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					AUSTRALIAN PERSONAL PROPERTY SECURITIES REFORM AND SECURED FINANCE IN THE AVIATION INDUSTRY
Conference paper by Sandra Henderson-Kelly Senior Legal Officer, Australian Attorney-General’s Department

Synopsis Australia is set to introduce fundamental reforms to personal property securities law from May 2010. This paper provides a brief history of PPS reform, outlines the central features of the reforms and explains how the Exposure Draft PPS Bill will operate in the aviation industry. The Bill is considered in the light of the Cape Town Convention on International Interest in Mobile Equipment and Protocol on Aircraft Equipment and concludes that PPS reform will provide a useful testing ground in the light of future consideration of ratification of these instruments.

Introduction Effective and efficient financing laws are crucial to all sectors in the Australian economy—this is especially so in the aviation industry. This industry is of particular strategic importance due to our size, ‘island’ geography, economic composition (including our reliance on tourism and air freight revenue) and exposure to international trade and finance. This industry has special features: the equipment is specialised, costly and highly mobile; and financing techniques are sophisticated and complex. The international experience in this industry is that sound financing laws and practice can substantially reduce the cost of equipment supply. 2. Existing inefficiencies in financing non-real estate assets plague all sectors of the Australian economy—not just the aviation industry. There is a multiplicity of laws dealing with secured finance of personal property and a miscellany of registers. The laws and registers are overlayed by jurisdiction-specific interpretative and evidential rules, the common law and equitable principles. Personal property securities (PPS) reform is necessary to streamline Australian finance law for the benefit of all sectors. 3. This paper considers the financing techniques used in the aviation sector and considers these in the light of the Exposure Draft Personal Property Securities Bill 2009 (the PPS Bill). It is noteworthy that the PPS Bill generally focuses on the substance of secured transactions and applies to those that secure payment or the performance of an obligation. For example, it applies to mortgages, purchase money loans, conditional sales agreements, leases and the sale of accounts.

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4. The paper provides a brief outline the key features of the PPS Bill. It considers some key issues affecting aircraft finance and how these might be dealt with under PPS reform. Finally, the paper considers the relationship between PPS reform and the Convention on International Interests in Mobile Equipment and the Protocol thereto relating to Aircraft Objects. History of PPS reforms 5. Australian PPS reform has a history tracing back to the late 1960s and 1970s. Early law reform reports recommend a functional approach be taken to secured transactions in both consumer and commercial contexts. Commencing in 2006, the current round of reforms has been embraced by the Council of Australian Governments—a pivotal outcome that has helped garner broad industry support for the reforms. The Australian Government has committed $113.3 million over five years to the project. The history of PPS reform is set out in Appendix A. 6. The existing law and arrangements for the regulation of PPS in Australia are unsatisfactory in a modern national economy. Across the nine Australian jurisdictions, there are more than 70 Commonwealth, State and Territory laws and 40 registers of security interests in personal property. The law varies according to the location and nature of the collateral, the nature of the security interest, and the legal personality of the grantor (for example, whether the grantor is a corporation or an individual). These artificial distinctions are widely regarded as immaterial to the substance of secured transactions; instead, the central concern ought to be whether the function of a transaction is to provide new or additional resources. 7. The decentralised and inconsistent approach to the registration of security interests in personal property creates unnecessary uncertainty and complexities for borrowers and lenders. As a consequence, transaction costs (such as legal fees and registration and search costs) for lenders and borrowers are unnecessarily high. In short, the present laws increase costs and risks for financiers and have the effect of limiting the availability of credit. 8. In November 2009, parliamentary processes for the PPS Bill began with the referral of the exposure draft PPS Bill to the Senate Standing Committee on Legal and Constitutional Affairs. The Committee is expected to table its report in Parliament in mid-March 2009. The next step is to finalise the text of the Bill in response to the Committee’s recommendations and stakeholder concerns. This will facilitate the Bill’s introduction in the Commonwealth Parliament around mid-2009 with passage anticipated by October 2009. 9. PPS reform is a collaborative reform that affects a raft of Commonwealth, State and Territory laws and operations, which means that other legislative processes and practical issues must also be addressed. For example, State Governments are scheduled to introduce constitutional referral legislation in the first half of 2009. Consequential amendments will be required in relation to laws of the Commonwealth and the referring jurisdictions. 10. As well, the Australian Government is focussing efforts on building the PPS Register, establishing the Registrar’s Office and a call centre and preparing for data migration. The Australian Attorney-General’s Department has established working groups to facilitate the transition to the new scheme and to assist financial sector and other stakeholders to prepare for implementation of PPS reform in May 2010.

