037 – Small Business Development Corporation WA



Small Business Development Corporation

Submission to the Attorney-General’s Statutory Review of the Personal Property Securities Act 2009

June 2014

About the Small Business Development Corporation

The Western Australian (“WA”) Small Business Development Corporation (“SBDC”) welcomes the opportunity to provide a submission to the Attorney General’s ‘Review of the Personal Property Securities Act 2009’ (“the Review”).

The SBDC, headed by the Western Australian Small Business Commissioner (“the Commissioner”), is an independent statutory authority of the WA Government. The SBDC was established in 1984 to support the development and growth of small businesses in this State. Among its main roles is the provision of advisory and advocacy services to the small business sector in WA and more recently the SBDC has added an alternative dispute resolution service to help small businesses resolve their commercial disputes.

The SBDC’s involvement in the PPSR

Through its policy and advocacy functions, the SBDC has been involved in consultations and providing feedback to central agencies on the development of the Personal Property Securities Register (“the PPSR”) since the initiative was first conceived as part of the Council of Australian Governments (“COAG”) ‘National Partnership Agreement to Deliver a Seamless National Economy’.

The SBDC notes that at the time, there was strong stakeholder support for the development of a single national register when the Standing Committee of Attorneys General consulted on the issue and released discussion papers back in 2006 and 2007. The SBDC recalls that the response to these papers was a resounding endorsement from the business and financial community for the development of a single national law to cover Australia’s security register framework.

As part of the COAG process, the SBDC participated in a WA Government interdepartmental working group which was established to negotiate the agreement that framed the referral of powers from States/ Territories to the Commonwealth. As a member of this group, the SBDC represented the interests of the WA small business sector during the development of the PPSR and associated legislative framework (i.e. what is now the Personal Property Securities Act 2009 (“the PPSA”)).

During its development, the SBDC supported the concept of a single national security interest register, however, raised concerns about the possible implications that this may have for small businesses. For example, at a demonstration of the PPSR by Commonwealth officials, SBDC representatives raised a number of issues about the perceived functionality of the register and the overly complex language adopted. These concerns were dismissed at the presentation by the Commonwealth officials. However, since its introduction these issues have proven valid as evidenced by the apparent lack of awareness and adoption of the PPSR amongst small businesses in WA.

Additionally, through our general advisory function, SBDC Business Advisers continue to provide advice and information to WA small business operators regarding securing their interest in personal property. This includes advice on the PPSR and the legislative framework. Whilst the SBDC does not record specific data on the number and types of queries it receives on the PPSR, our client record management system gives an indication of how the security register framework is impacting on small businesses in WA.

Feedback on the Review

The SBDC welcomes the statutory review of the PPSA and the associated PPSR. Whilst the SBDC is still supportive in principle of the intention behind the reforms to Australia’s security register framework and the introduction of the PPSR, we are aware that there have been ongoing problems with its implementation and adoption – despite its introduction over two years ago – and that these impacts have been significant for some small businesses in this State.

This submission is informed by the input provided during the initial development of the PPSR, anecdotal information gathered by our Business Advisers when dealing with clients since its implementation, as well as a short client survey conducted to glean information on the level of small business awareness and use of the register in WA.

Although small businesses are impacted by both aspects of the PPSR (i.e. searching and registering security interests) this submission focuses only on the registration component of the PPSR.

The effects of the PPS Act reforms on small business

The introduction of a single national register for personal property, and the redefinition of personal property, was originally espoused to have many potential benefits for the small business sector. Having a single, national register to record and search security interests in personal property across Australia should have made it easier for small businesses that own, or are looking to acquire, personal property. Similarly, the expansion of the types of personal property that could be registered should have benefited small businesses in securing finance.

In the SBDC’s experience in dealing with clients impacted by the PPSR, we believe that these touted benefits have not been fully realised for the small business sector. It would appear that small businesses do not appreciate the importance of the new framework, nor how to effectively use the PPSR. In particular, there appears to be significant confusion about the registration process and the rules around priority of security interests.

Further, the SBDC has heard anecdotally that some small business operators know they need to use the PPSR but fail to do so as the costs associated with using it outweigh the risks associated with non-compliance (and hence the loss of their security interests).

Small business awareness and understanding of the PPSR

It appears that small business operators do not fully appreciate the legal and financial importance of the PPSR and how significantly it can impact on their operations. Perhaps this fundamental lack of understanding of the importance is the cause of what appears to be a complete lack of interest in the PPSR by some small businesses. If they do not understand the importance of the register and how it is relevant to them, then they will not invest the time and money into learning about the requirements of registering their security interests on it.

