New Zealand Credit Law Bulletin - Vol 2, No 1, January 2002
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:
- Canadian PPSA case - creditor authorised sale
- Being a wife is no excuse
- "Receiver" liable for making company's debt worse
1. Canadian PPSA case - creditor authorised sale
Lanson v Saskatchewan Valley Credit Union [1998] 10 WWR 82 (5 October 1998)
Nickel was a licensed real estate salesman in Saskatchewan. Lanson loaned Nickel $16,000 to buy a mobile home. He secured his interest in it by registering on the Saskatchewan Personal Property Register. This is the equivalent of the New Zealand Personal Property Security Register which will be used from 1 Mlay 2002. The New Zealand legislation is based on that in Saskatchewan.
Nickel sold the mobile home but did not tell Lanson. The purchaser, Spruce Meadow Trucking Ltd, did not search the register. Nickel continued to pay off Lanson's loan. Spruce Meadow onsold the mobile home. The new buyer financed the purchase through the Saskatchewan Valley Credit Union. The Credit Union registered a security interest in the mobile home and its proceeds.
By this time Nickel was insolvent and had stopped paying the instalments on the loan. Lanson then discovered that the mobile home had been sold and tried to seize it. The Credit Union claimed that their security took priority.
Lanson's security would usually take priority as it was registered first. However, he would lose his security interest if he had authorised the sale. This is outlined in section 28 of the Saskatchewan Personal Property Security Act, which is effectively the same as section 45 of the PPSA in New Zealand.
Lanson knew that Nickel was buying the mobile home to rent it out or resell it. The Judge decided that he had given express authority to deal with it. A paragraph of their security agreement said, "I will not sell the mobile home without repaying in full my indebtedness to the secured party". The question was whether any authority to sell was conditional on payment in full. The Court said that conditional payments must be explicitly outlined in the security agreement. Lanson should have included in the paragraph an express condition releasing the security interest only after the debt was satisfied in full. Lanson also had to make clear to Nickel that he was not relying simply on the proceeds. He had not done so.
The fact that Nickel had failed to pay Lanson did not make the resale invalid. So ownership passed to Spruce Meadow free from the secured interest. This meant that the Credit Union, in turn, obtained their interest in the mobile home free of Lanson's security interest. Lanson's rights against Nickel were restricted to the proceeds.
It is worth noting that Lanson also loses his security in the mobile home itself if Nickel sells it "in the ordinary course of business". In this case Nickel had purchased the mobile home as a private buyer. He did not on-sell it in the ordinary course of his business as a real estate agent. This is covered by s.30 of the Saskatchewan Act which as the same as s. 53 in the PPSA in New Zealand. The Canadian Courts have decided that "in the ordinary course of business" means basic business dealings which are carried out under normal terms and which are consistent with general commercial practice. It does not include private sales between individual buyers.
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2. Being a wife is no excuse
Benchmark Building Supplies Ltd v Jackson High Court, Palmerston North CP26/99, 31 May 2001
Mr and Mrs Jackson were the sole directors of a company that manufactured and sold kitset houses. After initial success in the late 1980's they expanded into non-residential construction. Benchmark was the company's sole supplier of building materials. In the mid-1990's the residential housing market became increasingly competitive and matters began to go awry for the company. The account with Benchmark was run out to 120 days and remained there. Payments were received but these fell well short of expectations. Mr Jackson was informed of Benchmark's growing concern. Around this time the Jacksons transferred their home and their holiday house near Lake Taupo into family trusts.
In early 1997 Benchmark appointed a new credit controller. He was unimpressed with Benchmark's past endeavours and tightened up, demanding mortgage security and personal guarantees from both the Jacksons. Promises were made and broken, and Benchmark stopped credit to the company. Voluntary liquidation was inevitable, the debt to Benchmark standing at almost $400,000.
The law in relation to reckless trading is clear. If there is something in a company's financial position that would alert an ordinarily prudent director to the real possibility that carrying on business would cause serious loss to creditors, the directors should call it a day. If they continue to trade, they face the risk that the court will find them personally liable.
Optimism must be reasonable and based on objective grounds. Jackson had maintained his confidence in his company's future. However, he failed to impress the judge. The Court was in no doubt that Mr and Mrs Jackson were in breach of their obligations from at least mid-1996. They were ordered to pay Benchmark in full. It was no excuse for Mrs Jackson to argue that she had limited involvement in the running of the company or no input into critical decisions. As Justice Wild stated in this case, "Directorship of any company involves acceptance of all directorial duties imposed by the law. There is no halfway house."
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3. "Receiver" liable for making company's debt worse
Fatupaito v Bates [2001] 3 NZLR 386 (23 May 2001)
Fatupaito v Bates [2001] 3 NZLR 386 (23 May 2001)
In November 1997 Metalsmiths Ltd employed Bates as their accountant and business adviser. The company was in a bad way financially and the position continued to deteriorate. Bates suggested putting the company into receivership.
Mr Moon, the sole director of Metalsmiths, invited Bates to take on the role of receiver. The Judge said this absolved him from personal liability. Mr Moon recognised the dangers of the company trading and responded by appointing Mr Bates as a receiver. However, due to a misunderstanding of the law, no legal appointment was made. Metalsmiths believed Bates would arrange for the winding up of the company's business, but, for a number of reasons, Bates decided to continue to trade. He did so even though Metalsmiths had a deficit and an unauthorised overdraft.
Metalsmiths continued trading until July 1998, and was finally put into liquidation by court order after an application by Inland Revenue in February 1999. The properly appointed liquidators considered that Metalsmiths' financial position had worsened by $59,517.59 over the period that Bates was in control. They sued him for this amount.
The sole director of Metalsmiths had handed over the powers that he had as the board of the company and Bates had accepted his presumed appointment as receiver. This meant that Bates was considered by the Court to have become a director under the definition in section 126 of the Companies Act 1993 . Bates believed that he had the powers of control of a receiver and this had changed his position from being merely an accountant and business adviser acting in his professional capacity.
Bates was supposed to have evaluated the financial health of the company within a reasonable period. He had not done so and had allowed Metalsmiths to keep trading even though this involved a serious risk of substantial loss for creditors of the company.
The Court determined that Bates was liable for reckless trading as the person who had the apparent authority to cease trading, but had not done so. In assessing the amount of Bates' liability the Court took three factors in to consideration. These were how much Bates' actions had contributed to any losses, his blameworthiness and the length of time he had had control over the company. Bates was ordered to pay $30,000 to the liquidators.