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Features of the aircraft industry and its financing techniques 11. In post-war years, economic prosperity and internationalisation of the world economy has fuelled substantial growth in international air travel, travel routes and fleet size. As world trade has grown so, too, have financial institutions developed more sophisticated means of financing equipment and providing businesses with increased leverage. These developments have had positive spin-offs for consumers, including those purchasing light aircraft and helicopters. Key methods of financing aircraft objects include chattels mortgages, purchase money loans, conditional sales agreements with retention of title arrangements, operating and finance leases and complex securitisation arrangements. 12. Airworthiness is the key driver of the Australian regulatory framework for aircraft. Public safety is paramount, and is protected by a schema of compulsory aircraft registration. The focus is on regulating the aircraft and the activities of the aircraft operator rather than to identify security interest holders. 13. Aviation finance is not subject to specialised laws, but is broadly recognised as a specialty area of the law. Fixed and floating company charges granted by Australian companies, foreign registered bodies and other entities covered by the Corporations Act 2001 must be registered on the ASIC Register of Company Charges within the statutory period. Other state and territory based registration systems may also be relevant. Sales of accounts are dealt with by state and territory based conveyancing and property law statutes. When an international dispute arises, private international (common) law rules will be apply. 14. The emergence of a privately based national register of encumbered aircraft is a curiosity that suggests that the Australian aviation industry is ready to accept PPS-style laws.1 The private register purports to cover Australian civil registered aircraft, recreational aircraft, international registered aircraft operating within Australia, gliders, balloons, engines, propellers, avionics and aircraft kits. As a wholly private endeavour, the register no legal backing or effect. At a minimum, its emergence suggests a healthy demand for a more extensive secured finance publicity regime. 15. It is also noted that the Commonwealth Parliament amended the Air Navigation Act 1920 in 1997 to allow regulations to be made to establish a register of security interests over nationally regulated aircraft and components.2 The enabling provision envisages a potentially mandatory system of registration. However, the provision has never been activated. The general operation of the PPS Bill – a functional approach 16. Australian PPS reform takes a functional approach to secured transactions. This means that the PPS Bill would apply to all ‘security interests’ arising from transactions over personal property that, in substance, secure payment or the performance of an obligation. Other transactions would be deemed to be security interests, regardless of whether they secure the performance or payment of an obligation, for example, an interest arising under a lease or a sale of accounts or chattel paper.3 17. The PPS Bill sets out the requirements for an effective security agreement, and to ensure its enforceability against third parties. It establishes the circumstances in which a person will take personal property free of a security interest, and provides general rules for determining priority
1 2

The Australian Government has no association with this register. See section 27A of the Air Navigation Act. 3 Section 28 of the PPS Bill.

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among competing security interests in the same collateral. There will be special priority rules for transactions involving specific acquisitions (including purchase money loans) and other interests such as conditional sales agreements (incorporating retention of title devices) and sales of accounts. 18. The Bill sets out processes for enforcing a security agreement following debtor default, many of which the parties may contract out of in respect of property used for commercial purposes. It establishes a single national online register of security interests taken over personal property—a key object of which is to facilitate detection of prior security interests for priority purposes. 19. Finally, the PPS Bill establishes a regime for transitioning to the new scheme. The priority of existing security interests will be protected for the first 24 months of the scheme’s operation. If secured parties wish to maintain their priority position after that time, they will have to opt-in to the new system. They should, in any case, consider opting into the new PPS scheme upon its commencement in order to protect against the possibility of grantor insolvency. 20. Overall, the central themes underlying the PPS Bill are to: regulate secured transactions according to their substance rather than form; establish effective mechanisms to highlight possible security interests, for example, by perfection methods (including registration); encourage parties to manage their own risks; facilitate the transition to the new system; and provide adequate protections for certain transactions, for example, consumer transactions.4 Essentially, creditors will need to consider whether to change their practices in response to the PPS Bill and whether they need to take protective action to opt-in into the new scheme. PPS concepts 21. The following section describes some basic concepts used in the PPS Bill and gives some simple examples as to how specific provisions would work in practice. 22. The PPS Bill is designed as a general statute regulating PPS interests such as company charges, bills of sale, primary produce liens, pledges, and so on. For the aviation industry, this means that its normal financing techniques will be subject to the PPS Bill. For example, a chattel mortgage over a helicopter, the supply of aircraft components under a conditional sale agreement subject to a retention of title (ROT) arrangement, certain leases and the assignment of aircraft leases or mortgage payments into special purpose vehicles are all within the scope of the PPS Bill. 23. For the purposes of the PPS Bill, a person who provides the credit (such as a financier, consignor, lessor, bailor or transferor) will be known as a ‘secured party’. A person who holds the grantable interest in the property will be the ‘grantor’, while the person who owes the payment or performance of the obligation will be the ‘debtor’.5 In most transactions, the grantor and the debtor will be the same person, but the distinction may be important in complex financing arrangements.
Example LeaseCo leases aircraft to FlyCo and assigns the leases (by outright sale) to TrustCo. LeaseCo is the secured party in relation the lease transaction with FlyCo, who is the grantor. In the receivables transaction, TrustCo is the secured party while LeaseCo is the grantor.

