Giving notice of an amalgamation to secured creditors: every man and his dog?

Under the Companies Act 1993, companies planning to amalgamate must give notice of their proposed amalgamation to their "secured creditors". In this article, Bell Gully senior associate Louise Hill considers who is a "secured creditor" for the purposes of giving such notice in light of the recent decision of the Court of Appeal in Dunphy and Shephard v Sleepyhead Manufacturing Company Ltd and the backdrop of the Personal Property Securities Act 1999 (PPSA).

REQUIREMENT FOR NOTICE OF AMALGAMATION

Companies Act

Under section 221(4) of the Companies Act 1993 (the Companies Act), the board of each amalgamating company must, not less than 20 working days before the amalgamation is proposed to take effect, send a copy of the amalgamation proposal to every secured creditor of that company. A "secured creditor" is defined in the Companies Act as "a person entitled to a charge on or over property owned by that company". This definition has not changed since the enactment of the Companies Act in 1993. In 1993, a person who was entitled to a charge on or over property owned by that company was a person who was entitled to a floating charge or fixed charge. However, the concepts of floating and fixed charges are no longer applicable as a result of the enactment of the Personal Properties Securities Act 1999 (PPSA) and this raises the difficult question of how "secured creditor" should be interpreted in the PPSA era.

Security interests under the PPSA

The PPSA introduced a new regime in relation to security interests in personal property. In particular, the PPSA provides for the creation and enforceability of security interests in personal property and the determination of priority between security interests in the same personal property.

Security interests are registered on the Personal Property Securities Register (PPSR). It is not only traditional floating and fixed charge type interests that are registered on the PPSR. Persons supplying goods under a retention of title arrangement will also register their interest in the goods on the PPSR, as will (or should) people who have leased assets to the company for more than one year.

Who is a "secured creditor"?

The central issue is whether all persons who have registered security interests on the PPSR may be regarded as "secured creditors" and thus require notice of an amalgamation proposal under section 221(4) of the Companies Act. Has the enactment of the PPSA altered the meaning of the words "a person entitled to a charge on or over property owned by that company"?

SLEEPYHEAD CASE AND ITS RAMIFICATIONS

The facts

In the recent Court of Appeal decision of Dunphy and Shephard v Sleepyhead Manufacturing Company Ltd¹ (the Sleepyhead case) the court considered whether Sleepyhead was a "secured creditor" for the purposes of the Companies Act. The facts of the case are that Sleepyhead supplied beds to King Robb Ltd (King Robb) on the basis that Sleepyhead retained title until King Robb paid for the beds. There was no formal agreement between the parties relating to the supply of beds. The terms of sale, including the retention of title, were set out on the reverse of Sleepyhead's invoices. King Robb never signed and returned the invoices, as directed (and as required under the PPSA for the security interest to be enforceable against third parties). Sleepyhead registered a financing statement in respect of its security interest in the beds on the PPSR. Subsequently, King Robb went into liquidation and Sleepyhead sought to enforce its security interest against King Robb's liquidators.

Guidance for enforcement of security interests

The Sleepyhead case established important principles for lawyers dealing with the PPSA, in particular around the consideration of priority of security interests and the ability of a company to enforce its retention of title arrangements against liquidators. The court held that a liquidator acts as agent of the company, and is not a "third party" when considering enforceability of an unsigned security interest under section 36 of the PPSA. The Court of Appeal also held that Sleepyhead could not enforce its security interest in the goods supplied to King Robb against the BNZ, which had a general security interest over the assets of the company, as the BNZ was a third party and thus an unsigned security arrangement is not enforceable against it, but that the security interest was enforceable against the liquidators, who were treated as agents of the company, and not third parties. Sleepyhead was therefore entitled to the residual proceeds of sale of the goods supplied to the company after the BNZ's claim had been satisfied.

Application of Sleepyhead case to definition of "secured creditor"

The Sleepyhead case also has importance in the context of considering the definition of "secured creditor" under the Companies Act (which as described above is relevant in the case of amalgamations). As part of the Sleepyhead decision, the Court of Appeal considered whether or not Sleepyhead's security interest amounted to a "charge" as defined in the Companies Act. Under the Companies Act "charge" is defined as "a right or interest in relation to property owned by a company, by virtue of which a creditor of the company is entitled to claim payment in priority to creditors entitled to be paid under section 313". The court concluded that Sleepyhead's interest did amount to a charge and that Sleepyhead was a "secured creditor" for the purposes of the Companies Act.

