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Brief Counsel

Entitlement to interest under the standard NZBA Deed of Priority

11 March 2010

The High Court has recently clarified the meaning of the interest provisions in the New Zealand Bankers’ Association (NZBA) standard form Deed of Priority.  The provisions are important because they provide for the extent to which each secured party is entitled to claim interest in priority to other secured creditors.

A more recent version of the Deed has amended the interest provisions, but not in a way that necessarily overrides the Court’s ruling.  Also, the version of the Deed relevant to the High Court ruling is in common use.  The decision has been appealed but, if upheld, will be relevant in future disputes. 

The context

KC Securities Limited (KC) and Belgrave Finance Limited (in receivership) (Belgrave) had both lent funds to a property development company, Aspiring Custodians Limited (Aspiring) and, as partial security, took mortgages over land owned by the borrower.  As the First Secured Party under the Deed, KC was entitled to claim interest for an Interest Period of 24 months in addition to its First Secured Party Amount.  Belgrave, as Second Secured Party, was entitled to any surplus of realisations of the land following payment to KC of its First Secured Party Priority Amount.

The borrower defaulted on its loan obligations and KC issued a notice under the Property Law Act 1952.  KC later appointed receivers over Aspiring who entered into an agreement for sale and purchase of the relevant land.  KC then adopted the agreement pursuant to section 179 of the Property Law Act 2007, and settled the sale. 

KC retained the full proceeds of sale, which it contended it was entitled to do pursuant to the Deed of Priority.  Belgrave’s Receivers made demand on KC for approximately $200,000 of the sale proceeds, on the basis that KC’s calculation of interest under the Deed of Priority was incorrect.

Under the NZBA Deed of Priority, the total priority sum is made up of components, including the relevant “Secured Party Amount”, which is a sum specified in the deed, and an amount designated as “Interest”, which is stated by way of a formula.  The dispute concerned that “Interest” formula.

For Belgrave’s Receivers, it was argued that KC was entitled to interest in fact calculated as accruing from the Enforcement Date to the date the sale settled (an 8 month period in this case).  KC argued that it was entitled to interest for an entire, but notional, period of 24 months (the specified “Interest Period”), regardless of when the Enforcement Date occurred or whether this interest had actually accrued.  It argued that any other meaning was uncommercial, because it could not then recover interest for the period between the default and the Enforcement Date (the expiry of the PLA notice in this case).

The decision

Associate Judge Bell preferred the Receivers’ interpretation, noting that usual commercial practice was to negotiate a specified "Secured Party Amount" that will be more than the amount of anticipated advances.  He recognised that KC was effectively trying to make up for the shortfall in the specified amount it had negotiated by using the interest provisions.  The Associate Judge also rejected KC’s submission that the Court should apply a “purposive interpretation” where the parties’ intentions are taken into account; he thought this approach was inappropriate where a standard form contract was being considered.

KC has appealed against the decision.

Lessons for the future

As noted in the Belgrave judgment, the NZBA Deed of Priority was, prior to the Court’s decision, amended so that it no longer refers to interest “commencing on the Enforcement Date”.  But the Court’s decision was not based solely on those words.  The clause in question goes on to explain how the interest amount is to be calculated.  In our view, while the starting date may now have changed, the NZBA deed still requires an actual calculation of interest.  A lender is not protected for a notional amount calculated by multiplying the daily interest charge by the specified interest period.  Secured parties will not be entitled to claim interest regardless of whether it has accrued.  The Court’s decision will remain persuasive in interpreting the current deed.

Regardless of which version of the Deed is used, lenders ought to ensure, insofar as is commercially viable, that there is sufficient headroom built into their specified “Secured Party Amount” to cover interest.  Pending any further iteration of the standard form document, lenders ought also to take care to ensure that the wording of any priority agreement is clear.  

Earlier Chapman Tripp commentary on the Deed

The Belgrave case is not the only recent judgment concerning the NZBA Deed of Priority.  In our recent Brief Counsel, we reported last year on two cases which expressed competing views on the meaning of “Enforcement Date” in the Deed. 

For further information on these judgments or other matters related to the NZBA Deed, please contact the lawyers featured.

Contacts