New Zealand Credit Law Bulletin - Vol 7, No 5, July 2007

A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe send a blank email to: nz-bulletin-join@mailman.hattaways.com

Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.

In this issue:

Court of Appeal on PPSA - is an unsigned security agreement valid against liquidators?
Creditor succeeds, but a lesson to others about the need to get agreements signed
How do you enforce an NZ judgment in Australia?
Drama as the six-year deadline for registering an overseas judgment looms
Supreme Court on the right of MSD to recover overpaid benefits
A win for commonsense (as the debtor attempts to appeal a 5th time)
Registration of financial service providers
No bankrupts need apply
New disputes resolution process coming for the financial sector
Decisions to be binding on lenders but not on borrowers
Licensing for Non-Bank Deposit Takers (NBDTs)
More regulation for financiers

1. Court of Appeal on PPSA - is an unsigned security agreement valid against liquidators?

Dunphy and anor v Sleepyhead Manufacturing Company Limited [2007] NZCA 241 (14 June 2007)

Sleepyhead Manufacturing Company Ltd supplied beds to King Robb Ltd. Sleepyhead's terms were that it retained title until paid, and that it had a security interest in the goods in terms of the PPSA. The terms were set out in their invoices.

King Robb never signed the standard security agreement provided to it by Sleepyhead. Sleepyhead did, however, register a financing statement on the Personal Property Securities Register.

King Robb went into liquidation. At the time, there was $22,979 worth of Sleepyhead stock in its possession which hadn't been paid for. Sleepyhead asked the liquidators, Dunphy and Shephard, for its goods back. The liquidators refused to give it back, and instead, sold it.

Under section 36(1) of the PPSA, to be enforceable against a "third party" Sleepyhead's security agreement had to be in Sleepyhead's possession or "signed, or ... assented to by letter, telegram, cable, telex message, facsimile, electronic mail, or other similar means of communication". The liquidators said they were "a third party". Sleepyhead said they weren't.

After liquidating all the assets of the business, the liquidators paid out the Bank of New Zealand, which had a general security over the assets of King Robb. Because the security agreement wasn't signed, Sleepyhead's security wasn't enforceable against the BNZ, which was definitely a third party in terms of s 36(1). However, in this case, even after BNZ was paid, there was money left over. However, the liquidators applied the remaining $100,000 to "paying preferential creditors, legal fees and [their] own fees".

Sleepyhead successfully sued for conversion (wrongful taking of its goods) in the High Court. The liquidators took the matter to the Court of Appeal.

The Court of Appeal held that the liquidators were not liable for conversion of the goods. They would have been liable for conversion, had it not been for the BNZ's security. The BNZ did not appoint a receiver, but instead left the liquidators to sell the assets over which the bank had security and pay the bank what it was owed. The Court said that this made the liquidators agents of the BNZ. Because the BNZ had priority over the goods in question, ahead of Sleepyhead, this gave the liquidators the right to reject Sleepyhead's claim for them to return the goods.

However, once the goods were sold and the BNZ paid, the liquidators had an obligation to account to Sleepyhead for the proceeds of the sale of the goods. The Court of Appeal therefore found, for slightly different reasons from those of the High Court Judge, that summary judgment was properly entered in the High Court against the liquidators for $26,225 plus interest.

It is important that trade creditors understand that in recovering some money despite being behind the general security of the bank, Sleepyhead was extremely fortunate. In many - perhaps most - similar cases, a trade creditor which registers a security which the debtor has not signed is likely to receive nothing.

2. How do you enforce an NZ judgment in Australia?

Ellis v. Dariush-Far [2007] QSC 142 (13 June 2007)

First Foods Limited obtained judgment against Alexander Dariush-Far for $NZ154,639.93 in the Christchurch District Court on 4 April 2001. The company changed its name on 22 April 2003 to FFO Limited. Geoffrey Ellis was the sole director. FFO was wound up in January 2005. Ellis then found that Dariush-Far was living on the Gold Coast, in Queensland. FFO was restored to the Companies Register on 9 November 2006. The company assigned the judgment debt to Ellis by a deed of assignment dated 19 January 2007.

