Registration is everything - Personal Property Securities Act 1999 (PPSA)
Friday March 1, 2013
The receivership of Mainzeal has once again highlighted the importance of contractors and suppliers that lease machinery and/or supply materials to construction companies, registering financing statements under the Personal Property Security Act to protect their interests in the personal property until the property is paid for or returned to the lessor.
What is the PPSA and PPSR?
The PPSA is the Personal Property Security Act 1999 which established a regime for the registration of a party's interest in personal property on the PPSR (the Personal Property Security Register). Simply put the PPSA allows the registration of a "security interest" (essentially a mortgage) over personal property.
What is personal property?
Personal Property is defined in the Act as including a chattel paper, documents of title, goods, intangibles, investment securities, money, and negotiable instruments
Why is registration so important?
Registration under the PPSA is important if you supply goods to third parties on credit or lease equipment to a party for more than a year.
Under the Act an interest in the personal property is created as soon as value is given by the secured party (in this case you if you are the supplier or lessor) and when the debtor has rights in the personal property. The debtor often obtains these rights when they obtain possession of the personal property. The creation of this security interest in personal property is called "attachment" of a security interest in the Act.
Although with the attachment of a security interest you are able to enforce your interest (as unpaid supplier or as lessor/owner) against the debtor if your interest is not "perfected" (that means registered on the PPSR) your interest is not enforceable against third parties.
This situation commonly occurs where a company goes into liquidation or receivership and the bank has a general security registered over the assets of the company. If you have not registered an interest on the PPSR, and the company then goes into receivership or liquidation, items supplied or leased by you may be sold by the liquidator or receiver, and the proceeds used to pay secured creditors.
But I have a retention of title clause / Romalpa clause
You may however have a contract with the debtor which may include terms and conditions that attempt to retain title in goods supplied/leased until they are paid for in full or returned to you. Where the goods have been incorporated into real estate (say windows into a building) or an interest has not been registered on the PPSR, then this attempt to retain title is effectively meaningless, and will be trumped by a registered secured creditors' rights.
The likely outcome from the Mainzeal receivership is that building materials and goods found onsite and not yet paid for by Mainzeal and which do not have security interests registered over them will be sold to other parties and the proceeds pocketed by the receiver's secured creditor.
Two important decisions showing how the regime works are set out in brief below:
Graham & Gibson & Ors v Portacom New Zealand Limited
The Portacom case, decided in 2004, is the seminal PPSA case. The background is that Portacom leased five buildings to NDG between April 1998 and September 2002. NDG never owned the buildings leased by Portacom to NDG but had day to day possession of them on NDG's site. HSBC, NDG's bank, had a registered security interest over all the assets of NDG. The Court held that because the PPSA includes an interest created or provided for by a lease for a term of more than one year, NDG had an interest in the leased buildings that could then be secured or charged to HSBC through the debenture. Accordingly the Court allowed, in this case, the receivers of NDG appointed by HSBC to take Portacom's buildings and sell them and the moneys be paid to the HSBC.
Harvestpro Logging Limited v Cordyline Holdings Limited
Another company ForestOne entered into an agreement for sale and purchase of logging trucks with Cordyline whereby ForestOne would purchase the trucks for $1.4 million. ForestOne took possession of the trucks immediately and defaulted on paying the purchase price to Cordyline. Unknown to Cordyline the seller of the vehicles Harvestpro had a general security agreement over the assets of ForestOne. Harvetpro took possession of the vehicles under the registered security interest. Subsequently ForestOne retook possession of the trucks and sold them. Harvestpro sued Cordyline for unlawfully taking the trucks and selling them contrary to Harvestpro's security interest. The court whilst having sympathy for Cordyline found in favour of Harvestpro.
Cordyline effectively lost $1.4million for giving possession of the trucks early to ForestOne and not registering Cordyline's interest as unpaid vendor of the trucks.
Points to note:
- If you supply goods on credit or lease equipment for more than a year you should update your terms of trade to include the ability to register a security interest in those goods or that equipment on the PPSR
- If property is sold to another party retaining possession of the property until payment has been made in full, it is always preferable (this is not always commercially possible), otherwise it is important to register the vendor's interests on the PPSR.
- When property is being sold or leased, a search of the other party on the PPSR is always recommended to see whether that property is already secured.
- Retention of title clauses in supply agreements for terms and conditions are not enforceable against competing secured parties if they are not registered under the PPSR. However, a supplier should utilise clauses called "Purchase Money Security Interest" (PMSI) which will have priority in relation to any parties such as banks who may hold a general security agreement.
- If you are a supplier, it is vital to ensure that your terms of trade or supply agreements allow for the registration of PPSR clauses and then that you actually register those security interests.
- Financing statements must be renewed every five years.
Written by Ben Eagleson, Senior Solicitor, Holland Beckett