The SBDC notes that the Review wishes to explore the level of awareness and understanding of the PPSA by business. In the SBDC’s opinion, there is a risk that the Review could consider this term of reference superficially and not delve into the actual level of understanding of small businesses. A small business owner may believe that they understand the requirements of the PPSR; however they may in effect not be fully aware of the concepts and definitions and their potential legal and financial implications.

There are many aspects of the PPSA that small businesses need to understand and be aware of in order to fully comprehend their rights and obligations and protect their legitimate interests. Firstly, they need to be aware of the importance of the PPSR to their business and the consequences of failing to correctly register a security interest in personal property. In the SBDC’s opinion, this is a major hurdle to overcome.

Flowing on from this, the small business operator needs to understand how to make an effective and enforceable registration. This involves a detailed understanding of the concepts around registration, attachment and perfection. To ensure their registration is effective, they must understand and comply with the rules around registration, documentation, possession and control of property, priority of security interests (depending on the type of personal property involved) and their ongoing obligations (such as payment of the fee to maintain their registration and notification requirements).

SBDC survey of small businesses

To help inform this submission, the SBDC surveyed[1] WA small business operators to canvas whether they had heard of the PPSR, whether they believed that they understood it and whether they had registered their security interests on any items of personal property. It included an open ended question to ascertain their experiences when registering items on the PPSR.

Of those that completed the survey, 54% of respondents claimed that they had heard of the PPSR. Of these, 85% indicated that they knew what it was for; however, only 44.4% had actually registered interests on it. Analysis of the remaining respondents who indicated that they had heard of the PPSR and believed that they knew what it was about but had not actually registered security interests on any items of personal property, revealed that the majority operated in industries that are directly impacted by the PPSR. This included businesses operating in the hire and rental, equipment sales and hire, clothing and retail industries, as well as a supplier to the hire industry. Based on their industry, it could be assumed that these respondents in particular would have items of personal property that should be registered on the PPSR.

Despite the small sample size of the survey, the SBDC is concerned about the overall general lack of awareness and understanding of the PPSR amongst small business operators, particularly in most exposed industries. This lack of awareness is especially troubling as it indicates that the PPSR has failed to penetrate the small business sector, despite being in operation for over two years now. This could have dire consequences at an individual business level.

The SBDC survey also revealed that small business operators are not inclined to seek professional advice and assistance in relation to their interactions with the PPSR. Less than a third of respondents (32.5%) who indicated that they knew about, understood and registered interests on the PPSR sought external assistance with their registrations. The sources of assistance included lawyers and firms specialising in PPSR registrations.

This low level of assistance seeking is not surprising to the SBDC, as we are aware of a general lack of resources (in terms of both time and money) amongst small business operators. However, the lack of professional advice received by small businesses on the PPSR is particularly concerning given the serious implications of ineffective registrations.

The SBDC’s efforts to raise awareness of the PPSR amongst WA small businesses

Since its introduction, the SBDC has tried to raise awareness of the PPSR amongst WA small businesses through various media releases, providing links to the PPSR website on our website and by informing individual small business operators about the register during client appointments and telephone calls. The Small Business Minister and WA Small Business Commissioner have also advocated to the Federal Government on numerous occasions about the need to improve small business awareness about the PPSR.

The SBDC has also heard anecdotally that organisers of information sessions on the PPSR have struggled to attract small business attendees, even if the events are provided free of charge.

This illustrates the point that the provision of advice and information is futile if the audience to which it is pitched lacks an appreciation of the importance of the PPSR to their business. Given this, the SBDC strongly recommends that the Review investigate strategies to improve awareness and ensure that the message effectively penetrates the small business sector.

Incidence and cause of non-compliance with PPSA requirements by small business

Reasons for non-compliance

Based on feedback received from our clients, the SBDC believes that non-compliance with the PPSR by small businesses in WA is significant. The SBDC has many examples of small business clients indicating that they suffered detriment as a result of not being aware of the PPSR:

|Case Study: Supplying to a commercial customer |

|A small business supplier of air-conditioning and heating goods supplied approximately $70,000 worth of goods to a commercial customer. |

|The customer’s purchase order stated a longer payment term than the small business usually agreed to. The small business raised with the |

|SBDC its concerns that the commercial customer was going into financial trouble, with the unpaid goods remaining on the customer’s |