Ellis applied to the Supreme Court of Queensland under the Australian Foreign Judgments Act 1991 to register and enforce the New Zealand judgment in his own name. Under the Act, a foreign judgment can be registered and enforced as if it were a judgment of the local Australian court. The judgment creditor must apply to the appropriate court within 6 years after the date of the judgment.

Dariush-Far argued that that the application was out of time. The application date in the Supreme Court of Queensland, 13 March 2007, was within the six years. However, at that date a further procedural step under rule 568 of the New Zealand District Court Rules 1992 had to be carried out before the debt could be enforced. This required service of documents relating to the assignment on the debtor. The Christchurch District Court shortened the length of time for this process to allow Ellis to squeak in ahead of the six year anniversary. However, the documents couldn't be served until the day after the six years had passed. Only from that point was the New Zealand judgment enforceable, Dariush-Far argued, therefore the application was out of time.

However, the judge said he was "satisfied that the judgment could be enforced in New Zealand on 13 March 2007. Once the deed of assignment was executed on 19 January 2007 under s 130 of the Property Law Act 1952 (NZ), [Ellis] obtained ... the right to enforce the judgment. Whilst there needed to be a further procedural step under r 568 of the District Court Rules 1992 (NZ) this did not mean the judgment could not be enforced but rather it could be enforced subject to a further procedural step."

Judgment was entered against Dariush-Far.

3. Supreme Court on the right of MSD to recover overpaid benefits

Patricia Linda Owens v Ministry of Social Development [2007] NZSC 8 (20 February 2007)

Patricia Linda Owens received a legacy and bought a house with it, while she was being paid an accommodation allowance by WINZ. She was overpaid $10,040.

The Social Security Act 1964 provides that the chief executive of the relevant department, WINZ, may write it off if it arose as a result of the Department's error, and the beneficiary received the money "in good faith and has altered his position in reliance on the validity of the payment that it would be inequitable in all the circumstances, including his financial circumstances, to require payment."

The chief executive decided to recover the debt. He or she took into account, amongst other things, the relative faults of the department and the applicant and that the applicant's financial position had improved because the equity in the house had increased by $55,000 and some of this could be used to repay the debt.

Owens disagreed with the decision. However, it was upheld by the Benefits Review Committee, the Social Security Appeal Authority, the High Court and the Court of Appeal. Owens asked for permission to appeal to the Supreme Court.

From the very Supreme Court brief decision, it appears that Owens argues that the relative faults of those involved and the fact that she could afford to repay shouldn't be a consideration.

The Court said, "These decisions are plainly correct in law." It was plain that financial circumstances were relevant to the question of fairness. "It is also obvious that in considering issues of fairness, relative fault in connection with the unauthorised benefit may sometimes be relevant." The case was not appropriate for consideration by the Supreme Court. It had no realistic prospect of success.

4. Registration of financial service providers

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Under new legislation to come in later this year, it will be an offence to provide financial services without being registered or to falsely hold oneself out as being registered. There will be a maximum penalty of up to two years imprisonment or a fine of $100,000 for individuals, and up to $300,000 fine for a body corporate.

"Financial institution" includes banks; finance companies; friendly societies; credit unions; building societies; industrial and provident societies; issuers of equity and debt securities; issuers of collective investment schemes; trustees supervising these issuers; insurers; platform and portfolio service providers and custodians; investment brokers; dealers in securities and futures contracts; lending businesses; financial leasing businesses; money or value transfer services (e.g. money remittance); money and currency changers.

The purpose of the legislation is to identify financial service providers, allow more effective monitoring and evaluation of the financial system, provide easy access for consumers to information about financial service providers and their products, give some assurance about the integrity of people running financial institutions and assist in meeting New Zealand's anti-money laundering obligations.

The Companies Registrar will be responsible for establishing and maintaining the register. The Registrar will check that the controlling shareholders, directors and senior management of entities applying for registration have no record of having engaged in relevant criminal activities or are an undischarged bankrupt, or are the subject of a director/management ban under companies or securities legislation.