4

Consumers, in particular are given a higher level of protection because of their relative disadvantage. In addition, section 235 of the PPS Bill imposes a general obligation on all parties to act honestly and in a commercially reasonable manner. 5 Section 26 of the PPS Bill.

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Enforceability, attachment and perfection 24. A principal goal of the new PPS scheme is to assist third parties dealing with personal property dealing to discover whether that property is or may be subject to other secured interests. This is achieved, in part, by the PPS rules relating to enforceability, attachment, and perfection. 25. For a security interest to be enforceable against a third party, the security interest must be in the possession or control of the secured party or the parties must have executed a written agreement signed by the grantor. The security interest must also have ‘attached’ to the property. 26. ‘Attachment’ will occur when the grantor has an interest in the property (or the power to transfer an interest in that property) and either (a) the secured party has given value or (b) the grantor performs an act that creates or provides for a security interest (for example, by entering a security interest or executing a deed that commits the property as collateral). For ROT devices, attachment is satisfied as the grantor has a possessory interest in the collateral and the supplier has provided value by virtue of the supply. 27. To attain premium protection against competing third parties and in insolvency, a secured party must ‘perfect’ its interest in the collateral. This is particularly important in insolvency as the security interest will otherwise be void. Perfection can occur by any of four methods: possession, control by the secured party, registration on the PPS Register, or temporary perfection (a statutory grace period that applies in limited circumstances). While registration on the PPS Register is voluntary, it is the only method by which PMSI super-priority can be gained. That is, the PPS Bill provides extra protection to those security interests under which the financier has facilitated the acquisition of specific assets such as by lease or under a conditional sales agreement. 28. It is important to note that attachment and perfection can occur in any order. This also facilitates pre-registration of security interests on the PPS Register.

Example Manufacturer supplies aircraft components to ServiceCo on a ROT basis. Prior to supply Manufacturer asks ServiceCo to sign the standard terms of trade, which will be incorporated into future invoices. Before supply, Manufacturer registers its interest in the components on the PPS Register. It has satisfied the requirements for attachment and perfection.

Personal Property Securities Register (the PPS Register) 29. Registration on the PPS Register is a key method of perfection. The Register will be a fully electronic web-based system that will be available internationally 24 hours a day, 365 days of the year. The PPS Register will serve as a notice board of security interests which will be searchable by members of the public who apply to search for an authorised purpose. The purposes are mostly related to having an interest, or undertaking a dealing, in relation to the collateral or the provision of credit and other purposes, for example, relating to the administration of insolvents and deceased estates.6

6

A list of authorised search purposes is set out in section 227 of the PPS Bill.

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30. The details that would need to be recorded against collateral are set out in a Discussion Paper on Regulations to be made under the PPS Act.7 31. Some collateral will be registrable on the PPS Register by a serial number, for example, aircraft, aircraft engines and helicopters (motor vehicles and boats are also in this category).8 That said, registration by serial number will be optional where collateral is used for commercial purposes. It will be a matter for the secured party as to whether to register commercial serial numbered property by a serial number. However, failure to register by serial number may result in a security interest being extinguished under the extinguishment rules in the PPS Bill, for example, where a search of the register by serial number fails to disclose the registration. 32. Other personal property, such as aircraft componentry, will not be registrable by serial number and will be described in generic terms on the PPS register (for example, under the category of ‘goods: other’ with a free text description as appropriate). General priority rules – general security interests 33. The Bill sets out a series of general priority rules that will apply to general security interests such as fixed and floating charges taken over existing property and future. It is central to the philosophy of the PPS Bill that a perfected interest will have priority over an unperfected interest. Of the perfection methods, an interest perfected by control will attain the highest level of priority. However, most property is not controllable for the purposes of the Bill. As between possession and registration, the first to perfect an interest in property (by either method) will attain higher priority. In the standard case, this will generally mean that the first to register a general security interest will prevail. The general priority rules are subject to special rules for other interests discussed below. Purchase Money Security Interests (PMSIs)—purchase money loans, conditional sales and leases 34. Under the Bill, ROT arrangements and certain leases will become known as ‘purchase money security interests’ or ‘PMSIs’.9 A PMSI will also arise where the secured party provides finance for the acquisition of a specific asset such as the purchase of a light aircraft on a secured basis through a finance company. PMSIs can be taken in any kind of property, tangible or intangible. 35. There are special rules for PMSIs reflecting the super-priority given to these kinds of interests. Super-priority means that the PMSI will benefit from a ‘second in time, first in line’ priority status vis-à-vis general security interests (for example, an all assets charge) where the legislative requirements are satisfied. To obtain PMSI super-priority, the secured party must register its interest on the PPS Register. The rules differ for property that is acquired as inventory and property acquired as equipment or for consumer use. For inventory, there is an additional requirement to notify holders of a general security interest.10

