New Zealand Credit Law Bulletin - Vol 6, No 3, April 2006
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:
- Security clause not signed by debtor – is it binding liquidator under the PPSA?
Liquidators refuse to recognise an unsigned agreement - Privacy Act - prisoners object to stamping of their mail with name of prison
Result shows the Privacy Act doesn’t always overcome commonsense - Unintentional courtroom humour
This made us laugh so we’ll share it with you. - Was description on PPSR “seriously misleading”?
Another useful insight into the way the courts will interpret practical PPSA issues
1. Security clause not signed by debtor – is it binding liquidator under the PPSA?
SLEEPYHEAD MANUFACTURING CO LTD V DUNPHY AND SHEPHARD HC AK CIV-2005-404-001691 [23 February 2006]
Sleepyhead began supplying King Robb Ltd (trading as Bedworld) with beds and other goods in 1992. They never had a formal contract drawn up between them.
From 19 April 2002, Sleepyhead put a “retention of title” clause and a security interest over the goods on its invoices. The Personal Property Securities Act came into force on 1 May 2002 with a transition period for creditors for creditors to register prior securities. On 3 May Sleepyhead registered its interest in all the goods it supplied to King Robb Ltd on the Personal Property Securities Register (PPSR).
King Robb Ltd went into liquidation. The liquidators sold the goods which had been supplied by Sleepyhead and refused to recognise Sleepyhead’s security interest or account for the sale of the goods. King Robb hadn’t signed the agreement. The liquidators argued that while the unsigned agreement bound King Robb, it didn’t bind them. They were not, they said, obliged to recognise Sleepyhead’s security interest.
Interestingly, the sale of stock raised $147,524. Of this, $39,618 went to the BNZ, which had a general security. There were various expenses of just over $40,000, and liquidators’ fees of $56,504. Only $2560 remained for distribution among all other creditors including Sleepyhead. The lawyer for Sleepyhead in the subsequent court case was critical of the amount of the liquidators’ fees. The liquidators’ lawyer explained that the amount of the fees was due to their attempts to sell the business as a going concern. The judge commented that: “the appropriate time to follow that course was before liquidation. Experience shows that the prospects of a successful sale after liquidation are remote.”
Sleepyhead sued the liquidators for conversion of its property. Sleepyhead’s lawyers accepted that as King Robb hadn’t signed the agreement it was not enforceable against third parties. It was up to the court to decide whether or not the liquidators were agents of King Robb Ltd or third parties. Agents would be bound by King Robb’s agreement. Third parties would not be bound.
The judge concluded that the liquidators were agents. Sleepyhead had an immediate right to possession of the goods it supplied King Robb which the liquidators declined. The liquidators had no defence to Sleepyheads claim in conversion. Judgment was awarded for $43,354 plus interest.
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2. Privacy Act - prisoners object to stamping of their mail with name of prison
Case Note 68858 [2005] NZPrivCmr 3 (1 May 2005)
It is the policy of the Department of Corrections to stamp all outgoing mail with the address of the prison on the outside of the envelope. While the name of the inmate would only be discovered on opening the actual envelope, many inmates expressed concerns with this policy.
They argued that it could lead to embarrassment, or that retribution could be carried out by a victim’s family on discovery of his/her whereabouts. The Privacy Commissioner said that as the inmate was identifiable on the letter being opened this could possibly be in breach of the Privacy Act.
“Principle 11 prohibits the disclosure of personal information by an agency unless an exception applies.” The department was, however, of the view that this fell under an exception. The policy was introduced after a situation involving offensive letters being written to girls between the ages of 12-16. The inmate was misleading the recipient as to his circumstances and the letters were offensive. The Department said that this was an ongoing problem and needed to be addressed.
By stamping all outgoing mail with the prison’s name the matter could be easily dealt with and inappropriate mail could be intercepted by parents before causing any harm. The Privacy Commissioner concluded that this disclosure of the inmates’ prison on outgoing mail was an effective and acceptable solution to the problem.
The public’s perception of the Privacy Act is that it often tends to restrict communication in ways that are nonsensical. This case note from the Privacy Commissioner has nothing to do with credit but is interesting in that it shows political correctness doesn’t always stop sensible results being achieved. Hooray!
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3. Unintentional courtroom humour
Here are a few excerpts from a book called ' Disorder in the American Courts'. These are things people actually said in court, word for word, taken down and now published by court reporters.
ATTORNEY: What was the first thing your husband said to you that morning?
WITNESS: He said, "Where am I, Cathy?"
ATTORNEY: And why did that upset you?
WITNESS: My name is Susan.
ATTORNEY: Doctor, before you performed the autopsy, did you check for a pulse?
WITNESS: No.
