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Ten years on, PPSA practice in New Zealand

04 March 2013

This article first appeared in the March 2013 issue of ALB magazine.

Australia’s Personal Property Securities Act 2009 has now been in force for more than a year.  Australian lawyers, financiers and insolvency practitioners have quickly got up to speed with the Act, but at this early stage there has been very little guidance from the courts as to how the Act should operate.

The Australian Act is very similar to New Zealand’s PPSA, which has now been in play for over a decade.  During that time, common practices have developed in New Zealand for security documentation and registration of financing statements.

Security documentation - financiers

When the New Zealand PPSA arrived, it was not necessary to change security instruments in a wholesale and immediate way.  New forms were introduced slowly, as facilities were refinanced or amended and restated.  The New Zealand PPSA does not regulate the form required to create a security interest (other than the requirement that it be evidenced in writing or by possession).  It regulates the relative priority of security interests.

One of the earliest New Zealand court decisions confirmed that approach by ruling that a pre-PPSA debenture was no narrower in scope than a general security agreement drawn up with the PPSA firmly in mind.1  

For personal property, the old legal classifications of charges, mortgages, etc have all but disappeared.  In their place, lenders will often seek merely a “security interest” on terms that are set out in the particular document.  A financier will take either a general security interest, by a general security agreement (GSA), or a specific security interest, by a specific security agreement (SSA).  Those abbreviations, as with “PMSI” (purchase money security interest), “ROT” (retention of title), “ALLPAAPP” (all present and after-acquired personal property) and others have entered our commercial language. 

Our new forms of security documentation do not generally refer to fixed or floating charges, or to circulating or revolving assets.  In some GSAs, those terms will receive a mention in respect of assets that fall outside the PPSA.  However, they are usually expressed more simply than in old-style debentures.  The clause will provide that in respect of assets not covered by the PPSA, the debtor grants a charge which is of a fixed nature to the extent permissible, and is otherwise floating.  A simple crystallisation clause will follow.

Security documentation – suppliers and lessors

Financial creditors, especially banks, responded well and promptly to the New Zealand PPSA.  Suppliers and lessors, being a larger and more diverse group, have struggled more with the new system. 
In the early years particularly, it was not uncommon for receivers to encounter suppliers of valuable inventory or equipment who were completely unaware of the Act’s existence or requirements, and this is still encountered more frequently than might be hoped. 

Suppliers who retained title often fell at the first hurdle, namely proof of the security agreement.  New Zealand’s statute requires that, where the secured creditor does not have possession, the security interests must be evidenced in writing, and in particular the debtor must sign or otherwise evidence their consent by writing.2   Suppliers who relied on standard retention of title terms included in unsigned terms of trade were left without recourse to their goods, even where they had registered on the PPSR.

The New Zealand PPSA threshold is too high.  Australia has adopted the same rule, but with an important further qualification.3  Section 20 provides that the writing must either be signed by the grantor (note the special definition of “signed”) or:
“Adopted or accepted by the grantor by an act, or omission, that reasonably appears to be done with the intention of adopting or accepting the writing”.
In our view, this development is a very sensible one, which ought to be adopted in New Zealand.

Registration

In New Zealand, registration prior to completion of the security documentation is effective to establish priority, and recently that has been confirmed by the Court of Appeal.   Practice varies between financiers and banks as to whether registration occurs before the loan and security documentation is completed, but invariable practice is to ensure registration has been completed before drawdown. 

Certainly for finance creditors, the starting point is a proper PPSR search.  Prudent searchers will search against the debtor company, against its number and by way of a ‘wild card’ search (e.g. the first few letters of the name).

If a potential GSA creditor discovers an “ALLPAAPP” registration already on the register, or indeed anything broader than a retention of title registration, the proposed new creditor (assuming it is intending to rank above that registration) will seek to have the earlier registration removed or reduced in scope. 

It is not uncommon for suppliers or other holders of specific security interests to incorrectly register by ticking the ALLPAAPP box.  An assurance from that creditor that it does not currently hold a GSA should be of no great comfort to the proposed new GSA creditor.  Because registration can precede the creation of a security interest, that first registered security holder could later obtain a wider security interest, which would then have priority over the second registered GSA, despite being entered into subsequently.

Retention of title suppliers usually register once, rather than in connection with each supply made.  A well advised supplier would therefore describe the collateral in the financing statement in terms broad enough to capture all likely supplies of product.

Crucially, the supplier must also register in such a way as to perfect over proceeds of such supplies.  There is some debate over how that is to be achieved.  Is it enough, as many do, to tick the “ALLPAAP” box, with a further description along the lines of “being proceeds of collateral otherwise described in this financing statement”?  Or must a more focussed attempt be made to identify the particular type of collateral that may comprise the proceeds?

Banks will often register multiple financing statements.  A market practice has developed whereby banks will usually register their general and specific security interests separately.

Complications have arisen for many creditors in dealing with changes of names of debtors.  Adverse priority results can follow if a creditor is aware of a name change, an amalgamation or a transfer of the collateral, but does not update its financing statement within 15 days of becoming aware of that change.

In order to release security interests, it is usual for parties to rely on a deed poll release.  On an entire refinancing, the removal of the financing statement does not tend to be a settlement deliverable.  Rather, the incoming financier will frequently rely on the undertaking to remove the financing statement within a reasonable period.

Where the bank’s facility is to remain in place, but some or all of the debtor’s assets are to be sold, banks would usually resist altering their financing statement in any way.  Instead, where specifically required, they would execute a deed poll release making it clear that the assets in question had been released from the security interest. 

This article was written by Michael Arthur.  He is the co-leader of the firm’s national Restructuring and Insolvency Group.

Footnotes

1     Waller v NZ Bloodstock [2006] 3 NZLR 629 (CA)

2     NZ PPSA s 36

3     Australian PPSA s 20

4     Healy Holmberg v Grant [2012] 3 NZLR 614 

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