Supply on retention of title terms - can an overly broad financing statement be seriously misleading?

The High Court has considered whether or not a supplier had a perfected purchase money security interest (a PMSI) in respect of goods supplied on retention of title terms.

In this case,1 two financing statements were registered at the Personal Property Securities Register (PPSR):

• first, by a bank in respect of a general security agreement over all of the company's assets; and
  
  
• second, by the supplier in respect of the goods supplied on retention of title terms.

In determining which security interest had priority, the court had to consider whether the supplier's financing statement contained an adequate description of the collateral or whether the collateral type and description did not properly reflect the security interest and therefore did not perfect it. In other words, was the financing statement seriously misleading, rendering it invalid?

The court considered three questions:

1.    Does the supplier have a security interest in the goods supplied?

The receivers claimed that the terms of trade agreement was void because it did not reflect the actual terms of trade as conducted. They argued that the payment for supply arrangement was a verbal agreement between the parties.

The terms of trade provided that:

• "prior to the buyer paying in full for all goods supplied to the buyer by the company, ownership of any such goods will remain with the company".
  
  
• "If the buyer on-sells any goods (supplied by the company) before ownership has passed to the buyer, the proceeds of such sale shall be received and held by the buyer in trust for both the company and the buyer."
  
  
• "The buyer agrees that, for the purposes of the Personal Property Securities Act 1999 (the "PPSA"), the company has a security interest in the goods supplied by the company to the buyer (as detailed) in each invoice supplied to the buyer as well as the proceeds of such goods."

The court determined that although the modification to the terms of trade relating to how payments were to be made should have been in writing, this did not render the entire terms of trade void. The terms of trade accurately recorded the contractual relationship between the parties.

The receivers also challenged the retention of title clause used in the terms of trade. They claimed the language was outdated and did not create a security interest.

The court determined that the inclusion of a retention of title clause is a material and permissible term of trade and is enforceable.

The court held that the terms of trade:

• satisfied the section 16 definition of "security agreement" - they amounted to an agreement that creates or provides for a security interest and included writing that evidenced a security agreement; and
  
  
• satisfied the section 17 definition of "security interest" - a "conditional sale agreement (including an agreement to sell subject to retention of title)" comes within the definition of a security interest. It is the substance of the arrangement securing the payment or performance of an obligation that is contemplated by section 17 rather than the form of the arrangement.

The court concluded that the security interest was a PMSI.

2.    If there is a security interest, was it perfected by the registration of a financing statement?

There was a financing statement registered at the PPSR. However, the following question was relevant to determine whether the security interest was perfected by registration.

3.    Is there a seriously misleading defect, irregularity, omission or error in the financing statement to render the financing statement invalid?

The court focussed on the following sections of the PPSA:

• Section 41 - a security interest is perfected when it has attached and a financing statement has been registered.
  
  
• Section 142(1)(e) - a financing statement must include a description of the collateral.
  
  
• Section 149 - a financing statement is only invalid if it is seriously misleading.
  
  
• Section 150 - a financing statement is invalid if there is a seriously misleading error in the debtor's name or in a serial number.

The supplier's financing statement recorded the collateral type as "All Present And After Acquired Personal Property". The receivers claimed that this was seriously misleading because it was too broad and did not properly describe the goods supplied.

The court held that the financing statement perfected the security interest and was not seriously misleading. The collateral description may have been overly broad, but the supplier's valid security interest was confined to the goods and proceeds described in the terms of trade.

 

1 Service Foods Manawatu Limited (In Receivership and Liquidation) v NZ Associated Refrigerated Food Distributors Limited (High Court, Wellington, CIV-2005-485-1820, 30/01/2006)

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