An effective security interest relies on a valid financing statement registered on the Personal Property Securities Register (PPSR).
Defects in the financing statement could result in a secured party losing out to other creditors. A recent case is a reminder of the need for creditors to take care with financing statements.
Polymers International Limited (Polymers) supplied product on credit to Interworld Plastics N Z Limited (Interworld). As security for payment, Interworld granted a security interest to Polymers, which registered a financing statement on the PPSR.
There were three difficulties with the financing statement:
- the failure to leave a gap between the “N” and the “Z” in Interworld’s name
- the omission of Interworld’s unique incorporation number, and
- the failure to classify Interworld as a “company”.
Liquidators were appointed to Interworld, which owed Polymers more than $750,000. The liquidators did not recognise Polymers as a secured creditor and Polymers applied to the Court for a declaration that its financing statement was valid.
Financing statement seriously misleading
The Court found that Polymers’ financing statement was not valid. It decided not to use the “reasonable searcher” concept applied by the Ontario courts in deciding whether the errors were seriously misleading.
Instead, it asked whether an error would prevent a registration being disclosed by a properly formatted search in the relevant searchable field.
Applying this test, it found that the running together of the N and the Z in Interworld’s name did not create a problem because a search for debtor names in the PPSR automatically excludes all spaces and abbreviations in “NZ”, so the gap would have been removed anyway in the search process.
But there is an express requirement to register a company’s number on the PPSR so that a search using the number as a reference (or a search through the Companies Office website) will reveal the statement against the debtor company.
And, had Interworld been classified as a company, this omission would not have occurred as the PPSR website would have required the correct incorporation number to be registered.
If whoever filled out the financing statement had indicated that the debtor was a company, the PPSR website would have prompted the person to add the company number. The PPSR does not permit a creditor to register a company name that is inconsistent with the company number.
Chapman Tripp comment
It is not clear, from the Court’s decision, why the issues with Polymers’ financing statement needed to be resolved. The decision records that the liquidators issued a report in which they “did not recognise Polymers as a secured creditor”, but the lack of a valid registration does not invalidate the security itself. An unregistered or unperfected security interest is valid against a liquidator. Registration affects priority, not validity.
The validity of a financing statement in inventory or accounts receivable would, however, be relevant to the distributions made by liquidators to preferential creditors. The proceeds of inventory (and accounts receivable) must be applied first to preferential creditors, unless a secured party holds a PMSI perfected in accordance with section 74 of the PPSA.
This case is a reminder to creditors to check carefully the data contained in new and existing financing statements. The onus is on a creditor to make sure its financing statement is correct.