ATTORNEY: Did you check for blood pressure?
WITNESS: No.
ATTORNEY: Did you check for breathing?
WITNESS: No.
ATTORNEY: So, then it is possible that the patient was alive when you began the autopsy?
WITNESS: No.
ATTORNEY: How can you be so sure, Doctor?
WITNESS: Because his brain was sitting in a jar on my desk.
ATTORNEY: But nevertheless could the patient have still been alive?
WITNESS: Yes, it is possible that he could have been alive and practicing law
ATTORNEY: What gear were you in at the moment of the impact?
WITNESS: Gucci sweats and Reeboks.
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4. Was description on PPSR “seriously misleading”?
SERVICE FOODS MANAWATU LIMITED (RECEIVERS) V NZARFD HC WN CIV-2005-485-1820 [30 January 2006]
NZ Associated Refrigerated Food Distributors Limited (NZARFD) supplied Service Foods Manawatu Limited. Service Foods Manawatu signed an agreement which gave NZARFD security over, in essence, all goods supplied by NZARFD to Service Foods Manawatu. NZARFD registered the security on the Personal Property Securities Register (PPSR) under the Personal Property Securities Act.
The Financing Statement is the data entered on the PPSR. The data entered was:
Collateral type: All Present and After Acquired (sic) Property
Description: Being all the debtors (sic) personal property and all other property.
The agreement signed by Service Foods Manawatu only covered goods which were supplied by NZARFD but NZARFD registered what is known as a “general security” over all present and after-acquired property.
Service Foods Manawatu had also given a general security to Westpac. Service Foods Manawatu was placed into liquidation and receivers were appointed by Westpac. At that point NZARFD was owed $579,732. There was $131,000 worth of stock which had been supplied by NZARFD on hand.
Westpac’s general security was registered before NZARFD’s, giving Westpac priority ahead of NZARFD. However, if NZARFD’s security was valid in respect of stock which it had supplied, NZARFD would get some money – the proceeds of stock which it had supplied – ahead of Westpac. One of the important concepts in the Act is that a creditor which supplies goods and takes a security over those goods which it has supplied has priority over those goods ahead of a creditor (such as Westpac here) which only has a general security. This “super-priority” for a creditor which supplies goods is called a purchase money security interest or “PMSI” (pronounced “pimsy”).
The receivers asked the court to decide whether NZARFD’s PMSI was valid – in other words, whether they had to pay NZARFD the money from the sale of goods which had come from that company, or whether they could pay that money to Westpac.
The receivers raised a number of issues. One was that the NZARFD terms of trade applied largely to the situation prior to the Personal Property Securities Act coming into force and was not in a form consistent with the Act. In essence, it was a “retention of title” arrangement which, they argued, did not properly take account of the new law. However the judge found the agreement was sufficient to meet the definition of “security agreement” in s16 of the Act and created a “security interest” (s17). He said, “it is the substance of an arrangement securing payment or performance of an obligation that is contemplated by s 17 rather than the form of the arrangement.”
[Having said that, our view is that creditors should get a commercial lawyer who understands the PPSA – not all lawyers do – to re-draft their pre-PPSA documents to avoid the possibility of this type of argument being raised.]
The critical question, however, was whether NZARFD’s description in its financing statement was sufficient. It had registered a security interest on the PPSR over “All Present and After Acquired Property”. However, its terms of trade, signed by one of the directors of Service Foods Manawatu, only claimed a security over goods it had supplied. Did the description on the PPSR identify property it had supplied well enough to give a PMSI over that property? If not, was the misdescription “seriously misleading”.
The judge quoted Widdup and Mayne in “Personal Property Securities A conceptual approach”:
“The PPSA does not penalise overly broad collateral descriptions in financing statements. The security agreement, not the financing statement, governs the terms of the security and reflects the intentions of the parties with respect of the collateral provided to secure the obligation. An overly broad financing statement collateral description should not be viewed as an attempt by the secured party to subject the collateral to the security agreement to which the debtor did not agree. The PPSA indicates that the secured party will only have a valid security interest in the property described in the security agreement and this is not affected by the fact that the financing statement defines the collateral.”
The judge said that “the real mischief …[of] the concept of ‘seriously misleading’” descriptions is when they prevent a searcher from being able to find a security on the electronic register because of error in either the debtor name or the collateral’s serial number (for goods with serial numbers).
So NZARFD’s description in the PPSR, while “possibly overly broad”, was valid for the goods described in the terms of trade accepted by Service Foods Manawatu (i.e. goods supplied by NZARFD). The judge said it might also be possible for NZARFD to trace the proceeds of those goods which came from NZARFD and were sold. The receivers promised to cooperate with NZARFD in this tracing exercise.