The court stated that "in pre-Personal Property Securities Act (PPSA) terms, the goods supplied by Sleepyhead would not have been "owned" by King Robb, they would have been wholly outside the liquidation because title remained with Sleepyhead. Now that the PPSA governs the method by which creditors obtain security, "owned" must be read in a manner that is consistent with the PPSA, which means that King Robb's interest in the goods must be treated as sufficient for them to be "owned" by King Robb for the purposes of this definition. As Sleepyhead has a security interest which has attached for the purpose of enforcing its rights against King Robb (and its liquidators), it is entitled to claim payment in priority to unsecured creditors. Its security interest is, therefore, a "charge" and Sleepyhead is a "secured creditor" as defined in section 2(1) of the Companies Act".

The analysis of the court suggests that the PPSA has affected consideration of whether or not a company "owns" assets. Prior to enactment of the PPSA, a company would not have been considered to own goods that had been supplied to it under a retention of title arrangement and which had not yet been paid for. The supplier retains title to the goods until paid for, and so they remain owned by the supplier, rather than the company. The Sleepyhead decision suggests that these goods are now to be considered as assets of the company, rather than the supplier, with the supplier taking a security interest in the assets. A similar analysis can be applied to assets supplied under a finance lease arrangement. Previously, assets such as photocopiers or faxes that are commonly supplied under a finance lease arrangement would be considered to be owned by the supplier until they have been paid for by the company. However, under the PPSA regime, and applying the analysis of the court in Sleepyhead, it may be thought that these assets are now assets of the company and the supplier merely takes a security interest in the goods.

Application of Sleepyhead case and PPSA to amalgamations

On a literal reading of the court's decision in the Sleepyhead case and applying that decision to amalgamations, one could consider that notice of amalgamation must be given to all persons who have registered a security interest on the PPSA. We do not think that this is the correct application of the Sleepyhead decision.

The Sleepyhead decision is about priority of interests under the PPSA. It is not about amalgamations. We do not think that the court intended that its comments on the interpretation of "secured creditor" in the context of considering priority of interests in a liquidation situation would be applied to amalgamations. Such an application would mean that a company must give notice to all persons with interests registered on the PPSR. This would often be impractical and an unnecessary burden on an amalgamating company - some companies can have thousands of interests registered on the PPSR.

The Sleepyhead case involves consideration of competing interests between creditors of a company. The PPSA is a regime designed primarily for the creation and enforceability of security interests in personal property and the determination of priority between security interests in the same personal property. Persons register their interest in an asset on the PPSA in order to "give notice to the world" of that interest. In an amalgamation, the notice regime requires the company to give notice to its creditors. This is a relationship between the company and its creditors; the company will know who its secured creditors are. It is not necessary to link the notice regime with those persons who are registered on the PPSR as this will capture persons not intended to be given notice under the wording of the Companies Act.

The regime that existed prior to enactment of the PPSA was that a company that was intending to amalgamate must give notice to all persons with a charge over assets of the company, meaning persons with a fixed or floating charge over assets that were (in pre-PPSA terms) owned by the company. This would not encapsulate persons who had leased assets to the company, as the company did not own those assets. Nor would it apply to persons who had supplied goods to the company on the basis of a retention of title arrangement, as prior to payment for those goods the company did not own those goods (and post payment the supplier was not entitled to charge over the assets).

CALL FOR LEGISLATIVE REFORM

Parliament cannot have intended to significantly change the application of this provision by enactment of the PPSA so that all persons who had registered security interests over the PPSA would be entitled to notice of amalgamation. It would be useful, however, for Parliament to clarify that this was their intention. We think that it may be useful to have a separate definition for those persons to whom notice must be given, rather than using the "secured creditor" definition. This class of persons would be those persons who are entitled to a security interest over assets of the company which are owned by the company or to which the company has title, and for the avoidance of doubt does not include assets supplied under a retention of title arrangement which have not yet been paid for by the company or assets leased to the company.

¹ [2007] 3 NZLR 602

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