The Personal Property Securities Act

David Craig, Partner and David McPherson, Partner | September 2000

The Personal Property Securities Act 1999 (the PPSA) is likely to take effect in the first quarter of 2001. The PPSA is intended to improve the administration of personal property in New Zealand. Every transaction will have to be examined individually to determine the applicability and the effects of the PPSA. This is the first in a series of newsletters reviewing the key concepts introduced by the legislation.

Formalities

In order for the PPSA to apply, a secured party must generally hold a security interest in personal property with the consent of the debtor.

The meaning of "security interest"

The PPSA will only apply to transactions that create security interests in personal property. However, the PPSA introduces a broad definition of the term "security interest", which will capture many types of transactions not currently considered to be secured transactions.

The term security interest is defined as an interest in personal property, created or provided for by a transaction that, in substance, secures payment or performance of an obligation, without regard to the form of the transaction and without regard to the person who has title to the collateral.

If a transaction creates a security interest, then the requirements set out in the PPSA regarding the formalities of a security agreement and the rules governing perfection, priorities and remedies will apply to the transaction.

The PPSA specifically mentions various types of transactions that create a security interest, including fixed charges, floating charges, chattel mortgages, conditional sale agreements (including an agreement to sell subject to retention of title), hire purchase agreements, leases, assignments and flawed asset arrangements. These transactions will create security interests so long as they create an interest in personal property that secures payment or performance of an obligation.

In addition, certain transactions that may not secure payment or performance of an obligation will still be regarded as security interests. These are:

1. A transfer of an account receivable or chattel paper.
2. A lease for a term of more than one year.
3. A commercial consignment.

Therefore, when considering, for example, a lease, it is necessary to consider both a lease that secures an obligation (which can be of any duration) and a lease that does not secure an obligation but that is deemed to be a security interest.

The security agreement

Any written agreement creating or evidencing a security interest is referred to in the PPSA as a security agreement. The parties to a security agreement are the debtor (the party who gives a security interest) and the secured party (the party who is a recipient of the security interest). The term collateral is used to describe personal property subject to a security interest.

The formalities for enforceability will usually, but not always, require a security agreement to be in writing. The formalities are important because compliance with them ensures that a security interest can be enforced, not only against the debtor but also against third parties.

For an agreement to be enforceable against third parties (such as other creditors), the secured party must either take possession of the collateral or have the debtor sign or assent to a security agreement.

Option 1: Take possession of the collateral

A security interest enforceable against a third party can be created and exist without a written security agreement if the collateral is in the possession of the secured party.

For a security interest to be created by possession, the collateral must have been given voluntarily to the secured party for the purpose of creating a security interest. Under the PPSA, seizure or repossession of collateral will not constitute possession.

A secured party can take and hold possession itself or by its agent, but will not be in possession of collateral that is in the actual or apparent possession or control of the debtor or the debtor's agent.

The secured party must hold the collateral for the purpose of creating a security interest and not for some other purpose.

Option 2: Have the debtor consent to a security agreement

If the secured party does not have possession of the collateral, a perfected security interest can still be created so long as the debtor consents to a security agreement. The definition of security agreement includes both an agreement that creates or provides for a security interest and a writing that evidences a security agreement.

The PPSA also requires that an adequate description of the collateral be contained within the security agreement.

This description can be either of the specific collateral being secured or a general statement that a security interest is taken in all of the debtor's present and after-acquired property.

It is possible for a security interest to be created orally or by conduct rather than in writing, but such an agreement is not enforceable against a third party. The secured party may also have a problem showing that it was the intention that particular collateral be secured against performance of an obligation.

Personal property under the PPSA

Determining whether a security interest relates to "personal property" is important because, if it does not, then priority rules outside the PPSA will apply.

The term personal property in the PPSA is an inclusive rather than exclusive term. The PPSA sets out seven broadly defined types of personal property and also sets out classes of assets that are not personal property under the PPSA. The PPSA does not apply to land.

The categories of personal property are: goods; intangibles; investment securities; negotiable instruments; money; chattel paper; and documents of title. All personal property must fall within one of these categories and cannot be in more than one category.

These categories will be considered in more detail in a future newsletter.

Recent Case Law

Elders Pastoral Holdings Limited v Raptorial Holdings Limited

This case clarified the uncertainty faced by lenders in New Zealand concerning the steps required to accelerate indebtedness on default, when loans are secured by both a mortgage of land and a debenture. The issue focuses on the relationship between:

• section 92 of the Property Law Act 1952, which requires four weeks' notice by a mortgagee prior to exercise of certain rights under a mortgage, and
• section 9 of the Receiverships Act 1993, which provides that section 92 does not apply to the payment of money secured by a debenture.

