Assignment by way of security may not be enforceable under Part 9 of the PPSA

In a successful application to have a statutory demand set aside, the court decided that, while it was unclear whether a "transfer" included an assignment by way of security, or was limited to absolute transfers, it was reasonably arguable that section 105(b)(i) of the Personal Property Securities Act (PPSA) prevented the lender from enforcing its security interest under Part 9 of the PPSA.

In this case¹, the defendant was a member of a group of companies referred to as the Thompson Group. The Thompson Group had dealings in land with another group of companies known as the Brown Group. The result of those dealings was that certain payments were due from the Thompson Group to the Brown Group.

The Thompson Group agreed to grant the Brown Group a mortgage over land. The parties entered into a settlement agreement, which provided that the Thompson group would pay $500,000 to the Brown Group on a specified date, and that the mortgage would be discharged when that payment was made.

In time, a finance company lent money to a company in the Brown group. That loan was secured by an assignment to the finance company of the debt, by way of a mortgage, under the settlement agreement. The assignment was registered on the Personal Property Securities Register.

Subsequently, the borrower failed to repay the loan and the finance company made a statutory demand against the defendant for $500,000, which it contended was due under the assignment of debt.

Issue

The defendant challenged the legal effect of the assignment, arguing that it was not an absolute assignment of debt but rather an assignment by way of security. As such, the defendant argued that the finance company was only entitled to receive any payments due to the assignors.

Arguments

The finance company argued that its rights stemmed from the interest under the PPSA, and not by virtue of rights acquired by a mortgage of property at common law. It claimed it had a deemed security interest under section 17(1)(b) of the PPSA, being "... an interest created or provided for by a transfer of an account receivable or chattel paper ...". It contended that:

• section 108 of the PPSA gives a secured party the right to apply an account receivable taken as collateral to the satisfaction of the obligation secured by the security interest if the debtor is in default; and
• when there was a default under the loan agreement it became entitled to call up and collect the account receivable of $500,000 by issuing the statutory demand.

The finance company further claimed that the PPSA did away with the need to be concerned with distinctions between absolute assignments and assignments by way of charge or mortgage, and that the PPSA was intended to simplify distinctions between legal mortgages, equitable mortgages, equitable charges, floating charges, pledges, liens, hypothecation and reservation of property or title.

In response, the defendant argued that the PPSA did not apply to the assignment of debt because the right of payment transferred to the finance company arose in connection with an interest in land. It noted that section 23(e)(ii) of the PPSA provides that the PPSA does not apply to an interest created or provided for by "a transfer of a right to payment that arises in connection with an interest in land ... unless the payment is evidenced by an investment security", and there was no investment security.

The court noted that section 105(b)(i) of the PPSA provides that Part 9 of the PPSA (which deals with the rights and obligations of a secured party when enforcing a security interest) does not apply to a security interest that is created or provided for by a transfer of an account receivable or chattel paper. It referred to the view of some commentators that the term "transfer" in that provision should be limited to absolute transfers of accounts receivable and chattel paper because there was no reason to exclude, from Part 9, agreements documented as a transfer by way of mortgage.

Decision

In its application to have the statutory demand set aside, the defendant needed to show that there was a substantial dispute to be heard.

The associate judge determined that the threshold had been met because:

• it was likely that the assignment was not absolute (expressed to be by way of mortgage) and therefore could not be directly enforced by the lender at common law;
• although the assignment might be a deemed security interest under
  section 17(1)(b) of the PPSA (an interest created or provided for by a transfer of an account receivable), the application of the PPSA was arguably excluded under section 23(e)(ii) because the settlement debt arose in connection with an interest in land; and
• section 105(b)(i) of the PPSA provided that the enforcement provisions of Part 9 did not apply to a security interest created by a transfer of an account receivable.

While it was unclear whether a "transfer" included an assignment by way of security, or was limited to absolute transfers, it was reasonably arguable that this provision prevented the lender from enforcing its security interest under Part 9 of the PPSA.

¹ Blue Water Resort Limited v MARAC Finance Limited (2009) 9 NZBLC 102,409

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