7

The Discussion Paper on Regulations to be made under the PPS Act can be found at http://www.ag.gov.au/www/agd/agd.nsf/Page/Consultationsreformsandreviews_personalpropertysecuritiesreform_P PSDownloads. 8 For all aircraft objects, it is proposed that it will be mandatory to record the serial number on the PPS Register. For aircraft objects (other than small aircraft), the manufacturer’s name and generic model description would also be recorded. In some circumstances, secured parties may also record the aircraft’s nationality and registration marks. 9 Section 32 of the PPS Bill. 10 Sections 109 and 111 of the PPS Bill.

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Example FlyCo buys a new regional aircraft to fly passengers between routes on the eastern seaboard. It approaches FinanceCo for a secured loan. FlyCo has already given a general security interest to Bank over all of its present and future property—an interest which Bank has registered against FlyCo on the PPS Register. FinanceCo lends money to FlyCo to buy the aircraft which will be used as equipment. To obtain super-priority, FinanceCo must register its interest in the aircraft within 5 business days after FlyCo takes possession of the aircraft. Bank retains first priority over the remainder of FlyCo’s assets.

36. A PMSI is granted only to the extent that it secures the debtor’s obligation to pay the purchase price or the finance provided to enable the grantor to acquire that specific property (that is, the purchase money obligation). Unless the parties agree otherwise (either expressly or impliedly), amounts paid by the debtor will be applied to all monies obligations before they are applied to the purchase money obligations. This means that the PMSI interest obtains additional protection. PPS Leases 37. The PPS Bill will apply to any interest or right in relation to personal property that, in substance, secures payment or the performance of an obligation.11 The Bill provides some guidance as to when this test will be met. Ultimately, however, the application of the Bill will depend on the facts of each case.12 Regardless of the substance of a lease transaction, a ‘PPS lease’ will be a security interest for the purposes of the Act. Thus the Bill will apply to leases and bailments where the term is:13      greater than one year indefinite (even if determinable within one year) up to one year where the lease is renewable and might exceed one year up to one year where the lessee or bailee retains uninterrupted possession for more than one year, and leases of tangible property that are described by a serial number and last or may last for more than 90 days.14

38. A ‘PPS lease’ is a PMSI and will benefit from the PMSI super-priority rules where the registration requirements are met. The PMSI rules will apply to most commercial leases, including finance and operating leases, where the lessor is regularly engaged in leasing. Competing PMSIs 39. The PPS Bill recognises that there will be circumstances in which competing PMSIs are granted in the same collateral. For example, personal property may be supplied on a ROT basis
11 12

Section 28 of the PPS Bill. Section 30(1) of the PPS Bill. 13 Section 28(3)(b) of the PPS Bill. 14 ‘PPS lease’ is defined in section 31 of the PPS Bill.

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following payment of a deposit that has been made available by another financier. In this case, the ROT supplier’s perfected PMSI will prevail over any other PMSI in the collateral provided that the priority PMSI is perfected when the grantor takes possession.15

Example Manufacturer supplies landing gear to ServiceCo on a ROT basis with a 25 per cent deposit before supply. ServiceCo finances the deposit through a loan from Bank made specifically to purchase the landing gear. Both Manufacturer and Bank register against ServiceCo before ServiceCo takes possession of the landing gear. The first to register gives notice to the other and to earlier competing registrants. Manufacturer will have priority over Bank upon ServiceCo’s default.

40. The default priority rules will apply when competing PMSIs are granted in the same collateral and none of the secured parties are sellers, lessors or consignors.16 For example, where the supply is financed by two separate loans. Here, the first registered PMSI will prevail. Accessions—airframes, engines and components 41. The aviation industry relies heavily on components. It has been estimated that up to 20 per cent of the fleet value is attributable to the value of spare parts, which may be separately financed.17 Businesses that provide new value to an existing aircraft object by providing components may benefit from the special accession priority rules. 42. Many components supplied to aircraft operators will be affixed to an airframe and treated as ‘accessions’ for the purposes of the Bill.18 An ‘accession’ is defined as tangible property that is installed in, or affixed to, improved property where the separate identities of the two items are lost upon installation or affixation. Products that might become ‘accessions’ include avionics systems, propellers, landing gear, wheels, brakes and so on. 43. In most cases, an aircraft engine will retain its separate identity despite being affixed to an airframe. It is common industry practice to interchange aircraft engines between different aircraft and, indeed, across different fleet operators. Aircraft engines will be separately registrable on the PPS Register as serial numbered property. By contrast, the installation of an engine into a helicopter would create an ‘accession’ for the purposes of determining priority in that engine. 44. A security interest in an accession will prevail unless one of two exceptions apply (these relate to the timing of attachment or perfection of the interest in the accession and operate where the accession is or has been installed without any alert of a prior interest as would be provided by a perfection method).

