached to"? Comments: I agree that this would be an improvement, for the reasons stated in the paper.

5.3.5 A possible alternative Proposed recommendation 2.28: That s 32(1) be amended along the lines described above. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper (though perhaps the reference to ‘extinguish’ in the amended clause could instead be changed to ‘taking free’, more consistently with Part 2.5).

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5.3.6.2 Is the limitation appropriate? Is the limitation in s 32(2) appropriate? Comments: I support the arguments canvassed in the paper for the proposition that s 32(2) is not needed, and would be happy to see it deleted. It should not be the purpose of the PPSA to guard against ‘windfalls’ arising from changes in the collateral. After all, the ‘windfall’ could just as easily arise from a change in the market value of the collateral without any dealing occurring. And if the secured party bargains for a security interest over both original collateral and proceeds, it is hard to see why the Act need concern itself with a windfall in one but not the other.

5.3.7 Section 32(5) - priority in relation to proceeds Is the rule in s 32(5) too narrow? Comments: The possible changes canvassed in the paper look like sensible improvements to me.

5.4.1.2.3 Rationale for the variations in usage (a) Should the references to "value" or "new value" in the taking free rules be made more consistent? (b) Should any "new value" be required to be more than nominal? Comments: I would support reducing the variation. I would not be in favour of imposing a requirement that any category of value should be more than nominal. That will lead to a difficult enquiry of what ‘nominal’ means, creating uncertainty. However, if nominal value is permitted (or if the new component of new value is permitted to be nominal), then there becomes little difference between a dealing for little value, and one for no value, so perhaps there is a good case for saying the value requirements should simply be deleted.

5.4.1.3 The "knowledge qualifier" Should the knowledge qualifiers in the taking free rules be made more consistent? Comments: I would support more consistency, but don’t have strong views about how it should be achieved. While I agree that there is merit in considering whether each qualifier is appropriate to each rule, I also see merit in the Act being made more internally consistent and, accordingly, easier to understand.

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5.4.1.4 Meaning of "buyer" and "lessee" Should the meaning of "buyer" derive from the general law, or be specific to the Act? Comments: I don’t think users of the Act should have to go hunting through other laws or commentary to discover what ‘buyer’ means in the Act, so would favour inclusion of a definition. Also, when considering ‘buyer’, it might also be useful to consider whether it should be aligned with ‘purchaser’ as defined in s 50(3).

5.4.2.1.2 Non-application to inventory Proposed Recommendation 2.34: That s 44(2)(a) be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.4.2.1.3 What types of serial-numbered property should s 44 apply to? Should s 44 be limited to motor vehicles? Comments: Taking free under s 44 is perhaps most significant consequence arising from property being required or permitted to be registered by serial number. If the other categories of serial numbered property are excluded from the operation of s 44, perhaps the balance of convenience would favour relieving secured parties from the burden of having to (or being able to) register by reference to serial number for the other categories of property at all.

5.4.2.2 Section 45(1) - the "day and a half" rule Should the "day and a half" rule be deleted, or limited so that it only operates in favour of individuals? Comments: I favour retaining the “day and a half” rule, for all purchasers. The Register may remain open at all hours, but not everyone does their own searches. Even if they do, they may not do a search at the location where the car is handed over. There is merit in retaining a period of protection after the search is done. I don’t see why those purchasing through a company should be less well protected than individuals.

5.4.2.3 Section 45(3) - prescribed dealers Proposed recommendation 2.37: That s 45(4)(c) be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

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5.4.3 Section 46 - transactions in the ordinary course of business Proposed recommendation 2.38: That s 46(2)(a) be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.4.3 - Section 46 - transactions in the ordinary course of business Should s 46 only allow a buyer or lessee to take free of a security interest granted by the seller or lessor, or of all security interests? Comments: I would favour extending it to all security interests, so that the buyer or lessee need not enquire.

5.4.3 - Section 46 - transactions in the ordinary course of business Does it matter that the taking free rules can overlap? Comments: I do not see any difficulty with overlap.

