Just around the corner ? – Proposed national register for personal property
What is personal property?
Personal Property is essentially property which is not real property (land). Examples of personal property include money, negotiable instruments, motor vehicles, business equipment, securities and choses in action.
What are personal property securities?
Personal Property Securities (or PPS for short) are interests in Property that are created or evidenced by an agreement that secures the payment or performance of an obligation. In simple terms, PPS are securities taken by a creditor over personal property to support finance to a borrower.
Proposed national register for PPS
Depending on where you are in Australia, and the nature of the personal property, the rules for registering an interest, or whether an interest can be registered at all, vary widely. According to the Australian Attorney-General’s website, there are at least 77 separate Acts governing PPS in Australia which are administered by 30 separate Commonwealth, State and Territory Government departments and agencies. To make life hard for financiers, lenders and lawyers, the existing registration laws overlap. The overlap of the legislation has created legal uncertainty and high transaction and compliance costs which have discouraged many lenders from accepting Personal Property as security for loans.
In order to improve the current situation, the federal government is proposing that Australia have a single national register to record security interests in Personal Property. The Australian government has announced that it will provide $113.3 million over 5 years to establish a national system.
The national register would contains details of the lender, borrower and also identifying information about the PPS. The register will be able to be searched by lenders or general members of the public to find out whether a particular item of Personal Property is encumbered.
Objectives of PPS reform
One of the objectives of PPS reform is to make secured lending more attractive to lenders by creating an efficient and competitive financial market and to ensure that savings are passed on to borrowers by lower fees and interest rates.
Discussion Paper 1 (“Paper”, see below), released by the Australian Attorney-General’s Department in November 2006, states that:
“greater clarity in the law should serve to reduce barriers into the financing sector, resulting in an increase in competition within the sector and greater innovation in financing products and lower borrowing costs.”
The Paper also states that:
“a single register would establish rules that determine priorities between competing interests in the same property, protect third parties such as purchasers of property who have no knowledge of existing security interests and protect security holders against loss, or the subordination of their interest to potential purchasers or other lenders.”
What systems do other countries have?
In the US and Canada, PPS registers operate at both a provincial and a state level. Our Kiwi cousins have established a single, national PPS register after initialising a process of reform in the mid-1990’s.
The Properties Securities Act 1999 (NZ) came into effect in New Zealand in 2002 and established a single procedure for the registration of security interests in Personal Property, as well as an electronic PPS register. According to the Australian Attorney General’s Department website, New Zealand’s reforms have resulted in increased certainty and confidence to the parties in commercial transactions where Personal Property is used as security, and clarity where competing security interests is an issue.
It is proposed that Australia adopt the New Zealand model as a basis for reform. There are of course benefits to basing our model for reform on the New Zealand model. The major benefit of this approach is that it would more closely harmonise the arrangement in Australia and New Zealand, and further strengthen economic ties between the countries.
When can Australia expect to have a single register in place?
A national personal property securities register may be just around the corner. However, the reform is still only just a proposal and has not yet been tabled as a bill in parliament.
The development of a national register has been endorsed by the Council of Australian Governments. The Australian Attorney-General has also formed a consultative group of experts from the banking and finance sector, consumer groups, insolvency practitioners and the legal profession to advise on the reform.
The Australian Attorney- General has also released three discussion papers on key issues inviting comment from the business community, members of the public with an interest in PPS reform and government agencies. The discussion papers can be found on the Australian Government Attorney General’s website at: www.ag.gov.au.
The discussion papers are as follows:
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Discussion Paper 1 – “Registration and search issues” (this discussion paper was released in November 2006);
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Discussion Paper 2 – “Extinguishment, Priorities, Conflicts of Laws, Enforcement, Insolvency” (comments on this paper were invited by 18 May 2007);
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Discussion Paper 3 – “Possessory Security Interests” (comments on this paper are invited by 18 June 2007).
Who will be affected by the PPS Reform?If a national PPS register is implemented it will effect most people in society at some stage or another including lenders, borrowers, manufacturers, distributors, solicitors and many businesses. The proposed reform should result in substantial benefits to lenders and borrowers, such as lower compliance costs and cheaper finance, which should result in a more efficient and competitive lending market.
To keep up to date with developments on the personal properties law reforms visit the website of the Australian Government Attorney General at:
www.ag.gov.au.
Permanent Mortgages v Cook – further warning against asset based lending
Introduction
Several recent Court decisions have been critical of lenders who were found to have granted loans more because of the security offered rather than the capacity of the borrower to repay. This type of lending, often called “asset based lending”, remains a practice to be avoided if lenders wish to steer clear of the ire of the Courts. This article looks at the recent (October 2006) case of Permanent Mortgages Pty Ltd v Cook (BC200608529) and examines the features of a loan that might lead to it being characterised by the Court as an asset based loan, the consequences of Court intervention and the steps lenders might take to avoid these risks.
