Some Personal Property Securities Act Issues
The Personal Property Securities Act 1999 (PPSA) is one of the most significant pieces of commercial legislation ever enacted in New Zealand. When it comes into force (probably later this year) the Act will alter the existing law on securities. The existing jumble of rules and regulations relating to the taking of security when credit is granted (A.K.A. "the quagmire") has long been considered unsatisfactory and will finally be replaced.
The main thrust of the Act is to simplify the procedures for registering and searching securities. The PPSA will (finally) create one electronic register. It will do away with, among other things, chattels security registration at the High Court, registration of motor vehicle securities on the Motor Vehicle Securities Register, and registration of floating charges at the Companies Office. Goods sold under hire purchase will now also be subject to the same rules relating to registration as other types of security. Romalpa (retention of title) clauses will also be substantially effected.
The Personal Property Securities Register (PPSR) site is at www.ppsr.co.nz and creditors should subscribe to the electronic newsletter available from that site to keep updated on when the register will become operational. Creditors and others will be able to search the register via the Internet. Registration of security interests will also be possible via the Internet. Advances in technology mean that this type of registration has never been more practical, more feasible, and cheaper. The fees for registration are $5 and for searching $1.50.
Once the Act comes into force creditors will have a six-month period to register their existing securities including securities registered on the Motor Vehicle Securities Register. During the six month period both the new law and the existing law will be in effect. There will be no charge for registering pre-existing securities.
The two key concepts contained in the Act are attachment and perfection. Attachment is the creation of a security interest, generally by signing a document. Perfection generally means registration (though it can mean taking possession of the collateral). An attached but unperfected (unregistered) security interest is still binding between the creditor and debtor to the security and those claiming under the debtor. This means judgment creditors, liquidators and official assignees in bankruptcy, which seems to run contrary to the idea that the register is everything. (An exception is made for judgment creditors who use a distress warrant to seize goods which have an unregistered security. They have priority ahead of the secured creditor.)
The unregistered interest comes behind the rights of a buyer or a lessee without notice and behind the interests of a latter registered security holder. This point is very important and should mean that financiers, in particular, who are thinking of not registering, should think again and register their security. For example, John purchases a car on HP. The HP is financed by Fastcar Loans, which does not register the security agreement. A few days latter John, in need of cash goes to Easy-Peasy Loans and borrows cash on the security of the car. Easy-Peasy loans register their interest and therefore have a higher priority than Fastcar Loans.
Registration is not compulsory. In practice we would hope that most creditors will register whether they have to or not, because of the obvious benefits in doing so.
Even if the interest is registered there are circumstances under which good title passes to a third party.
1. Purchase from a seller in the ordinary course of a seller’s business. For example if you buy a car from a car dealer you don’t have to check the register.
2. Purchase of consumer goods worth less than $2000 at the time the security interest is registered.
Ordinary course of business has in other jurisdictions been interpreted widely. For example a Canadian company that hired and leased cranes but occasionally sold them was held to be in the business of selling cranes despite the fact that they had only sold one crane in the last year.
The fact that good title is passed to subsequent purchasers of consumer goods worth less than $2000 at the time the security is registered has caused much gnashing of teeth at seminars we have run over the last year. The purpose of the so-called garage sale clause is that people don’t have to search the register for every last garage sale purchase. The intent of the clause has merit. A further uncertainty is created by this clause if the secured good are composite goods. For example, take a computer package that is made up of lots of individual easily separable components such as hard drives, cd-writers and printers. It seems to us that it is the value of the individual comments at the time the security is taken that is important. This is even if a security was registered over the computer package and the package was worth over $2000 at the time the security was registered. The security interest holder is unlikely to be able to recover the cd-writer if it is sold for $200 to a purchaser who is unaware of the interest.
Trade creditors will now have to register their retention of clauses (now classed as a purchase money security interests "PMSI"). However, they also gain new benefits. At the moment, if the goods covered by their clause are mixed with other goods or on-sold the creditor is generally out of luck. Under the PPSA their position is strengthened.
In spite of a few problems and some uncertainties the PPSA is, overall, a very good thing it will change, and potentially vastly improve, life for creditors in New Zealand.
Godfrey Livingstone and Peter Hattaway.