Vendor PMSI holder entitlement to be reconsidered

A decision determining how to quantify amounts owed to a PMSI holder when the purchaser goes into receivership (summarised in the Winter 2008 issue of Financial Services Quarterly) is to be reconsidered.

The decision in question¹ was about how to calculate the amount payable to the vendor purchase money security interest (PMSI) holder ahead of the general security holder. The case was brought by the receivers, who argued that the onus was on the vendor to identify the goods it had supplied and for which it had not been paid. This was not possible because each item of goods supplied was not separately identifiable from each other item. The receivers argued that, therefore, the security was worthless.

The judge decided that the amount owed to the vendor was calculated as the cost of sales to the purchaser in the period following registration of the PMSI, less amounts paid by the purchaser to the vendor during that period.

An application was made by the supplier² for recall of the judgment on the following two issues:

Marshalling

The supplier argued that the receivers were obliged to apply the doctrine of marshalling and apportion the proceeds of the receivership in a manner that recognised the supplier's security interest over some of the goods. It was established that the supplier's PMSI had priority over the general security holder's interest. The supplier argued that on that basis, the receivers should not have satisfied the general security holder's indebtedness from the assets that were charged to the supplier.

In response, the receivers argued that the doctrine of marshalling does not extend to directing which assets should be realised, and that when marshalling applies, equity intervenes after realisation by the senior creditor to ensure that the junior creditor is left no worse off than if a different sequence of realisation had applied.

The judge determined that:

• the doctrine does not affect the quantification of what is covered by a security interest but preserves the right to recovery of one creditor over another where there is a shortfall;

• the doctrine can't be used to increase the amount owed to the supplier;

• in enforcing its security, the supplier had to be prepared to make out its value; and

• the absence of any challenge by the receivers would not have made the PMSI any more valuable.

Section 293 Companies Act

The supplier argued that the court's reliance on section 293 of the Companies Act (which relates to liquidators acting on behalf of unsecured creditors) was incorrect, because the issue is between two secured creditors, not a secured creditor and an unsecured creditor.

The judge agreed that drawing on section 293 as an analogy for what should occur under the Personal Property Securities Act risked compromising the rights of unsecured creditors under section 293. As a result, it was determined that justice required that the matter be reconsidered.

The issue for re-consideration was identified as how to find an appropriate method of quantifying the value of the PMSI that is consistent with the findings that:

• the supplier is obliged to identify the goods supplied and not paid for after perfection of the PMSI, but is not obliged to identify individual items of stock; and

• the rule in Clayton's case is to apply to the sequence of payments.

We will update progress on this case in future issues of Financial Services Quarterly.

¹ Re Service Foods Manawatu Limited (in receivership and liquidation): New Zealand Associated Refrigerated Food Distributors Limited v Simpson and Walton High Court, Wellington, CIV 2007-485-1563, 24 April 2008

² New Zealand Associated Refrigerated Food Distributors Limited v Simpson and Walton High Court, Wellington, CIV 2007-485-1563, 6 May 2008

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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.