15 16

Section 112 of the PPS Bill. Section 112(3) of the PPS Bill. 17 Tetley, A, ‘Security Interests in Ships and Aircraft’, New Zealand Law Review [2006] 689 at 696-7. 18 Section 34 of the PPS Bill.

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Example FinanceCo loans money to AirCo to buy avionics for installation in airframes leased from LeaseCo. Before advancing loan funds, FinanceCo registers a PMSI on the PPS Register against AirCo over avionics. LeaseCo has registered a PMSI interest against AirCo (relating to the airframes) while Bank has registered a general security interest in all of AirCo’s present and after acquired property. The avionics are installed in the airframe. Under the Bill, FinanceCo has priority over the avionics notwithstanding the perfection of the earlier interests held by LeaseCo and Bank.

Commingled property A similar issue may arise in relation to security interests in commingled goods such as aircraft wheels provided by different suppliers and kept in a stockpile. In this case, the holder of the wheels is unable to identify the supply source. As with a grain of wheat in a silo, the identity of specific wheels is lost in the mass so that the property may properly said to be ‘commingled’. Under the PPS Bill, the holders of a perfected security interest in commingled property will have equal priority and will be able to claim the property or any proceeds in proportion to their contribution.
45.

Example WheelCo and TyreCo both supply identical aircraft wheels to AirCo on a ROT basis and have both registered their interests as PMSIs on the PPS Register. AirCo keeps the wheels in a stockpile and is unable to distinguish between who has supplied the specific wheels. When a default occurs, WheelCo and TyreCo will be able to seize the property or any proceeds in proportion to their relative contribution. Their rights to proceeds will depend upon the nature of the proceeds and what proceeds are claimed in their respective registrations.

Extinguishment rules Part 2.3 of the PPS Bill sets out the circumstances in which a person may take personal property free of a security interest. There are general rules as well as some aimed at particular circumstances. Of particular interest, a security interest will be extinguished where:
46.

 a security interest is unperfected immediately before the acquisition of the property19  a security interest in serial numbered property (held other than as inventory) is not disclosed by a search of the register,20 or  the transfer takes place in the ordinary course of business.21

Example Bank lends ChopperCo funds to buy three new helicopters using the helicopters as security for the loan. Bank registers the helicopters on the PPS Register. Each is separately registered with its unique serial number and other required data. Bank incorrectly transcribes the serial number of the third helicopter (recording 1235 instead of 1234). ChopperCo sells the third helicopter to Consumer in breach of the security agreement. Before completing the purchase, Consumer searches the PPS Register. The search does not reveal the helicopter’s serial number of 1234. Consumer takes the helicopter free of the security interest.

19 20

Section 85 of the PPS Bill. Section 86 of the PPS Bill. 21 Section 87 of the PPS Bill.

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Proceeds 47. The PPS Bill would establish clear rules that allow secured parties to access the ‘proceeds’ of collateral—proceeds being identifiable or traceable personal property derived directly or indirectly from a dealing with the collateral, insurance payments, redemption payments and, where the property is financial property, rights arising out of and certain property distributed in relation to the collateral.22 48. The PPS Bill will allow secured parties to perfect a security interest over proceeds in all forms of personal property in a registration relating to the original collateral.23 However, even absent registration, a security interest in original collateral (such as an airframe or aircraft engine) will attach to proceeds unless the underlying security agreement provides otherwise.24 Thus, provided that the security agreement does not preclude a proceeds claim, mere registration of original collateral on the PPS Register will be sufficient to perfect a security interest in proceeds in cash or a right to an insurance payment or any other payment as indemnity or compensation for loss or damage to the collateral or proceeds.25 Proceeds are commonly claimed in cash, book debts or an amount commensurate with the debt owed to the seller that is kept separately (on trust) in a bank account. The PPS Bill simplifies the procedure for a proceeds claim and makes the outcome more certain.

Example Bank loans money to TripCo to buy airframes (secured against the airframes). Bank registers a PMSI interest in the airframes against TripCo, but fails to register its interest in the proceeds. TripCo sells two of the airframes in breach of the security agreement. TripCo retains some of the money in a separate bank account and uses the remainder to purchase a boat. Bank is entitled to trace the proceeds into the account. Had Bank registered an interests in proceeds either generally or in relation to boats, Bank would also have been able to trace the proceeds to the boat.