5.4.4 Section 47 - the "low-value personal-use property" taking free rule Proposed recommendation 2.40: That the taking free rule in the s 47(1) be amended as described above. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.4.5 Section 50 - investment instruments Proposed recommendation 2.41: That s 50 be deleted. Do you agree with the proposed recommendation? No Comments: Although CHESS securities are intermediated securities, it may not be clear that listed securities on the issuer sponsored subregister are, and there needs to be a taking free rule for them. I would agree that the operation of the section could be clarified to better align with the ways in which listed securities are actually transferred. But the outcome should be that dealings with listed shares, whether via the CHESS subregister, the issuer-sponsored subregister or through a nominee, take free. Sections 50 and 51 also need to make it clear that transfers as a result of takeovers (including compulsory acquisition) and schemes of arrangement, which may not be consensual, result in the acquirer taking free. This would be better stated expressly than leaving parties to rely on the uncertain and obscure operation of reg 7.1.

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5.4.6 Section 51 - intermediated securities Should s 51 be retained? Comments: Please see my comments above on s 50 – I think they should both be retained, even if altered as described in those comments.

5.4.7 Section 52 - temporarily perfected security interests Proposed recommendation 2.43: That s 52(1) be amended by replacing the references to proceeds, goods or negotiable documents of title with references to "personal property", and that s 52(2) be amended so that any buyer or lessee can rely on s 52(1) unless they had the requisite knowledge at the time that they entered into the agreement to buy or lease the property. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.4.8 Section 69 - creditor who receives payment of a debt Proposed recommendation 2.44: That the language of s 69 be tailored more closely to Australian market conditions, and that it be explored whether the rules in ss 48 and 69 can be more closely aligned. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.4.9 Section 70 - negotiable instruments (a) Should the definition of negotiable instrument be aligned with its general law meaning? (b) Should s 70 be deleted? Comments: Please see my comments on the definition of ‘negotiable instrument’ at 4.3.7 above. In short, I think paragraph (e) should be deleted. It seems to me that s 70 should be re-branded as a taking free rule rather than a priority rule. I think it is useful to retain it in the Act, even if only by a specific incorporation by reference (not merely a general incorporation as in s256) of the Bills of Exchange Act and Cheques Act rules.

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5.4.11 Section 72 - negotiable documents of title Is the taking free rule in s 72 appropriate? Comments: As with my comments on s 70, I think it should be retained but as a taking free rule. Although the tests don’t exactly align (and perhaps they should), ss 70 and 72 are effectively doing for purchasers what the control rules do for secured parties: allow them to get ahead of secured parties that have perfected by registration, as long as they get hold of the right documents. It would be anomalous if purchasers were less able to do that than secured parties who take control.

5.4.12 Section 53 – subrogation Proposed recommendation 2.47: That s 53 be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.4.13 Section 37 - reattachment of a security interest Proposed recommendation 2.48: That s 37 be amended to make it clear that it only applies if the effect of the buyer or lessee taking the goods free of a security interest is that the security interest ceases to be attached to the goods, and that ss 37 and 38 be amended to ensure that they apply appropriately for all types of security interests. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.4.14 Interaction with taking free rules outside the Act Should the taking free rules in the Act be exhaustive, or should taking free rules outside the Act be able to apply as well? Comments: I’m inclined to think the rules outside the Act should continue to operate, but the Act should be as code-like as possible and so should contain a cross-reference to them.

5.5.1 Potential overlap with Part 3.4 Proposed recommendation 2.50: That the definition of "accession" in s 10 be amended to clarify that goods will not be an accession to other goods if their identity has been lost in the other goods in a way that engages the application of Part 3.4 of the Act. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper (though I don’t think there is a high level of likely confusion at present).