What is an “asset based” loan?
Traditionally banks will decide to lend money based on whether the borrower can afford the repayments to discharge the loan. As a means of secondary comfort, the lender will look to what security can be offered in the event the borrower cannot afford to make repayments. In asset based lending, these traditional priorities are reversed. The lender’s primary concern is that it holds adequate security to cover the loan debt, with little if any regard to whether or not the borrower can afford to repay the loan.
Permanent Mortgages Pty Ltd v Cook BC20060859 (24 October 2006)
In Cook, the borrowers entered into a series of loans with a succession of lenders between 1998 and 2003. As the borrowers fell into difficulty with each loan in the sequence, they obtained another loan to refinance their indebtedness to the previous lender. As a result, an initial borrowing of $110,000 in 1998 ultimately grew to loans totalling $245,000 from Permanent Mortgages Pty Ltd (as to $200,000) and a Mr and Mrs Agius (as to $45,000) in 2003.
In seeking the loan, the borrowers provided a written statement to the lender that their combined annual income was $68,900. In fact, their income was less than that amount, but crucially to the decision in this case, the Court found that the lender made no attempt to verify the amount or source of the borrowers’ income as asserted in their statement to the lender.
The borrowers were represented by a solicitor on the loan and mortgage transactions. In the mortgage application, the solicitor wrote that the loan was to pay out a previous loan that was in default. This fact was relevant to the Court’s finding that the lender was aware that its loan was being sought to refinance a mortgage in default over the borrowers’ home, hence that the lender knew or should have known that the credit was to be applied wholly or predominantly for personal domestic or household purposes. On this basis, the Court found that the Consumer Credit Code (“CCC”) applied, despite the borrowers having provided the lender with a signed “business purpose” declaration under section 11 of the CCC.
In finding that the CCC applied, the Court considered whether or not it should reopen the loan transactions pursuant to section 70 of the CCC. This depended on whether or not the Court reached the view that the loan/mortgage was “unjust” within the meaning of section 70.
In turning to this question, Patten AJ said (at [88]):
“Given the means of the Defendants and their credit history, the Plaintiff, in my view, was aware, or would have been aware, had it made the most perfunctory of enquiries, that the Defendants were not capable of servicing the loan even at the lower rate of interest and could only satisfy their obligations by selling the mortgaged property for a sum sufficient to cover the principal and interest. It was likely they would thus
become obligated to pay interest on the amount of the credit, not at 8.8% p.a., but at the much higher rate of 13.8%.”
The Court then considered the judgment in Perpetual Trustee Company Limited v Khoshaba (2006) NSWCA 41, specifically the judgment of Basten JA to the effect that the Court would not intervene merely where the borrower had been foolish, gullible or greedy, but that ‘something more’ was required. In Cook, Patten AJ found that:
“The circumstances of this case constitute the ‘something more’ contemplated by Basten JA, in that the Plaintiff or its agents who were, or should have been, aware of the [borrowers’] foolishness had, in effect encouraged it.”
Accordingly the Court found the loan and mortgage contract unjust.
The relief granted by the Court is interesting. The Court appeared keen to implement expressions used by Justice Santow in the case of Elkofairi v Permanent Trustee Co (2003) 11 BPR 20, 841, and ensure that ‘practical justice’ was achieved by the borrower receiving no unwarranted benefit and the remedy to redress the unconscionability being ‘no more than the minimum necessary to do so’. To this end, the Court sought to return the Cooks to the position they were in prior to the loans being provided, relieving them of the costs and expenses incurred in respect of the credit provided and reducing the principal to the sum which was actually applied for their benefit, namely, the discharge of their outstanding debts. The defendants were also relieved of the obligation to pay interest at a rate exceeding simple interest of 8.8% and of any obligation to pay the lender’s costs and expenses following default.
How might a lender mitigate the risks of court intervention?
The lender’s failure to follow its own lending guidelines is often relevant to the Court’s decision to reopen a loan or mortgage transaction. If a lender has lending guidelines, it should follow those guidelines and in any case where it departs from those guidelines it should be able to provide good reason as to why it has made an exception. The particular lesson from the Cook case is that a lender should take steps to verify the income of the borrowers and their capacity to service the loan. Relying solely on a statement of the borrowers as to their income will not be sufficient.
Requiring borrowers to obtain independent advice, although not failsafe, generally never hurts. A prudent option a lender can take to deflect any potential criticism of a loan being ‘asset based’ is to require a certificate from the borrower’s accountant or financial advisor to the effect that the borrower has received advice concerning their ability to service and repay the loan.
If the information provided by the borrower, and the lender’s own inquiries, indicate the borrower’s ability to repay the loan is questionable, particularly where the security offered is the family home, the best approach may be to decline the loan. Whilst the Courts have not gone so far as to say that lenders have a duty not to engage in asset based lending, the risks nevertheless are such that the loan may not withstand judicial scrutiny.
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