New Zealand Credit Law Bulletin - Vol 1, No 2, November 2001
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:
- PPSA - what's a PMSI and what does it do?
- Reckless trading - director personally liable
- The minefield of personal guarantees
- New feature to credit reports
1. PPSA - what's a PMSI and what does it do?
Money in a Minute Auto Loans Ltd v Price 2001 BCSC 864, 15 June 2001
(This case was heard in the Supreme Court of British Columbia. The New Zealand Personal Property Securities Act 1999 is based on Canadian law.)
A rogue named Price bought a Buick from Carter Pontiac Buick Ltd. He paid by cheque. The next day he went to Money in a Minute and borrowed $1500 using the car as security. He granted Money a security interest in "all present and after-acquired property", specifically including the vehicle. Money in a Minute registered its loan on the "Personal Property Register", the equivalent of the New Zealand Personal Property Securities Register that will commence on 1 May 2002.
Meanwhile, the cheque to Carter Pontiac had been returned "NSF" by the bank. The sale contract said that Carter Pontiac was allowed to repossess the vehicle if the cheque bounced and that it was able to rely on the appropriate provisions of the British Columbian Personal Property Securities Act.
As soon as Carter Pontiac learned that the cheque had bounced, it registered on the Personal Property Register, claiming an interest in the vehicle. It registered seven days after the sale, and two days after Money in a Minute had perfected its interest. Two months later Carter Pontiac recovered the car and wrote to Money in a Minute, requesting it cancel its PPSA registration. Money in a Minute refused.
Generally, priority goes with order of "perfection" (which generally means order of registration). However, a purchase money security interest ("PMSI") gives the holder a "super-priority". This overcomes the general priority by order of perfection (see section 73 PPSA New
Zealand which is essentially the same as section 34 PPSA British Columbia) provided it was registered within the required period. In British Columbia and New Zealand, that period is 10 days from the date of sale. The rationale behind the concept of the PMSI is that the person who provides new goods or new money to buy those goods should have first claim over those goods if he registers a security.
In this case, both parties claimed to have a PMSI. The Supreme Court of British Columbia held that Carter Pontiac had one and Money in a Minute didn't. The contract between Money in a Minute and Price had no express requirement that the $1500 be used to purchase the Buick, therefore, Money in a Minute did not have a PMSI. It still held a security interest in the collateral under the PPSA, but the security interest came behind that of Carter Pontiac.
The same result would have been reached under the New Zealand PPSA.
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2. Reckless trading - director personally liable
Re Hilltop Group Ltd (in Liq); Lawrence v Jacobson (2001) 9 NZCLC 262,477, 2 February 2001
Jacobson and Cowley operated a profitable partnership, manufacturing clothing. In the 1995 financial year, the business lost its major customer, Max Fashions, which represented 90% of its turnover. In 1996 the business made a loss and the partners transferred the assets and liabilities of the partnership to Hilltop Group Ltd.
Cowley immediately resigned as a director of Hilltop. That left Jacobson as the sole director. The company traded until 1997 when it was placed in liquidation owing various creditors almost $600,000.
The liquidators pursued Jacobson personally for the debts. The Companies Act contains certain duties which directors owe to their company and to creditors. This matter was dealt with under the 1955 Act but the 1993 Act has identical provisions. The key alleged breach was of section 189 of the Companies Act 1955 (s135 of the 1993 Act). This section prohibits causing or allowing a business to carry on in a manner likely to create substantial risk of serious loss to creditors.
There were numerous irregularities. The transfer had included goodwill of $100,000, despite the substantial loss of business. A personal bank loan of $150,000 to freehold Jacobson and Cowley's home was transferred to the company. There was no stocktake nor any allowance made for obsolete items or uncollectable debts.
While the business was failing, company funds were used to meet personal obligations of Jacobson and Crowley, even though creditors were not being paid. Their personal overdraft was reduced from $350,000 to $115,000 in the three months before the company went into liquidation.
The company failed both parts of the solvency test in the Companies Act 1993. These are the cash flow test _ can it pay its debts as they fall due? _ and the balance sheet test _ do the assets exceed the liabilities? It must pass both of these to be considered solvent. In fact it was insolvent right from the start.
The key issue was whether or not Jacobson ought to have known that Hilltop was insolvent while he continued to trade. Jacobson claimed he did not believe the company was insolvent and that it could have traded out of its difficulties. This was roundly rejected. The test is that of the reasonable, prudent director. He knew or ought to have known.
The court has a disretion as to how much of the debt the director should be personally liable for. In this case Jacobson was ordered to pay the full outstanding sum owed to Hilltop's creditors, plus interest, plus costs.
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3. The minefield of personal guarantees
Benchmark Building Supplies v Weatherby CA 278/00, 19 July 2001.
In our seminars we describe the law relating to personal guarantees as
a minefield. This case is another example of the problems that can befall creditors.
Benchmark supplied Weatherby Developments Ltd. The operator of that business was Mrs Weatherby's son. Both mother and son completed an application for credit up to $120,000 and signed the section providing for a personal guarantee. Mrs Weatherby was a 25% shareholder and the only other director of the company.
Subsequently, the son and a business associate applied for an increase in the credit limit to $220,000. Significantly, Mrs Weatherby was not a party to that later arrangement. The company defaulted and Benchmark sought summary judgement against both for just under $250,000.
Benchmark had a comprehensive contract of personal guarantee. It established the guarantors as "principal debtors" rather than simple sureties. This provided greater security and fewer potential escape hatches, but it contained no provision to bind Mrs Weatherby to an additional advance if she did not agree to it. She was the one with the greater ability to pay the debt. Mrs Weatherby argued that increasing the credit limit to $220,000 constituted a variation that discharged all of her obligations as guarantor. The High Court Master granted summary judgment against the son, but not the mother.
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4. New feature to credit reports
In response to the growing threat of identity theft and subsequent fraud, Baycorp has enhanced its standard consumer credit report. Their recent newsletter says that the report can now include details of any personal identification reported lost or stolen by an individual.
This is how the service works. When an individual reports the theft or loss of identification to the police, they contact the Baycorp Privacy Desk on 09 356 5851 and supply details of the ID (type, issuer etc.), along with a copy of the police report. This information will be recorded in a special new section of the person's credit report.
The information is kept for a period of 24 months. Should the recorded ID be presented to obtain credit, the credit provider will be alerted that the ID has been reported lost or stolen and they should exercise caution and request further types of identification.
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
1. The Law of Credit Management
2. The Law of Credit Management for Finance Companies
3. Seminar schedule
4. Credit Revolution: A Practical Guide to Surviving the Personal Property Securities Act
Credit Revolution
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