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5.5.2 Terminology - "continues in" Proposed recommendation 2.51: That references in Part 3.3 of the Act to a security interest "continuing in" collateral be amended to refer to the security interest "remaining attached to" the collateral. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.5.3 Section 90 - competitions with an interest in the whole Proposed recommendation 2.52: That s 90(b) be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.6.1 Should processed and commingled goods be dealt with separately? Proposed recommendation 2.53: That Part 3.4 of the Act be split into two, and that commingled goods be dealt with separately, in accordance with the principles described above. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.6.2 Deemed perfection Should the application of s 100 be expanded? Comments: It seems sensible (and potentially less confusing) for s 100 to apply generally rather than just for the purposes of the default rules.

5.6.3.1 Competition with a security interest over the whole (a) Do you agree with the explanation provided for s 101? (b) Should s 101 apply to the value of the goods when processed, or when the security interest is enforced? Comments: I don’t think s 101 should be altered to cap the amount recoverable. A secured party should be entitled to the ‘windfall’ that results if its under-secured position is eliminated by the woodchips being turned into more valuable chipboard, just as an under-secured real property mortgagee would be entitled to the ‘windfall’ that would result if market values improved. In principle I would agree that the value should be measured when the security interest is enforced. The secured party should be entitled to take the benefit (or risk the loss) of changes in market values prior to enforcement.

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5.6.3.2 Competition with another continuing security interest Proposed recommendation 2.56: That ss 102 and 103 be amended to reflect the principles set out above. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper. (Though equally, I would not be much troubled if these sections remained unamended. The selection of any solution seems to some extent an arbitrary one.)

5.7.1 Grantor must have an interest in the proceeds Of the options provided to explain the role of s 31(3)(a)(i), which is preferred, and why? Comments: I find the second explanation – that the buyer becomes the grantor, but the interest is unperfected – more persuasive. This is due to the fact that (as the paper notes) there are other provisions in the Act that make it clear that there is a change of grantor in equivalent circumstances: as the paper says, it fits more neatly with the rest of the Act’s conceptual framework.

5.7.1 Grantor must have an interest in the proceeds Proposed recommendation 2.57: That the words "an interest" in s 31(3)(a)(i) be replaced with "rights", and that s 19(5) be amended to refer to s 31(3)(a) as well as s 19(2)(a). Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.7.2 Grantor can instead have the power to transfer rights in the proceeds to the secured party Proposed recommendation 2.58: That s 31(3)(a)(ii) be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.7.3.1 Description of the proceeds in the financing statement Should perfection over proceeds be automatic, if the security interest in the original collateral was perfected by registration? Comments: I favour simplifying the registration process. Accordingly, as the default elections for proceeds achieve the same outcome as if proceeds were automatic, and as the default elections are rarely changed, it would be worthwhile reform to make perfection over proceeds automatic and eliminate the need to deal with it as part of the registration process.

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5.7.3.2 Description of the proceeds as original collateral Proposed recommendation 2.60: That s 33(1)(b) be deleted or, if it is retained, that it be amended to make it clear that the security interest is perfected over the proceeds if the proceeds are within the collateral description of any current financing statement made by the secured party against the grantor, not just the same financing statement. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.7.3.3 Liquid proceeds Is the rule in s 33(1)(c) appropriate? Comments: I think it’s appropriate, though it would become unnecessary if perfection over proceeds were automatic.

5.7.3.4 Temporary perfection Proposed recommendation 2.62: That "in the collateral" be inserted after "interest" in line 3 of s 34(1). Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

5.8.1 Section 79 - transfers of collateral despite a prohibition in the security agreement (a) Is s 79 appropriate? (b) If so, should it extend beyond transfers to include security interests? Comments: I’m not in favour of the provision. It prioritises the interests of the securitisation market over those of contracting parties who wish to have some control over who their counterparties are. I’m not convinced the interests of contracting parties (or the principle of freedom of contract) should be sacrificed in this way.

5.8.2 Section 80 - rights of parties on transfer of an account Is s 80(3) appropriate? Comments: I’m inclined to agree with the sentiment noted in the paper that it is an unwarranted interference with the transferee’s power to control the terms of the accounts it has purchased.