|property. Prior to speaking with us, the small business had not heard of the PPSA or the PPSR and was advised by the SBDC Business |

|Adviser to urgently seek advice on registering a ‘purchase money security interest’. |

|Case Study: Supplying goods to a retail shop |

|A small business owner came into the SBDC for general advice on running his business. The business imported bicycles and supplied them to|

|retail outlets on a consignment arrangement. At the time of the appointment with the SBDC, the business had approximately 40 bicycles on |

|consignment to various retailers, which were supplied with no formal agreement or documentation. The small business owner had not heard |

|of the PPSA or the PPSR and was unaware that he risked losing an interest in the bicycles should any of the retailers he supplied to go |

|into administration. The SBDC Business Adviser suggested the small business owner take steps to secure his interests in the bicycles, one|

|such step being to register the interest on the PPSR. |

Small business respondents to the SBDC survey also reported that the PPSR is overly complicated and time consuming. In some cases, small business operators could not see any tangible benefit to using the PPSR and therefore did not use it, as evidenced by the following feedback:

“As we are a rental company there are a large number of items that have to be registered. This has placed a significant burden on our business. We now employ 1 person part time to manage this for us & have seen no real benefit despite the increased cost.” [Survey respondent]

“[Registering security interests on the PPSR] is a very time consuming task. I feel [it’s] necessary but reluctant to invest too much time, depending on the client who is hiring the equipment.” [Survey respondent]

Some survey respondents indicated that whilst the cost of registering single items was relatively cheap, the significant cost lay in understanding the PPSR and ensuring compliance with it:

“[The] time taken in researching [the[ PPSA was extensive not to mention the expense of obtaining professional opinion.... [The] time taken to register [an] item [is] reasonably quick, however, was very confusing to determine [the] type of registration. The PPSA laws are particularly cumbersome and legally challenging for those in the hire industry.” [Survey respondent]

“[The] PPSR has had [a] huge financial impact on our business, we have had to hire someone full time to keep up to date with registrations.” [Survey respondent]

Consequences of not complying

The SBDC is aware of numerous small businesses in WA that have suffered detriment as a result of non-compliance with the PPSR. The closure of a larger business can have devastating impacts on small business suppliers who supply on a credit or consignment arrangement. This is demonstrated by the case study below.

|Case Study: A widespread impact |

|In 2013, the SBDC assisted a number of small businesses that were affected by the closure of a Ford dealership in Perth. As a result of |

|the closure, 20 small business suppliers were owed approximately $1 million for parts and accessories. One company was owed close to |

|$5,000 for tyres that were supplied on a credit arrangement and had not registered their security interests on the PPSR. Many of the |

|small business clients seeking assistance from the SBDC were not aware of the PPSR. |

The lack of possession of their personal property is the cause of many of the issues faced by the SBDC’s clients. There have been numerous examples of a small business losing the rights to their personal property because it was in the possession of a third party who subsequently went into administration:

|Case Study: Leased goods |

|A client approached the SBDC for advice regarding his purchase of a machine. The client paid approximately $15,000 for the machine which |

|he leased back to the company from which he bought it. While the machine was still in its possession, that company went into |

|receivership. The SBDC’s client had not registered an interest on the machine on the PPSR. |

|Case Study: Consignment |

|A small business supplied goods to another business under a consignment arrangement, without registering their interest on the PPSR. The |

|other business went into liquidation and the liquidator deemed those goods to be an asset of the liquidated business. The small business |

|was not successful in claiming their interest in the property as it was not registered on the PPSR and as a consequence the small |

|business lost goods to the value of $25,000. |

As shown by the case studies above, the consequences of non-compliance can be particularly devastating for a small business.

Making the security interest regime easier for small business

It is difficult to make specific recommendations to simplify the security interest regime for small businesses, or make suggestions for strategies to overcome their lack of understanding. Given the variety in the type of small businesses and what items of ‘personal property’ they deal with, it is hard to recommend a one size fits all solution.

For instance, a small business may have different requirements depending on what role they play (e.g. as a grantor, third party or secured party). Additionally, they might deal with a variety of personal property and therefore have to understand the rules specific to each class of property (such as specific requirements for possession and control around investment instruments and ADI accounts).

Feedback from our clients suggests that the legal framework governing the PPSA is overly complex, uses legalistic terms and is unclear. Further, the PPSR website itself is not easy to navigate and the location of the guidance material is not intuitive. These issues have the combined effect of making the experience of registering security interests on the PPSR difficult and frustrating for many small business operators.

