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Brief Counsel

The Courts - up close and personal with the PPSA

12 August 2010

The finer detail of the Personal Property Securities Act 1999 (PPSA) continues to be sculpted by the Courts through a series of decisions, at what seems to be an increasing rate.   

This Brief Counsel summarises the key rulings over the last year with, where possible, links to the full judgments.

Introduction

We have collated the key rulings under four themes:

  • transfers of collateral free from security interests

  • priority

  • leases, and

  • new developments as to how the register works.

Transfers of collateral free from security interests

It is a key default rule in the PPSA that a security interest in collateral that is dealt with continues in the collateral, unless the secured party expressly or impliedly authorised the dealing.  There are, however, a number of exceptions to that rule which the Courts have recently explored.

Applying the “ordinary course of business” test

A buyer may take goods free of a security interest if the goods were sold in the seller’s “ordinary course of business”.In New Zealand Associated Refrigerated Food Distributors Ltd v Donley, it was outside the ordinary course of business for a company to supply and trade through a shelf company with the same director.  The company had originally supplied customers directly and received proceeds from the sales, and the shelf company had no other suppliers.  Even if the company legitimately sold goods to the shelf company, this was still a diversion of a substantial part of the company’s business.

In Tubbs v Ruby 2005 Ltd, the High Court found that a sale to a related company which was not to an everyday consumer would ordinarily be outside the “ordinary course of business”.  The Court took the view, however, that this was outweighed by the fact that the parties had consistently entered into such transactions in the past, the volumes sold were not unusual in that context, and full market value was paid at all times.

When has a secured party expressly or impliedly authorised a dealing?

The High Court in Motorworld Ltd (in Liq) v Turners Auctions Ltd found the secured party (a wholesale supplier of vehicles) had authorised the debtor to on-sell cars in a particular manner, preventing the security interest continuing in the cars.  There was no evidence that the secured party intended to restrict the manner in which the cars were sold, nor did the secured party raise any concerns after a representative witnessed how the cars were being sold.

Priority

Is copyright personal property subject to the PPSA?

The High Court in Viacom Global (Netherlands) B.V. v Scene 1 Entertainment Ltd (in Rec) ruled that copyright is personal property subject to the operation of the PPSA.  Receivers appointed by a prior-ranking security-holder did not breach copyright by selling DVDs that formed part of the collateral, even though the lower-ranking secured party held copyright.  If the sale of the DVDs breached a licence agreement between the parties, that would be a contractual matter between Viacom and Scene 1.

Priority of liens

Section 93 of the PPSA gives liens (arising out of materials or services provided in respect of goods) priority over any security interest in the same goods.  The High Court in McKay v Toll Logistics (NZ) Ltd confirmed this priority is only given to common law, statutory or maritime liens.  Contractual liens qualify as security interests and are subject to the priority rules governing security interests.

Leases

When is a lease a security interest?

It is now common knowledge that a lease for a term of more than one year is a security interest under the PPSA.  The District Court in Arcus Springs Ltd v Jeffreys confirmed that a lease for an indefinite term, even if it is terminated before a year passes, also qualifies as a security interest.  What matters is whether a lease has the potential to extend beyond one year.  In this case, the lease was a security interest because the lessee had the power to extend the term of the lease beyond one year.

Requirements for the register

Sustaining a financing statement

In Toyota Finance New Zealand Limited v Christie, the High Court summarised the Court’s approach to an application to maintain a financing statement.  This is an important mechanism for a party seeking to maintain priority over unregistered security interests.  In brief, the Court said that the party seeking to maintain the registration must establish a “seriously arguable” case that a security agreement exists between the parties.

The High Court subsequently confirmed this approach in Daniel Smith Industries Ltd v Cranes International NZ Ltd.  The Court found it unnecessary to consider whether a “seriously arguable case” test is a higher threshold than the “reasonably arguable case” test for maintaining caveats.

Importance of correct registration

The High Court in Rabobank New Zealand Ltd v Stockco Ltd declined to give summary judgment because a registered financing statement was arguably “seriously misleading”.  Stockco registered the financing statement under “AM & MJ Campbell” as partners.  It had not been aware of a formal partnership deed stating “Awapapa Station” as the partnership name.  In the Court’s view, Stockco’s failure to register the correct partnership name would have prevented a “reasonable searcher” from finding any relevant registered financing statements.  The case demonstrates the importance of checking the partnership deed when taking security over a partnership’s assets.  Presumably, the same logic would apply to trusts.

If you would like a summary of all significant PPSA cases in New Zealand since the Act came into force in 2002, or a copy of any cases on the PPSA, please contact Jennifer Tunna.

Our thanks to Janko Marcetic, Law Clerk, for writing this Brief Counsel.  For further information, please contact the lawyers featured.

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