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5.8.3 Section 81 - transfer prohibitions in a transferred account (a) Is s 81 appropriate? (b) If so, should it apply to security interests as well as transfers? (c) Should the definition of "currency" be changed? Comments: While acknowledging the trend towards overriding freedom of contract so as to enable prohibited transfers to occur, it’s not a trend I favour. So I would be happy to see s 81 deleted or limited. If retained, I support the drafting improvements referred to in the paper, and would be inclined to think the reference to currency in s 81(1)(b) should be deleted. The definition of ‘currency’ as a whole seems OK.

6.1 When is priority determined? What point in time should be used to resolve priority disputes? Comments: I lean towards retaining silence. If (contrary to my preference) the time specified were the time when proceeds of realisation were available, then:

(a) this might change after one distribution is made and before further amounts become available (but presumably this would be the intended consequence of specifying the time), and

(b) it would be necessary to have a separate rule to determine which party had priority for exercise of enforcement rights.

6.2 - Section 55(2) - priority as between two unperfected security interests Proposed recommendation 2.67: That the Act be amended to make it clear that priority as between two unperfected security interests that attach to collateral at the same time is to be determined by the order in which the security agreements were entered into. Do you agree with the proposed recommendation? No Comments: I take the view that the two unperfected security interests over the after-acquired item would rank equally, as the security interests both attach to it at the same time. Any solution here will be an arbitrary rule. I don’t mind the current position but, equally, would not be much concerned if it were to change.

6.3 - Section 55(5) - the "priority time" for a security interest Proposed recommendation 2.68: That s 55(5) be amended as described above. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

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6.4.1 Should perfection by control enjoy a superior priority? Should a security interest perfected by control have a superior priority for each type of collateral for which this is possible? Comments: I don’t have strong views on this point. I think there is merit in the concept that if a prior registered secured party has not bothered to get hold of the share certificates or other indicia of control, it should be taken to have consented to a subsequent more diligent secured party doing so and gaining priority. However I would not particularly object to removing super-priority for any category of property other than ADIs.

6.4.2 - Section 57(2) - priority as between security interests that are both perfected by control Proposed recommendation 2.70: That s 57(2) be deleted if the Act is amended so that only one security interest at a time can be perfected by control over the same item of collateral, or otherwise that it be amended to provide, if more than one security interest is perfected by control over an item of collateral at the same time, that priority is afforded to the security interest for which the control mechanisms are put in place first. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

6.4.3 Section 57(2A) - proceeds of collateral under a security interest that is perfected by control Should s 57(2A) be deleted? Comments: I would support deletion, for the reasons stated in the paper.

6.5 - Section 58 - priority of advances Proposed recommendation 2.72: That s 58 be amended to read along these lines: "A security interest has the same priority for all amounts and obligations secured by it, whether they are incurred or arise before or after the security interest arises." Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

6.6 - Section 59 - circular priority systems Proposed recommendation 2.73: That s 59 be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

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6.7 - Section 61 - priority agreements Proposed recommendation 2.74: That the language of s 61 and other relevant sections in the Act be amended to refer to "priority agreements", rather than "subordination". Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

6.8.1.1 Leases that are in-substance security interests Proposed recommendation 2.75: That s 14(1) be amended to make it clear that it captures all leases that are security interests, whether or not they are a PPS lease. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper. And, for the same reasons, it may also be useful to make it clear that s 14(1) captures all consignments that are security interests, whether or not they are commercial consignments.

6.8.1.2 Sale and lease-backs What types of sales and lease-backs, if any, should be able to be PMSIs? Comments: I am not strongly persuaded that the ‘swell the asset pool’ rationale for PMSI priority is a good one. The PMSI may or may not swell the asset pool; it depends on its value and what contractual obligations (for which the secured party might have recourse as an unsecured creditor to the grantor’s general asset pool) go along with it. Rather, there has to be a choice between favouring the interests of all-asset financiers or single-asset financiers, and the general rule giving priority to PMSIs comes down on the side of single-asset financiers, perhaps on the basis that there is economic merit in favouring diversity of funding sources, or perhaps arbitrarily. If single-asset financiers are to be preferred (as they are), whether on the basis of economic theory or arbitrary decision, the rules might as well be as simple as possible. In the interest of reducing complexity, I would therefore favour abolishing the exclusion of sale and lease-backs altogether. But if the exclusion is to be retained, then (again in the interest of simplicity) I would favour retaining it in its present form, rather than encumbering it with a further carve-out based on time or purpose.