The registration process

Guidance materials available on the PPSR website and from other sources indicate that the register is relatively easy and cheap to use. This may be the case for people who have the time and resources to learn about the PPSR and understand its requirements. However, from the SBDC’s experience, small businesses (especially those using it infrequently) generally do not have the time or resources necessary to fully comprehend the PPSR and its key concepts. As such, registering security interests on the register will not be easy for a small business that lacks the basic understanding of the key concepts and the requirements for an effective registration.

The SBDC notes that there are six steps involved in the registration process and at each point there is potential for the person entering the information to make a mistake, which may void their registration. For example registration may be void if the person incorrectly identifies the interest as transitional versus non-transitional at Step 1, or assigns the interest to an incorrect collateral class at Step 2. At Step 3, the person entering the information needs to select the correct identifier for the grantor and the order of importance of these (e.g. a body corporate needs to be identified by its ARSN, CAN or ARBN).

Furthermore, the SBDC has heard anecdotally that many small businesses are leaving the registration of security interests to an office junior or administration assistant who may not have received the appropriate training or guidance on how to effectively register interests. If that person is following a protocol that is incorrect then this could lead to the ineffective registration of security interests on every item of personal property owned by the small business. In this case, the person entering the information may not even realize that they have done so incorrectly and therefore would not be aware of their need to seek clarification.

As there is no independent verification of the information entered at the point where the information is reviewed (Step 4), a person who makes an error at registration will only realize when they seek to rely on that registration at some future point.

A major problem of this is that people may be lulled into a false sense of security during the registration process. They may believe that they are adequately protected because they have registered an interest, however, an error in the process or incorrect information will void that registration, which can have a significant detrimental impact on the business.

Some respondents to the SBDC’s survey indicated that while they believe that registration is relatively easy, problems lay elsewhere in the PPSR process. For example, there appears to be a lack of clarity and assistance from the PPS Registrar when a small business has questions about their registration, beyond the point of actually registering the interest:

“Easy to register – hard to get a straight answer out of anyone as to what impact the role of this register actually plays on recovering machinery.” [Survey respondent]

“The support from PPSR is useless and all I ever get told is that it is a legal question and to consult my lawyers. Conflicting advice on how to exactly word the registrations is frustrating.” [Survey respondent]

“It is quite easy to register however the costs are quite high. I find that it is difficult to get answers to some questions in regards to registrations as no one seems to know and don't know how the courts would view it if it ever went to court. In particular transitional registrations, should these be re-registered under non transitional registrations, some say it should be done just in case however the cost involved and the time it would take is quite a bit.” [Survey respondent]

Another point that came across in the SBDC’s survey was that the true cost involved with the PPSR was not the registration fee but the costs associated with compliance:

“I have had to spend several thousand dollars on lawyers in order to ensure my registrations are absolutely correct and introduce legal hire agreement documentation. We have 80 pieces of machinery which are continually registered and deregistered as well as our customer base.” [Survey respondent]

“I also now have to pay a bookkeeper to keep on top of the registrations as I do not have any time to do it. Not to mention the cost of the registrations and deregistrations.” [Survey respondent]

“Compliance cost is significant. Equally, PPSR is a complex platform which has only been truly tested with recent insolvency events. Understanding of how PPSR works and implementation is generally still weak across industries.” [Survey respondent]

The website and guidance material

Feedback from small businesses indicates that the website is hard to navigate and the material contained on it does not provide practical advice on how to do an effective registration. Anecdotally, the SBDC has heard that clients who have referred to the PPSR website for assistance in the registration process have found it to be unhelpful and full of legalese, as evidenced from the following quotes:

“[The] Government website [is] cumbersome to use.” [Survey respondent]

“[I] refuse to use [the] Govt site as [it is] unreliable, slow and riddled with nonsense jargon.” [Survey respondent]

The SBDC notes that whilst the website includes a glossary of terms and key concepts to assist users of the PPSR, this information is not readily accessible at the crucial points of the registration process. Currently, when additional information is required during registration, the user is taken away from the registration page to another page containing the concepts. This is a nuisance for the person doing the registration and could be overcome by either providing a downloadable pocket guide to the key concepts and definitions, or improving the interface of the registration page. The latter would involve including more definitions and assistance throughout the registration process.

Complex language

Regardless of what reforms are implemented to simplify the PPSR for small businesses, it cannot overcome the fact that the concepts and language used in the framework are overly complicated and difficult to grasp.

