Register your interest as lessor or risk losing priority

The High Court has again considered priorities of competing parties under the Personal Property Securities Act 1999 (the PPSA) and confirmed the recent Portacom1 decision that the owner of a leased asset can lose its rights to a lender that has a registered security interest over the relevant asset.

This case2 centred around rights to a stallion owned by a company that went into receivership.

In the insolvency proceedings, two parties claimed first priority over the stallion. The first claimed priority over the stallion as part of the company’s assets by virtue of a debenture. The debenture pre-dated the PPSA but was registered on the Personal Property Securities Register (the PPSR) on the day the PPSA came into force.

The company had entered into a lease-to-purchase agreement for the stallion with its owner, who was the second party claiming priority over the stallion.

The PPSA provides that a lease for a term of more than one year (which the lease-to-purchase agreement was) is deemed to be a security interest that is registerable under the PPSA.

There was no doubt that both the interest of the debenture holder pursuant to the debenture and the interest of the owner under the lease-to-purchase agreement were both security interests for the purposes of the PPSA. However, the owner never registered the lease-to-purchase agreement on the PPSR.

The PPSA sets out a regime for determining the priority of competing security interests, and specifies in section 66 that a “perfected” security interest takes priority over an “unperfected” security interest.

There are two steps to perfection of a security interest:

• attachment (when value is given by the secured party and the debtor has rights in the secured asset(s)); and



• registration or the taking of possession.

Following frequent failures by the company to make the payments due under the lease-to-purchase agreement, the owner had repossessed the stallion, but section 41(b)(ii) of the PPSA specifically excludes the taking of possession as a result of seizure or repossession from qualifying as a perfecting step. The debenture holder therefore took priority.

The Court noted that:

• “the fact that [the owner] may have legal title to [the stallion] is simply irrelevant where, in a situation where, as here [the owner] holds an unperfected security interest and is in competition with a party which has a perfected security interest… It is the lessee who is to be treated as the owner of the goods for registration and priority purposes, and not the lessor”; and
  
  
• “To those unfamiliar with the [PPSA], this conclusion may be surprising, and perhaps difficult to accept… But the result is a reflection of the extent to which the registration regime introduced by the [PPSA] has altered long established priority principles grounded in notions of legal title. Irrespective of title, it is paramount that security interests be the subject of registration if priority is to be preserved”.

1 Graham and Gibson and Ors v Portacom New Zealand Limited [2004] 2 NZLR 528

2 Waller and Agnew v NZ Bloodstock Limited (High Court, Auckland, CIV-2004-404-004093, 2 December 2004, Allan J)

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.