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6.8.1.3 Personal, domestic or household goods Proposed recommendation 2.77: That ss 14(2)(c) and (2A) be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper. Perhaps s 14(2)(b) (the exclusion of investment instruments etc from being PMSIs) could also be deleted. If there is a good reason for PMSI priority for goods (which I discussed in my comments on 6.8.1.2), then I don’t see why that good reason doesn’t also extend to shares and at least some of the other assets currently listed in s 14(2)(b).

6.8.1.4 Should PMSIs be able to be cross-collateralised? Should PMSIs be able to be cross-collateralised? Comments: Having regard to the reasons in the paper I also see merit in allowing PMSIs to be cross-collateralised for inventory, in the interest of ease of administration for ROT suppliers.

6.8.1.5 Use of the term "PMSI" in the Act Should the use of the term "PMSI" in the Act clarify whether the reference is to any PMSI, or only to a PMSI that has the s 62 priority? Comments: I think the ‘problem’ arises because of common usage of ‘PMSI’ as shorthand for ‘a security interest that has priority’ when it should be ‘a security interest that might have priority if it is registered in the way and within the time limit required by s 62’. However I haven’t identified any problems within the bounds of the Act itself, and don’t see any particular need to change it. Common usage may fall into line eventually.

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6.8.1.6 Refinancing a PMSI Proposed recommendation 2.80: That s 14(5) be expanded to make it clear that a security interest that replaces a PMSI can also be a PMSI, and can inherit the replaced PMSI's priority status. Do you agree with the proposed recommendation? Yes Comments: I think this is probably what s 14(5) already means, and so I suppose that if there is any doubt, it may as well be clarified. In my view, this recommendation serves to highlight the comments I made at 6.8.1.2 that PMSI priority is a largely arbitrary decision to favour single-asset financiers over all-asset financiers. If an equipment financier is refinanced by a new equipment financier providing specific asset finance, the new financier will probably have little difficulty working out that the original arrangement was a PMSI and that it can also claim PMSI status. On the other hand, a bank providing secured all asset finance which is in fact used both for general purposes and to pay out the equipment financier may not know, or easily be able to discover, that it is refinancing a PMSI. Under the ‘swell the asset pool’ theory, both are equally ‘deserving’ of PMSI priority – they are both just rolling over financing that was originally provided to swell the asset pool – but in practice only one of them is likely to get it. If the ‘swell the asset pool’ theory were correct as a justification for PMSI priority, one might use it to argue that refinanciers do not swell the asset pool and so should not be entitled to priority. If two new financiers provide new financing at the same time, and the cash flows happen to be arranged so that the funds provided by one are used to pay an outgoing PMSI financier while the funds provided by the other are not, I query the policy reason for allowing one the opportunity to get PMSI priority but not the other.

6.8.2.1 The timeframe for registration - When should the time period start? Should the PMSI registration timeframe run from when the grantor obtains possession, or from when the secured party provides funds? Comments: I agree that the Act should accommodate the way the Australian motor vehicle finance industry works rather than the North American one, but do not have a specific solution to propose.

6.8.2.2 The timeframe for registration - Capacity in which the grantor has possession If the PMSI timeframe runs from when the grantor obtains possession, should the time period only start when the grantor has possession in its capacity as grantor? Comments: Yes – and, if this is a matter needing clarification (which it probably is) then I would prefer to see the clarification in the Act itself rather than in extrinsic material, in the interest of making the Act as code-like as possible so that it is as easy as possible to understand and use.

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6.8.2.3 The timeframe for registration - How long should the time period be? Should the timeframe for all PMSI registrations, including for inventory, be 15 business days? Comments: I would see merit in simplifying the timeframe to 15 business days for all PMSI registrations.