Account receivables 49. It is common practice in many industries, including the aviation industry, to convert income producing assets into tradeable financial instruments.26 As with the sale of accounts to a factor, a key goal of businesses and individuals who sell receivables is to acquire greater liquidity and exploit a greater range of assets for financing purposes. 50. The PPS Bill contains special priority rules for receivables that reflect the new value acquired as a result of the sale of assets in the form of book debts including, for example, lease receivables. 27 The first rule provides a standard first-to-register priority rule for on-sold debts. That is, a buyer of accounts will have priority over any other interest provided they register the sale on the PPS Register before any other interest in the original collateral is registered.

22 23

Section 42 of the PPS Bill establishes the meaning of proceeds. Sections 69(2) and 191, table item 4(d) of the Bill, and regulations proposed to be made under the PPS Act. 24 Section 68 of the PPS Bill. 25 Section 69 of the PPS Bill. 26 For a useful discussion of aircraft financing see Craven, C, Aircraft Financing, May 2001, published by Clayton Utz at http://www.claytonutz.com/downloads/aircraft.pdf (last accessed by the author on 11 March 2009). 27 Section 111 of the Bill.

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51. Second, the PPS Bill provides that a purchaser of accounts will gain priority over a PMSI holder (for example, a lessor) even where the sale is perfected by registration after PMSI registration (in this cases, registration of a PMSI in, say, airframes). This outcome arises where the purchaser of the debt gives each PMSI holder with a registration describing the property at least 5 business days notice before the earlier of the registration or the day that the priority interest attaches to the collateral. A receivables buyer’s interest in book debts will have priority over any other PMSI holder’s (including a lessor’s) perfected security interest in proceeds.

Example LeaseCo leases a range of aircraft objects to various airlines. It decides to assign its lease receivables to TrustCo, a special purpose vehicle, which, in turn, issues debentures to the general public. TrustCo must give a notice to those secured parties who have registered a PMSI in the leased aircraft objects. The notice must be given at least 5 business says before the earlier of the day that TrustCo perfects the assignment by registration or the day that TrustCo’s interest attaches to the lease receivables. TrustCo has now obtained premium priority.

Enforcement 52. The PPS Bill contains rules relating to enforcement, many of which can be contracted out of.28 The enforcement provisions apply to most transactions covered by the Bill including PPS leases and conditional sales agreements containing ROT clauses which secure payment or performance of an obligation. This means that most financiers, lessors and inventory suppliers can contract for specific enforcement outcomes or rely upon the default enforcement provisions in the Bill.29 Choice of laws—an international dimension 53. Aircraft are ultra-mobile equipment. Larger aircraft frequently cross jurisdictional boundaries, and the parties to an aircraft financing transaction may be situated in different jurisdictions. For moveable property, private international law generally applies the law in which the property is situated when the enforcement event occurs (the lex rei sitae). It has been suggested that the law has developed an artificial situs for aircraft based on the nationality or flag of the aircraft (as specified by its nationality or registration mark).30 Nevertheless, a degree of uncertainty remains about this area of the law. 54. The PPS Bill does not currently contain provisions relating to governing laws. To obtain stakeholder views, the Australian Attorney-General’s Department (AGD) has outlined a governing laws model in the commentary accompanying the latest draft of the Bill. The PPS Bill and proposed model is before the Senate Legal and Constitutional Affairs Committee for consideration and has generally been well received by stakeholders. 55. If the model is adopted, the PPS Bill would provide separate rules for tangible property, intangible property and financial products. The main rule proposed for tangible property is that a

28 29

Section 154 of the PPS Bill. Section 149(1) of the PPS Bill. 30 Goode, R, ‘The International Interest as an Autonomous Property Interest’, European Review of Private Law, 1-2004 [18-25] at 19.

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security interest in tangible property would be governed by the law of the jurisdiction in which the property was located when the security interest attached to it. 56. However, where the property is used for commercial purposes and is of a kind that normally moves between jurisdictions, the security interest would be governed by the law of the jurisdiction in which the grantor was located when security interest attached to the property. This will generally be the jurisdiction in which the grantor is incorporated or, for natural persons, the jurisdiction in which the person’s principal place of residence is located. This does not require that the object is, in fact, used in other jurisdictions. Rather, the objective nature of the property would be considered.

Example Bank loans money to FlyCo to purchase airframes and aircraft engines for international travel. FlyCo is incorporated in Australia. When FlyCo defaults on its loan, the airframes and aircraft engines are overseas. Australian law would govern the security interest.

