Big receiverships often test legal boundaries, and the Crafar group receivership is no exception. Gibson & Stiassny v StockCo & Ors1 is the longest decision to date on the Personal Property Securities Act 1999 (PPSA).
Although the facts are complex, the practical take-outs are fairly simple:
check the Personal Property Securities Register (PPSR) before making large purchases
update your PPSA registration immediately you have any reason to believe that your secured property might not be in the debtor’s possession, and
clearly identify any property to be bought, sold or charged.
This is the first of a series of three Brief Counsels, each of which will explore one of these lessons in the context of the case.
A Crafar group company, Nugen Farms Limited (Nugen), leased around 5,600 cows from StockCo Limited (StockCo), a rural financier. Of those cows, 4,000 heifers had been purchased by StockCo from another Crafar company, Plateau Farms Limited (Plateau). Plateau, in common with other Crafar group companies, had granted general security over all of its assets to the banks who funded the Crafar group business and who ultimately appointed the receivers (the banks).
At the time the receivers were appointed all the livestock leased to Nugen was being grazed on land owned by other Crafar-related companies, under grazing arrangements between Nugen and those other companies. None of the livestock was on Nugen land.
The main issues were:
Brief Counsel 1 – whether the heifers Plateau sold StockCo were sold in the ordinary course of Plateau’s business, in which case StockCo would take the heifers free of the banks’ security interest
Brief Counsel 2 – how to deal with the problem that certain cows claimed by StockCo could not be clearly identified as having been sold to StockCo by Plateau due to the fact that they had never been distinguished from the main Crafar group herd, and
Brief Counsel 3 – how to deal with the fact that under the PPSA the livestock could be considered to be the assets of both Nugen and of the companies on whose land the cows were being grazed.
The ordinary course of business rule
Under section 53 of the PPSA, a purchaser of goods from a company takes those goods free of any security interest when the goods are sold in the ordinary course of the company’s business, and the purchaser is not aware that the sale is in breach of a security agreement.
This is one of a number of provisions in the PPSA designed to facilitate ordinary business and to preserve the utility of ‘floating’ security, which (subject to the precise terms of the security agreement) sees the security interest in inventory attaching to and detaching from goods as they pass in and out of the company’s possession during the normal course of its business.
The rule has expected consequences where the business of the vendor is well understood by all parties. If an appliance dealer sells a fridge (even at a discount price) it makes sense that the customer takes the fridge free of any security held by the dealer’s bank, even where the security extends to all the dealer’s inventory. These simple cases are fair to all participants: the customer has peace of mind, the dealer can conduct its core business without extra paperwork, and the bank is still able to predict the value of its general security position.
But things become less clear cut if our appliance dealer starts a sideline, say selling-down its old computer system to free up funds. In this case the customer and the bank might have different expectations about whether a sale was within the vendor’s ordinary course of business.
Ascertaining a seller’s ordinary course of business is a factual enquiry as to the seller’s business at the time of the sale. In Gibson v StockCo, White J followed prior New Zealand cases in holding that the test is wholly objective: that it asks what the seller’s business actually was at the time of sale, not what the customer or the lender thought. Determining whether a transaction was within the seller’s ordinary business requires reference to all the factual circumstances, including whether the transaction was of an isolated type, and whether the sale was part of a wider transaction that was out of the ordinary.
The heifers sold by Plateau to StockCo
In Gibson v StockCo it was not disputed that Plateau’s business included buying and selling livestock. The Court acknowledged that “[a]t one level and without considering all the circumstances of the transaction the answer could be in the affirmative in that a livestock sale, apparently at arm’s-length and for fair market value, was in the ordinary course of business of Plateau”.
However, on closer analysis, the Court considered that the sale of the 4,000 heifers to StockCo was exceptional for a variety of reasons:
there was an absence of direct economic benefit to Plateau, and the price was discounted
the sale was part of a wider transaction to reformulate the group’s finances by enabling Plateau urgently to obtain funds to lend, unsecured and undocumented, to Nugen (the making of which loan caused Plateau to breach its banking covenants)
Plateau sold all of its ‘rising year one’ heifers, something that had not taken place before, and
the process of negotiation was out of the ordinary, including involvement from Plateau’s and StockCo’s respective principal directors.
Did the banks expressly or impliedly authorise the transaction?
Had the banks expressly or impliedly consented to the sale, their security interest in the heifers would have ceased.2 But the Court found that they had not authorised the sale, primarily because there was no evidence that they were aware of it or of its purpose.
Had the sale been in the ordinary course of Plateau’s business, the banks’ security agreement would have automatically released the heifers. But the Court found that the sale was outside the ordinary course of business for the reasons set out above.
A prior case had held that authorisation could be inferred where the lender had allowed previous transactions of the same type,3 but here there were no prior similar transactions.
Also, witnesses for the Crafar group acknowledged that they would not have expected the banks to authorise the sale given that the proceeds were not to be used to reduce debt but to fund further property purchases.
Lessons for purchasers
The Judge underlined that purchasers in large transactions should expect to look into the existence of security interests. If the sales are outside the debtor/vendor’s ordinary business, a purchaser’s claim may be inferior to that of an existing secured party of the debtor, despite the payment of fair value.
If in doubt, purchasers should check the PPSR. StockCo relied on Alan Crafar’s assurance that the sale of the heifers was in the ordinary course of Plateau’s business, but clearly that was not enough in this case. In a non-retail situation where the transaction is of sufficiently high value and there is any concern as to the applicability of section 53, the purchaser can make enquiries and seek releases or confirmations from any secured party who is registered and whose security interest extends to the asset in question.
Lessons for secured lenders
Secured lenders need to be aware that a debtor’s ordinary business may change without the lender’s knowledge and those changes may alter how the PPSA rules apply. Security agreements may impose requirements on debtors that mitigate the risk of the debtor’s business changing without the lender’s knowledge. However, these provide practical protection only, and secured lenders should make sure that they are up to date with the actual nature of their debtor’s business, especially as it might relate to the disposal of significant charged assets.