6.8.3 Should the registration need to indicate that the security interest is a PMSI? Should a PMSI financier be required to take other steps to notify prior secured parties of its PMSI? (a) Should the registration need to indicate that the security interest is a PMSI? (b) Should a PMSI financier be required to take other steps to notify prior secured parties of its PMSI? Comments: I favour the NZ approach: no tick box, and no notices. The tick box, along with all the other tick boxes, are too great an impediment to ease of use of the register. The register should be accessible enough to be used by ordinary business people having reasonable general and commercial knowledge but without legal training or advice. I do not believe that will be achieved while registration requires the user to grapple with concepts such as PMSIs. Requiring notice will either create a trap (users failing to realise that they need to send them) resulting in failure to obtain PMSI priority, or generate a flood of notices that may not be readily understood by recipients. Both these outcomes are particularly likely when it is recalled that those most affected may well include small businesses supplying on ROT terms or bailing goods. If there is a valid policy rationale for PMSI priority existing at all (which I query, but am prepared for the purpose of discussion to accept), then surely it is a rationale that operates because of the nature of the security interest as a PMSI, and not because of the giving of notices, whether by box-ticking or otherwise.

6.9.1 The priority rule, and the policy behind it Is it appropriate fort s 64 to allow an accounts financier to rank ahead of prior registered PMSIs, not just later ones? Comments: I see the policy choice whether to favour the interests of inventory financiers or ROT suppliers as a largely arbitrary one, and have no particular reason to contend for one side or the other. Though as a matter of principle, it does seem a little strange that accounts financiers are singled out as a class to be accorded such high priority. Accounts financiers are no doubt important to the Australian economy, but surely so are ROT suppliers who in fact provide significant working capital finance to their customers. The general law recognises the importance of some categories of suppliers who add value before being paid, and ‘rewards’ them with liens – repairers, warehouse keepers, solicitors, etc. These liens retain priority under s 73. The general law does not reward ROT suppliers – who, it might be argued, similarly add value before being paid – with a lien, but they were able to achieve a similar priority by reserving title, though after introduction of the Act, only by registration. But one might query why,

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6.9.1 The priority rule, and the policy behind it as a policy matter, ROT suppliers should be subject to be overridden by accounts financiers, whereas holders of the general law liens are not.

6.9.3.1 Non-PMSI security interests? Should s 64 enable an accounts financier to defeat prior security interests that are not PMSIs, if they are held by a secured party who also has a PMSI? Comments: I’m not in favour of this. It’s hard to see why a bank, say, that has lent on the basis of first-ranking all-assets security should be exposed to losing priority to an accounts financier. The contrary arguments are presumably:

- the ‘swell the asset pool’ theory: that just like a PMSI, the accounts financier has added to the asset pool by (presumably) adding cash which is (presumably) no less valuable than the accounts over which it takes security, and the prior financiers should be indifferent to this; or

- the theory that there is economic merit in favouring diversity of funding sources: that there is some benefit to be gained by assisting single-asset financiers such as accounts financiers compete more strongly against all-asset financiers such as banks.

I’m not particularly taken by either argument, and so don’t see much reason to postpone prior non-PMSI financiers, whether they be banks or ROT suppliers taking all-money security. It follows that I don’t particularly see much reason, other than arbitrary preference, to postpone prior PMSI financiers as currently allowed under s 64(1)(b).

6.9.3.2 PMSIs granted by a different grantor? Should s 64 only apply to PMSIs that are granted by the same grantor? Comments: For the reasons above, I am not in favour of expanding s 64.

6.9.3.3 PMSIs perfected other than by registration? Should s 64(1)(a) only refer to PMSIs that have an earlier registration time? Comments: Yes, for the reasons stated in the paper.