57. The model also provides that a security interest in personal property would be governed by the law of Australia if, at the time the security interest attaches to the collateral, the grantor is an Australian entity and the security agreement expressly provides that it is governed by the law of Australia or of an Australian State or Territory. The PPS Bill and Cape Town Convention and Aircraft Protocol 58. The PPS Bill has been developed partly in tandem with the Australian Government’s consideration of the Convention on International Interests in Mobile Equipment (the Cape Town Convention) and the Protocol [thereto] on Matters Specific to Aircraft Equipment (the Aircraft Protocol). This has been advantageous for PPS reform as the Bill has been drafted with possible ratification of the Convention in mind. The instruments have informed refinements to the Bill. Background to the Cape Town Convention and Aircraft Protocol 59. The Cape Town Convention and Aircraft Protocol—developed under the auspices of UNIDROIT31— are aimed at addressing the instability of security, title retention and leasing interests in mobile equipment of high unit value or particular economic significance.32 The Convention itself applies to all forms of mobile equipment and allows for the development of industry specific protocols that will prevail over the Convention to the extent of the inconsistency. 33 To date, the Australia Government has not ratified either instrument.34

31 32

Otherwise known as the International Institute for the Unification of Private Law. Goode, R, loc cit, (n.29). 33 Separate protocols have been drafted for rolling stock and space assets. 34 In February 2008, the Department of Infrastructure, Transport Regional Development and Local Government issued a consultation paper published to gauge the level of support among Australian stakeholders for entering the Cape Town Convention and Aircraft Protocol. Responses were supportive, but not widespread. Only seven submissions received after the two-month consultation period.

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Australian PPS Reform—Secured finance in the aviation industry

Similarities in approach—the PPS Bill and the Cape Town Convention and Aircraft Protocol 60. The PPS Bill and the Cape Town Convention and Aircraft Protocol have a relatively high degree of commonality. This is unsurprising given that both are based on UCC Article 9 style laws, which adopt a functional approach to secured transactions and apply to a range of financing techniques, including leases and retention of title. Accordingly, the PPS Bill will provide a useful ‘testing ground’ for the adoption of this style of reforms by Australia. 61. One of the striking differences between the PPS Bill and the Cape Town Convention and Aircraft Protocol is that the PPS Bill is more comprehensive in its scope and coverage of aircraft equipment. For example, the PPS Bill will cover all aircraft objects and componentry, including light airplanes, gliders and balloons whereas the Cape Town Convention applies to aircraft objects over a certain size. Specifically, airframes that carry fewer than 8 passengers or 2750kg of goods are excluded as are gliders and balloons). The PPS Bill will also allow secured parties to trace their interests into identifiable and traceable proceeds of any dealing in the original collateral. Importantly, both regimes contain choice of law rules recognising the international mobility of this type of equipment. Potential interaction between the PPS Bill and the Cape Town instruments 62. An obvious question relates to how any transition to the international scheme would be managed in the event that the Australian Government ratified the Convention and Aircraft Protocol. A number of options present.35 The first is that Australia, like Canada and the US, could maintain a system of dual registration. This would mean that security interest holders could enjoy the benefits of both schemes, including the proceeds rules. Alternatively, a deeming approach could be taken. That is, the PPS Bill could provide that where a person registers an ‘international interest’ on the International Register, they would be deemed to have registered on the PPS Register, and could thereby avail themselves of the benefits of registration on the Australian system. Both approaches raise transitional issues, which would require further consideration. Conclusion 63. The aviation industry and related components industry employ a range of financing techniques common to many Australian commercial transactions such as chattel mortgages, purchase money loans, conditional sales agreements and leasing. The PPS Bill aims to bring all of these transactions under the one umbrella law and ensure that they are treated consistently with other transactions that function to allow businesses and individuals to increase their asset base and liquidity. A central concern is to provide greater consistency and certainty in the law, while reducing complexity and costs.

35

For an interesting article on how the two schemes might be integrated see: Cumming, R, Interface between Convention on international interests in mobile equipment and Canadian Personal Property Security Acts and related legislation: possible implications for Australia (2008) 82 ALJ 680.