In the present case, Elders held security under both a mortgage and a debenture. Following Raptorial's default Elders made a demand for payment under both the mortgage and the debenture. Raptorial argued that Elders had failed to comply with section 92, since Raptorial had not been allowed the statutory period of four weeks to remedy the default (as required by section 92). The court noted that a section 92 notice is not required before accelerating a loan secured by a debenture alone. The court then considered the relationship between section 9 of the Receiverships Act and section 92 of the Property Law Act. The court held that a notice under section 92 is not required in the situations contemplated by section 9 of the Receiverships Act, where there is both a mortgage and a debenture securing a loan. Therefore, there is no need to serve Property Law Act notices in such a situation prior to accelerating the debt (although a Property Law Act notice will still be required prior to a sale of the mortgaged property).

Commissioner of Inland Revenue v Agnew

This case, which has been long running, concerns a dispute between the Commissioner of Inland Revenue (a preferential claimant) and the receivers for a secured creditor under a debenture given by a company. The issue was whether the charge secured by the debenture over book debts constituted a fixed or a floating charge. The book debts, uncollected at the time the receivers were appointed, remained the only assets available for distribution. If the charge was a fixed charge then the secured creditor had priority and there was nothing to meet the preferential claims. If it was a floating charge which crystallised only on receivership, the secured creditor was postponed in priority behind the preferential claimant. The High Court had found that the debenture created a fixed charge and this decision was appealed to the Court of Appeal. The Court of Appeal held that the true nature of the arrangement was that the company had been free to deal with the charged book debts. The charge could not therefore be a fixed charge. The question was whether or not the charged book debts were under the control of the secured creditor. The exclusion from the purported fixed charge of the proceeds of book debts merely emphasised the freedom of the company to collect the book debts on its own account. The fact that the company was contractually bound not to dispose of, create, or allow any interest in the uncollected debts did not change the fact that the company was free to deal with them. The Court of Appeal therefore found that the charge was a floating charge.

New Zealand Associated Refrigerated Food Distributors Limited v Pierce

Food Distributors supplied foodstuffs to distributors. CPL, one of these distributors, experienced fluctuating financial circumstances over a period of some years. In August 1998 Food Distributors insisted that a debenture over all of CPL's assets be given to secure CPL's existing debt and any payment for any goods and services supplied in the future. Six months later CPL was placed into liquidation. The liquidator served notice pursuant to section 292 of the Companies Act 1993 to set aside the debenture on the basis that it was a transaction having preferential effect.

For the transaction to be set aside the liquidator had to establish that (a) at the time of entry into the transaction, CPL was insolvent; and (b) the transaction enabled Food Distributors to receive more towards satisfaction of a debt than it would otherwise have received in the liquidation.

The High Court found that CPL was insolvent, but held that:

1. Food Distributors did not receive more towards satisfaction of a debt than it would otherwise have received in the liquidation. For this purpose, the court held that "a debt' can only mean an existing debt. The giving of the debenture therefore did not make Food Distributors any better off in its capacity as an existing creditor. It simply provided a continuity of supply to CPL, therefore enabling CPL to continue to trade; and
   
   
2. Although Food Distributors had insisted on the debenture, it had reasonably believed that the debenture was valid and in return had supplied goods of considerable value to CPL.

Therefore the debenture was valid.

Coffey v Morris

Coffey (C), Morris (M) and Roberts (R) were co-guarantors of an insolvent company. DFC obtained judgment against all three for the sum owed. DFC subsequently entered into deeds of settlement with each of the three co-guarantors. C made a payment to DFC and then sought a contribution from M and R on the basis that he had paid DFC more than his proportionate share of the judgment debt. Both M and R successfully defended C's claim.

The court found that, in respect of the deed of discharge entered into with M, there was no express reservation of either DFC's right to enforce its judgment against the other co-guarantors or of the right of C to seek contribution against M following M's release by DFC. While the court was prepared to imply a term reserving DFC's right to enforce its judgment against the other co-guarantors, it was not prepared to imply a term reserving C's right of contribution. Because M had entered into the discharge prior to the payment by C, C's claim against M failed.

R argued that as the payment made by C to DFC also included liabilities additional to C's liability under the guarantee and because C's discharge did not distinguish between the different liabilities, C's right of contribution was extinguished. This argument was not accepted. Chisholm J, however, found that, after an analysis of the liabilities owed, and the amount paid, by C that C had not paid more that his proportionate share and therefore was not entitled to seek a contribution from R (or indeed M).

© Copyright BGBW 1999