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6.9.4 The nature of the registration Proposed recommendation 2.85: That s 64 be amended to require that the relevant registration be against the collateral class "accounts". Do you agree with the proposed recommendation? Yes, with qualifications Comments: Yes, with qualifications. In my view the current collateral class system leads to the registration process being too complicated, and it needs reform. However, if the policy behind s 64 – allowing accounts financiers to leapfrog ahead of PMSI holders – is to be retained, it does seem reasonable that the accounts financier should take some step when making its registration to claim this super-priority. That need not be by selecting a particular class. It could, instead, be by ticking a ‘s 64 box’. In saying this, I am assuming that those accounts financiers who wish to take advantage of s 64 are likely to be a limited and specialist class, probably better able to inform themselves about specialised registration rules required in connection with their business than are the broad range of businesses affected by the need to comply with registration requirements for ROT or equipment hire arrangements.

6.9.5 The notice process Proposed recommendation 2.86: That s 64(1)(b) be amended to provide that the "priority interest" in an account will take priority over existing perfected purchase money security interests, and purchase money security interests that have an earlier registration time (if that language is retained), if the priority interest is perfected, and the non-PMSI financier's security interest first attaches to the account at least 15 business days after it gives notice to the secured party in accordance with s 64(2). Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

6.9.6 To whom should the notices be given? Should s 64 only require that notices be given in relation to security interests that claim to be a PMSI? Comments: No, for the reasons stated in the paper. (Though, as indicated in 6.8.3 above, I favour deleting the PMSI box anyway.)

6.9.7 What should the notices say? Proposed recommendation 2.87: That s 64(2)(b) be amended as described above. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

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6.10 Section 73 - interests that arise by law - trustee's liens Should a trustee's lien be subordinated to a perfected security interest over the trust assets? Comments: If I understand correctly, the primary concern is that a trustee’s lien could, in the absence of an amendment to s 73, prevail over the security over trust assets. This would not, I think be the outcome at general law: I would think that a trustee who has granted security over trust assets to a secured party could not then derogate from the security it has granted by asserting its own rights in priority. If any clarification is necessary, perhaps it is that s73(1)(d) – no law of the Commonwealth, a State or Territory makes provision for the priority – should also refer to the general law. The result that would be that s73 could not be interpreted as elevating a trustee’s lien above security interests created by the trustee, since (if my understanding above is correct) this would not be allowed by the general law. There is perhaps a separate issue raised by the relevant submission, over whether a secured party ‘who has [only] perfected against the trustee’s ACN’ should be allowed recourse to the trustee’s lien at all. I don’t see why not: the trustee’s lien is a personal asset of the trustee. If it is commercially not intended that the trustee’s lien be subject to the security interest, then that should be specified in the security agreement, not resolved through the registration system or the Act. Incidentally, the heading to s 73 – ‘priority between security interests and declared statutory interests’ – is a little misleading, as s73 also applies to general law liens which are not statutory at all.

6.11 Does the section reflect Australian practice? Proposed recommendation 2.89: That s 74(4)(a) be deleted. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

6.11.2 Application to future property Proposed recommendation 2.90: That s 74(1) only allow an execution creditor to have priority over a security interest, if the "priority time" for the security interest is after the date specified in the section. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

6.11.3 Application to interests that are not security interests Proposed recommendation 2.91: That s 8(2) and reg 1.4(5)(b) be amended to make it clear that s 74 can only afford an execution creditor priority over another interest if that other interest is subject to the Act. Do you agree with the proposed recommendation? Yes Comments:

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6.11.3 Application to interests that are not security interests Yes, for the reasons stated in the paper.

6.12 Section 76 - security interests with different grantors Proposed recommendation 2.92: That s 76(3) be amended as described above. Do you agree with the proposed recommendation? Yes Comments: Yes, for the reasons stated in the paper.

6.13 Sections 85 and 86 - crops and livestock Should s 85 be amended so that it does not override PMSIs? Comments: I also suspect (without having any specific knowledge) that the reason the difference between ss 85 and 86 is the one stated in the paper: that it was not thought likely that a PMSI would exist over crops. The paper explains how this could arise (however rarely this may be the case in practice). I agree it seems a worthwhile amendment.

6.13 Sections 85 and 86 - crops and livestock Should s 85 and s 86 be deleted? Comments: I agree that they should be removed, in the interest of simplification, if it turns out to be the case that they are not currently of benefit (as to which I have no specific knowledge).