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Appendix A

Appendix A–Timetable for Australian PPS Reform Personal property securities law reform in Australia can be traced back to the late 1960s and early 1970s, when the Standing Committee of Attorneys-General (SCAG) and Victorian AttorneyGeneral commissioned reviews into consumer credit transactions.36 During the early 1990s, the Australian Law Reform Commission considered the reform in some significant detail and published a draft national PPS Bill in 1993. In response, the Australian Government published a discussion paper in 1995 proposing a single legal regime for PPS in Australia. The private sector also did much to progress discussions regarding PPS reform. In 2002, the Banking Law Association established a committee with representatives of interested stakeholders whose work culminated in a draft PPS Bill that was discussed at a workshop held at Bond University in 2002. The proceedings and outcomes of this workshop were published in a special issue of the Bond Law Review in December 2002.37 At a government level, PPS reform was advanced again in April 2006 when the SCAG released an options paper for public comment on the merits of national reform.38 The paper sought comment on whether the Government should proceed with reforms adopting the functional approach and, if so, the key design features for a registration system to underpin a regime based on providing notice of security interests to third parties. The proposal for reform received strong support. A series of seminars held in mainland state capitals to explain the basis for reforms was well attended and received. Since April 2006, the Attorney-General’s Department has released three discussion papers canvassing details of the proposed reforms and seeking public feedback.39 The purpose of these was to encourage discussion and to seek comments on the best practice and industry requirements for a streamlined and effective national regime. A Consultative Group of key representatives in the banking, finance, legal, consumer, government and academic sectors was also established in September 2006 to advise government on the reforms. In April 2007, COAG agreed to the establishment of a national system for registration of personal property securities. This system would be funded by the Commonwealth and underpinned by Commonwealth legislation based on a reference of legislative power from the States. COAG also requested that an inter-government agreement between the Commonwealth, States and Territories be prepared to record agreement between jurisdictions on the scope of the reform and the ongoing management of the proposed national system. In May 2007, the Australia Government announced that it would provide $113.3 million over five years to harmonise PPS law in one Commonwealth Act and to develop a single national online PPS register.
36

Committee of the Adelaide Law School, Report to the Standing Committee of State and Commonwealth AttorneysGeneral on the Law Relating to Consumer Credit and Moneylending (Rogerson report), Government Printer, Adelaide, 1969 and the Law Council of Australia, Report on Fair Consumer Credit Laws to Attorney-General for the State of Victoria, Government Printer, Melbourne, 1972. 37 Allan et al, ‘Special Issue: Proceedings of a Workshop on Personal Property Security’, (2002) 14 Bond Law Review 1. 38 Standing Committee of Attorneys-General, Review of the Law on Personal Property Securities: Options Paper, Canberra, 2006. 39 Australia, Review of the Law on Personal Property Securities: Registration and Search Issues, Discussion Paper 1, Canberra, 2006; Australia, Review of the Law on Personal Property Securities: Extinguishment, Priorities, Conflict of Laws, Enforcement, Insolvency, Discussion Paper 2, Canberra 2009; Australia, Review of the Law on Personal Property Securities: Possessory Security Interests, Discussion Paper 3, Canberra, 2007.

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Appendix A On 16 May 2008, the Australian Attorney-General released a consultation draft PPS Bill for public comment.40 On 29 August 2008 the Attorney-General also released a discussion paper outlining the regulations that it is proposed to be made. Consultation period followed the releases. As a result of the submissions received, a number of changes will be made to the PPS Bill and proposed Regulations. In particular, it is envisaged that a number of changes relating to the registration of interests in the various IP-registers and the effect of such registrations, will be made to the relevant intellectual property statutes. On 12 November 2008, the Senate referred an exposure draft of the PPS Bill to the Standing Committee on Constitutional and Legal Affairs for inquiry and report. The Senate Committee is expected to table its report in March 2009. In addition to the work on the legislation, significant progress has also been made on the development of the national PPS Register. In October 2008, a Systems Integrator was appointed to design, build and eventually maintain the PPS Register. As part of that tender process, the Statement of Requirements for the PPS Register was made available to the public. The Statement of Requirements provides a useful starting point for businesses seeking to understand their options to interface with the PPS Register. The design of the PPS Register will allow for the migration of data and establishing links with other registers (e.g. the National Exchange of Vehicle and Driver Information Systems, which records motor vehicle details, such as Vehicle Identification Numbers, in Australia). A contact centre will also be established to support the operation of the PPS Register. It is envisaged that the PPS Register will be available for industry testing from November 2009, the build and testing phase completed by March 2010, and be operational in May 2010. Liaison with the States and Territories will continue regarding the State and Territories’ referral and consequential amendment legislation. It is envisaged that the first State and Territory referral legislation will be introduced in April 2009, and the last State and Territory consequential amendments passed in September 2009. The Department will continue to work with stakeholders to assist with their preparations for transition and integration into the new PPS Register before it commences operation in May 2010. Whilst the specific program has yet to be settled, it is likely to include newsletters, education seminars, and continuing consultation with stakeholders. A public communications campaign on the launch of the PPS Register will also be undertaken in January 2010.

40

See http://www.ag.gov.au/www/agd/agd.nsf/Page/Consultationsreformsandreviews_personalpropertysecuritiesreform_PPS Downloads.

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