The PPSA introduced new terms and concepts, and redefined existing terms, which may be confusing for small business operators familiar with the previous registration systems. Adding to the confusion is the vast amounts of defined terms and key concepts that users must understand in order to now effectively register security interests on the PPSR. The SBDC recognises that these terms may be necessary due to the complex nature of the legislative framework created by the PPSA, however believes that more should be done to make it easier for general and/or irregular users of the register.

The SBDC recommends reviewing the defined terms and key concepts utilised in the PPSA in order to simplify the system and reduce the compliance burden. This should be coupled with a review of the guidance material to ensure that it is effectively conveying the meaning of terms and concepts in the simplest of terms.

Other feedback on the PPSR

The SBDC’s survey elicited a range of responses from respondents about their experiences using the PPSR. Some believe that it is unfair that they will lose their security interest for failing to register their interest on property in a third party’s possession in the event of a liquidator being appointed:

“The whole thing is completely ridiculous that a liquidator has the ability to seize something which belongs to us. I think I may run out of space for my list of complaints about it all.” [Survey respondent]

There also appears to be issues around the time in which people can register their security interest:

“The biggest issue in our industry is that many customers of ours cross hire equipment without informing us, therefore exposing us under this legislation. The other threat is the length of hire – many clients will hire a piece of equipment for four weeks and extend the hire anywhere up to a year. If we are informed of the extension at the four week mark, it is now too late for us to make a priority registration and are at risk of losing our equipment.” [Survey respondent]

One survey respondent indicated that the PPSR has added to the red tape associated with doing business:

“The PPSR should never have encompassed commercial plant hire, scaffold and formwork. The finance industry does not understand the PPSR registrations and are constantly demanding we remove our registrations. [The PPSR has] massively impacted our work loads and cost of doing business... [The] current legislation negatively impacts [the] cost of doing business. The hire industry should never have been covered by this legislation. Overall it is appalling legislation.” [Survey respondent]

In a further example of its compliance burden, the SBDC notes that for a casual user of the PPSR there are two steps involved in the payment stage of registration. Firstly they must register their credit card. Once this is completed they must then make the payment. Whilst this may be in place for a valid reason, it does appear to create an unnecessary burden on the person entering the data and may be overcome by allowing casual users to make the payment in one step.

The potential for misleading small businesses on the ease of using the PPSR

The SBDC is aware of the information and education materials (including the “How to” videos) being produced and distributed by the Australian Financial Security Authority to promote the PPSR to small businesses. However, given the complexity of the register and the severity of the consequences of non-compliance, the SBDC is concerned that it may potentially be misleading to small businesses to promote the message that they can do it themselves relatively easily.

A further concern is that a lot of the information about the PPSR focuses on the importance of registration to perfect a security interest. This creates the belief that all that is needed to secure an interest is registration. However, this doesn’t take into account the need to have a perfect registration and undertake certain requirements (such as documentation, payment of fees etc).

As stated previously, small business operators may believe that they understand the process and have made effective registrations, although in essence they may not; in the SBDC’s opinion, it is riskier for them to believe that their registrations are effective when they are not, then for them to accept that they do not understand it and seek out assistance. The consequences then of making an ineffective registration and only finding out when their security interest is tested can be significant.

Given the complexity of the legislative framework and uncertainty around how a Court may handle registration contests, there is a high risk that information produced could be misleading or factually incorrect. As such, the SBDC (and other WA Government agencies) lacks the confidence to publish advice or guidance material on how to effectively protect interests in personal property through the PPSR.

Further to this, the SBDC is also concerned about the apparent lack of advice/ guidance being offered by relevant third party providers (such as banks and insurance companies). This is despite the fact that these institutions often request a statement from the small business that they are compliant with the PPSR.

Conclusion

As stated previously, the SBDC supports the principles behind establishing the PPSR as a single, national register for security interests. However, the problems experienced by small businesses since the PPSR’s implementation, and the general lack of awareness and understanding of it still, cannot be ignored.

The SBDC strongly recommends that the Review explore strategies for improving awareness of the PPSR amongst small businesses across Australia. Furthermore, the legislative framework and the PPSR itself should be reviewed and reformed to make it simpler to understand and comply with and ensure it enhances the protection of personal property, as originally intended.

For further information about this submission, please contact Ms Darcy Bosch (Senior Policy & Project Officer) on (08) 6552 3308 or via email at darcy.bosch@smallbusiness..au.

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[1] The SBDC’s six question survey was completed by 79 small businesses in WA during May 2014.

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