Court finds that security interest can override ownership

Murray Tingey, Partner | Thursday 25 March 2004

In the first decision under the Personal Property Securities Act 1999 (the PPSA), the High Court has found that a person who leases goods can effectively pass ownership of those goods if a third party holding a registered security interest enforces that security interest.

As this can occur even where there are provisions in the lease preventing the lessee from charging the goods or using the goods as collateral, the decision will surprise many leasing companies who might have assumed they could not lose ownership of goods simply by leasing them.

Indeed, before the advent of the PPSA, only the true owner of goods could pass title to them, except in limited circumstances.

In this case, NDG Pine Limited (NDG) leased five portable buildings from Portacom New Zealand Limited (Portacom).

No lease period was specified - under the PPSA, a lease that lasts longer than a year or for an indefinite term is deemed to be a "security interest" and can be registered on the PPSR.

In addition, the lease terms and conditions acknowledged that the interest was registerable - but Portacom failed to register its interest.

Problems arose when NDG defaulted on its obligations to the Hongkong and Shanghai Banking Corporation Limited (HSBC). HSBC had lent significant funds to NDG and held a debenture over all of NDG's assets. The default led to the appointment of a receiver of NDG's assets.

A dispute then arose over who had priority to the portable buildings: was it HSBC or did Portacom retain ownership of the buildings?

The Court considered the provisions of the PPSA and cases decided under the equivalent Canadian legislation and found that a lessee of goods may grant a security interest in goods - even though it does not own them. The dispute as to who had priority in the buildings was therefore determined under the PPSA's priority rules.

Crucially, as HSBC had registered its interest on the Personal Property Securities Register (PPSR) and Portacom had not, HSBC had priority and its receivers had the right to sell the buildings and for HSBC to retain the proceeds.

Portacom's lawyers also argued that the terms used in the debenture granted in favour of the bank were not wide enough to cover the interest created by the PPSA, as the terms of the debenture were in a form used prior to the implementation of the PPSA and did not use the definition of "all present and after acquired property" referred to in the PPSA.

However, the court decided that although the exact words in the PPSA had not been used, it was clear that the charging clause was wide enough to cover the lessee's right to grant a security interest.

This is good news for banks and others who have been granted debentures prior to the passing of the PPSA and have not had them re-executed to reflect the PPSA's provisions.

However, the decision only relates to the specific wording of the debenture in this case. It is quite possible that the wording in another charging clause may not be wide enough to obtain an interest in leased goods not owned by the debtor.

The moral of this story is that the decision would have been entirely different if Portacom had simply registered its interest under the leases when the buildings were leased. This is a very straightforward task and requires payment of a $5 fee.

Leasing companies should review their leases and any other arrangements where third parties take possession of goods that they own to ensure that they have protected their interests.

Owners should register their interest on the PPSR as soon as possible in order to maximise the chances they will retain priority and ownership, and to prevent a lessor or person with possession granting a prior ranking security interest to a third party.

Note: Murray Tingey represented Ferrier Hodgson, the receivers of NDG, in the case described in this article.