The Minister of Commerce, Lianne Dalziel, says that "targeted consultation will ... be undertaken on a draft of the legislation later this year so that stakeholders with expertise in the financial sector area will have a chance to comment on the proposals at a more detailed level."

For all the original cabinet documents relating to the reviews of Financial Products and Providers, see:

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5. New disputes resolution process coming for the financial sector

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Cabinet has approved the establishment of a comprehensive, industry-based dispute resolution system across the financial sector.

Membership of an "approved dispute resolution scheme" will be mandatory for financial providers who are required to be registered and who transact with consumers. Membership of an approved dispute resolution scheme will also be mandatory for financial advisers who deal with members of the public.

The legislation proposed in the paper "Review of Financial Products and Providers: Registration of Financial Service Providers" will establish rules for which financial providers must belong to a dispute resolution scheme.

An approved dispute resolution scheme is one that has satisfied the Minister of Commerce that it meets criteria of accessibility, independence, fairness, accountability, efficiency and effectiveness. In deciding whether to approve a scheme, the Minister must give regard to some mandatory considerations relating to the governance of the scheme, periodic reviews, the scheme's funding, the cost to consumers, membership restrictions, the scheme's jurisdiction, limits on liability of scheme members, evidence and processes, awareness, promotion and education, and reporting to stakeholders.

A decision of a scheme will be binding on the financial provider, but will not stop a consumer from rejecting the scheme's decision and taking alternative court action.

Government involvement will be limited to approving schemes (including periodic renewal), receiving periodic reports, and powers of inspection if necessary, rather than involvement in the day-to-day operation of a scheme. Re-approval is to be obtained by schemes at 10 year intervals. Periodic reporting is to be annual and set out basic information about the activities of the scheme (e.g. number and type of complaints considered, promotional activities undertaken, etc), as well as identifying any systemic issues which the scheme considers require attention by government.

The dispute resolution system will be fully funded by industry.

For all the original cabinet documents relating to the reviews of Financial Products and Providers, see:

http://www.med.govt.nz/templates/ContentTopicSummary____27668.aspx

6. Licensing for Non-Bank Deposit Takers (NBDTs)

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The Minister of Commerce, Lianne Dalziel, has announced that all NBDTs (e.g. finance companies, building societies and credit unions) will be required to be licensed by the Reserve Bank and to comply with minimum prudential, governance and fit and proper requirements at licensing and on an ongoing basis.

NBDTs will continue to be supervised by trustee corporations under the proposed enhancements to trustee-based supervision for debt issuers

NBDTs will be required to obtain and publicly disclose a credit rating, subject to Cabinet being advised by 30 July 2007 on satisfactory options for minimising the compliance costs of a ratings regime for NBDTs, particularly for small providers

NBDTs will be subject to enhanced public disclosure requirements. The Reserve Bank will lead the development of any further policy decisions and the necessary legislative amendments.

Bills to make the changes will be introduced later this year and passed in 2008.

For all the original cabinet documents relating to the reviews of Financial Products and Providers, see:

http://www.med.govt.nz/templates/ContentTopicSummary____27668.aspx

The Psychology of Dealing with People seminar

R Glynn Owens DPhil (Oxon), Professor of Psychology, University of Auckland, former Professor of Health Studies, University of Wales. Author of eight books and over 50 research articles, has worked in numerous fields including general medicine, clinical psychology, sports psychology, forensics and industry. Member of editorial board of Psychology, Health and Medicine. Active researcher in a number of areas including psychological assessment, statistics, decision-making and research design.
Glynn Owens

Alan Liddell LL.B. B.A. presents legal seminars for Hattaway & Associates Ltd. He is the principal in Tauranga law firm Capamagian Liddell and has practised since 1973. He has particular interests in finance company law, commercial litigation, and legal training. His book on the Personal Property Securities Act, cowritten with Peter Hattaway, has received praise for being the most readable and understandable text written on this complex piece of law.
Alan Liddell