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Brief Counsel

Lessons from the Crafar receivership - Part Three: identifying personal property

17 June 2011

​The Gibson & Stiassny v StockCo & Ors litigation in relation to the Crafar receivership has clarified important aspects of the Personal Property Securities Act 1999 (PPSA).

The procedures seem obvious in the abstract but, as the case demonstrates, can be less obvious on the ground: 

  • check the Personal Property Securities Register (PPSR) before making a large purchase

  • update your PPSR registration immediately you have reason to suspect your secured property may not be in your debtor’s possession, and

  • clearly identify any property to be bought, sold or charged.

This is the third of three Brief Counsels exploring each of these take-outs.

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A Crafar group company, Nugen Farms Limited, leased around 5,600 cows from StockCo Limited, a rural financier.  Of those cows, 4,000 heifers had been purchased by StockCo from another Crafar company, Plateau Farms Limited.  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. 

At the time the receivers were appointed, 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. 

The main issues were:

  • whether the heifers Plateau sold to 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 (Chapman Tripp commentary available here)
  • 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 (Chapman Tripp commentary available here), and
  • 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.

Problems with livestock identification

There were a number of difficulties in identifying the livestock claimed by StockCo as much of it had been born into the wider Crafar herd and had never been tagged.  The evidence at trial was that Allan Crafar managed the Crafar companies’ livestock (including Nugen’s) effectively as a single herd.

The confusion was not helped by attempts to classify cattle after the receivers were appointed.  StockCo had sought to tag some livestock, and the receivers responded by removing some animals from Crafar land.  They also got court orders preventing StockCo from entering the land and ‘interfering’ with stock, arguing that StockCo had attempted to cherry-pick the best heifers from the broader herd.  It took several court applications and negotiations before the parties agreed to interim arrangements pending the outcome of the case.

One of the main issues related to 648 cows that were owned by StockCo and had been leased to Nugen, but had since become unidentifiable due to intermingling with other livestock on Crafar group land; livestock to which the banks had priority.

The other major issue concerned identifying 750 cows originally owned by other Crafar companies, which had initially been transferred to Nugen from other Crafar interests without separation from the main herd, and were therefore difficult to identify as the subject of a subsequent sale and leaseback arrangement with StockCo.

The 648 intermingled cows

The PPSA has special rules relating to comingled or processed goods, but these are only applicable where the products become part of a single product or mass (the PPSA example is sugar and cream being mixed to become ice-cream). 

The Judge relied on old English law that states where goods owned by two people are mixed-up by a third party (for whom neither owner is responsible) the owners take a proportionate share of the resulting mix.  However, if one of the owners is more to blame than the other for the mix-up, there is a presumption in favour of the innocent owner in the event of any shortfall.

The Judge found that it was Nugen which was primarily obliged to keep the livestock separate, and while neither StockCo nor the banks were entirely innocent in the mix-up as both could have seen to identification at various points, their responsibility was in roughly equal proportions. 

Accordingly, StockCo and the receivers of the group could take a share of the herd in proportion to their respective shares of the property.1

The 750 unascertained cows

The major identification debate related to the sale and leaseback between StockCo and Nugen of 750 cows that had originally been owned by other Crafar companies before being essentially gifted to Nugen in consideration of “many years of hard work” by Robert Crafar, the principal shareholder of Nugen. 

The Judge accepted the receivers’ evidence that the 750 cows had never been distinguished from the rest of the Crafar herd.  Thus, Nugen could never have obtained good title from the other Crafar companies, and StockCo could never have obtained good title from Nugen in order to leaseback this livestock.  

However, the Judge also accepted StockCo’s submission that if title had passed, the lease had identified these 750 animals with the specificity required by the PPSA, because Allan Crafar could, if called upon, identify the “750 mixed aged cows” referred to in the lease agreement.2  

Section 18 of the Sale of Goods Act 1908 provides that goods must be ascertained before ownership can pass under a contract of sale.  But the Judge considered the PPSA identification requirements were less rigorous than those in the Sale of Goods Act on the basis that:

  • section 36 of the PPSA merely requires the description of the item by ‘kind’, and
  • the scheme of the PPSA allows for further information to be obtained from a secured party.3  

We think the Judge’s view on this point is questionable.  While section 36 permits the description of collateral by kind, it must also be an adequate description.  The Judge’s interpretation could create problems in practice because it provides no fixed and objective reference point, instead relying on the willing assistance of someone whose memory and motivations may change over time. 

It would, therefore, be unwise for any secured party to rely on the prospect of supplementing their security agreement with the knowledge of individuals as a means of satisfying the requirements of section 36.

Our thanks to Richard May, Solicitor, for writing this Brief Counsel.

For further information, please contact the lawyers featured.

Footnotes

  1. It appears that the parties agreed their pro rata proportions by reference to the value of secured property claimed by each, rather than by the amount of indebtedness; this approach seems appropriate in cases where one secured party claims as owner to the collateral.
  2. Under s36(1)(b)(i) a security agreement is not enforceable against third parties (anyone other than the debtor) unless it is in writing, and contains a description of the collateral that is adequate to enable its identification; a receiver is a third party for s36 purposes, because receivers are appointed by a secured party, but a liquidator is not a third party, Dunphy v Sleepyhead [2007] NZCA 241.
  3. PPSA s 177 note, however, that in this case Alan Crafar was not one of (or related to) the secured parties.

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