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Personal Property Securities Act

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Among various high profile company collapses in recent weeks, Auckland design store Eon's receivership caught a few designers by surprise. Having spent less than a year in their new Britomart premises, all of Eon's stock was being sold to repay a single creditor. There were angry scenes when unpaid suppliers arrived to witness the discounted sale of stock.  Eon's main creditor, however, had a right to sell almost all of Eon's assets - and keep the proceeds - because of its registered position under the Personal Property Securities Act 1999 ("PPSA").

In a declining market, it is critically important that suppliers protect their interests when extending credit to customers/retailers.  This can be achieved through a combination of appropriate supply contracts, obtaining adequate security (which may include a personal guarantee and/or a security over property) and ensuring that any property securities are appropriately registered to ensure the security ranks higher than interests held by other suppliers/creditors.

Introduction to the PPSA


Most suppliers insist on taking some form of security when giving credit, often by retaining title to the goods supplied until full payment is received.  When this occurs, the supply arrangements usually give rise to a "security interest" as governed by the PPSA.  The PPSA provides a system for registering security interests in goods/assets, to provide adequate security to creditors (notably, priority over subsequent or unregistered security interests granted by the same debtor).

As with the previous company securities laws, the consequences of not registering a security interest on the Personal Properties Securities Register (see www.ppsr.govt.nz) can be severe and can effectively erode or eliminate any realistic prospect of recovering against an insolvent debtor.  A major difference under the PPSA regime is that the categories of "securities interests" covered is now broader, and includes retention-of-title supply arrangements, commercial consignments and various other specific types of supply arrangements.

Security Interest


Security can be given (or reserved) over most types of tangible or intangible property, including bank deposits, consumer goods, equipment, inventory and stock.   Security provided over real estate (e.g. mortgage of land) is not governed by the PPSA.  A debtor may grant a supplier/lender a security interest over all the debtor's current goods and property, property that is acquired later, and even the proceeds from the sale of such goods and personal property.

A registered security interest places a supplier in the position of a secured creditor, in relation to the specific goods/items covered by the security.  In contrast, unsecured suppliers only have a right to be paid from the debtor's general property, if there is any left after an insolvency.

Terms of Supply


To obtain a registrable security interest, there needs to be an agreement between the parties creating a "security interest" by consent.  Any agreement where the supplier retains ownership of goods supplied pending payment will constitute a registrable security interest.  Depending upon the supply circumstances, the supplier's contractual terms generally should record the specific details of the security interest, any ancillary rights (such as full entry rights to specific premises to entitle the supplier to seize the secured property, in the event of non-payment) and may by contract exclude various mechanical PPSA requirements where possible.

An oral security agreement will be enforceable against the debtor.  However, a security agreement is only enforceable against a 3rd party if the debtor signs a written agreement with the terms above.  A written contract is therefore essential.

Registration


Suppliers who retain title (or otherwise retain a "security interest") in the course of supply must register their interest on the PPSR, or risk losing the ability to enforce that interest against a third party creditor who is secured (ie. Registered).  It is not uncommon for debtors to grant security interests over property in favour of multiple parties.  The PPSA sets out a comprehensive regime for determining the relative priority of competing creditors.  Subject to supplier "super-priority" (discussed below), the PPSA generally adopts a first-to-register regime.

Suppliers often extend credit where there is an ongoing course of supply.  One registration is sufficient to cover the ongoing supply, provided that the secured property as described in the PPSR registration instrument is described appropriately to cover all subsequent supply types between the parties.  Proper description of the secured property (known as the "collateral") is very important. 

The registration fee of $5 is very reasonable, although care needs to be taken in the registration process and also in maintaining the security party Pin and related security information for future reference/use.  PPSR registrations must be renewed every 5 years, and internal reminders should be set to ensure this occurs.

Super Priority


Suppliers frequently take a security interest (normally, retained ownership) in the specific goods supplied. If registered, then this security interest has super priority over all other security interests (i.e. first-ranking) in those same goods. The purpose of this super-priority is to recognise that lenders often take all-assets securities which are duly registered, but subsequent suppliers should not rank second in priority for the specific goods they supply in circumstances where, if it were not for the retention of ownership, the supply would not otherwise have occurred except on a cash basis or similar. 

This super-priority is therefore of high importance to suppliers where the debtor party has (or may have) granted other security interests over property to third parties.  To obtain super-priority, a supplier needs to register the security interest on the PPSR either before the supply occurs, or within 10 days of the supply.  For ongoing supplies, the timing of the initial registration is key to achieving super-priority.

Tracing Proceeds


A debtor may on-sell the relevant property during the debtor's ordinary course of business, as consumer goods to customers, before the supplier has a chance to enforce its security interest and recover the relevant property.  This eventuality is also covered by the PPSA regime.

The secured property, if correctly described, can include the proceeds from the sale of secured goods or inventory stock. The supplier may be able to trace these proceeds and recover monies or goods obtained by the debtor when it sold the secured property. Tracing may even retrieve proceeds that have been mixed up or merged with other monies (in a bank account, for instance). This can be difficult where the bank holds a security interest in the account, or many transactions have since been processed through the account.  Recovery will also be difficult where proceeds have been paid into an overdrawn account.  For these reasons, there may be circumstances where a substantial supplier insists upon the debtor establishing/using a dedicated bank account.

Personal Guarantees


The debtor can be an individual or, where contracting with a corporate entity, the registered company. The shareholders or directors of a company are not usually liable in the event the company goes into liquidation (unless personal liability for reckless trading etc can be proven). Personal guarantees from the key debtor personnel/shareholders are therefore a valuable mechanism, and recommended for suppliers of goods on credit. A personal guarantee form can be included in the suppliers usual contract terms, or separately as a "credit application" or similar.

Summary


The PPSA laws can lead to outcomes which could be described as inequitable or unfair, because parties failing to register their security interests can lose ownership of goods (including circumstances where the goods were only leased, and there was never any intention to part with ownership.  The PPSA regime is, however, relatively ‘black and white' - failure to register on the PPSR where a registration opportunity exists will leave a supplier exposed to risk of loss, despite what the contract says.

A carefully prepared supply contract, together with appropriate security interests and PPSR registration, will leave suppliers in a higher-ranking position should a debtor fall into difficulties, and will confer super-priority for any goods from that supplier themselves.

Disclaimer


This Background Paper by its nature cannot be comprehensive, cannot be relied on by clients as advice, and is provided to assist clients to identify legal issues on which they should seek legal advice. Please consult the professional staff of Clendons for advice specific to your situation.

James Carnie
Principal
Clendons
PO Box 1305
Auckland
New Zealand
Phone:   +64 9 306 8000
DDI:      +64 9 306 8002
Fax:       +64 9 306 8009
Email:    james.carnie@clendons.co.nz