Introduction
Depending on the nature of your business, you may retain ownership of goods you have sold until all payments are made, or you may wish to list certain goods as security for a loan. Either way, if someone stops paying and a guarantor does not take over the repayments, good business sense would dictate that you repossess the goods and sell them to offset your losses.
The Credit Contracts and Consumer Finance Act 2003 is the main law designed to protect consumers in credit contracts. When someone signs up to a credit contract, the creditor must provide accurate information about the cost of the arrangement to the consumer. This information is contained in a disclosure statement which must be given before the contract is made or very shortly afterwards. The creditor’s right to repossess must be set out and explained in the contract. The creditor will have no right to repossess goods unless the right has been set out clearly in the contract, and the disclosure requirements of the Credit Contracts and Consumer Finance Act have been met.
If a creditor has a right to repossess, he or she must then follow the steps set out in the Credit (Repossession) Act 1997 (‘the Act’).
The Act refers to ‘consumer goods’ only, and defines these as goods that are used or acquired for use primarily for personal, domestic, or household purposes.
What gives you the right to repossess?
A creditor or their agent must not repossess any goods unless the debtor is in default under the security agreement, or the goods are at risk. ‘Security agreement’ is the term used in the Act for a contract to which it applies.
The Act defines goods as being ‘at risk’ if the creditor has reasonable grounds to believe that they have been or will be destroyed, damaged, endangered, disassembled, removed, or concealed contrary to the provisions of the contract. An example of goods being at risk might be that they have been advertised for sale by the debtor. You must be able to prove that you have grounds to believe the goods are at risk.
In order for you to be able to repossess goods, you must have a written and signed contract that states that ownership of the goods does not pass until the final payment is made, and that you have authority to repossess if there is a default on the contract. Goods can only be repossessed if they are listed on or are specific to that contract.
It is often best to get your lawyer to draft such a contract for you. You do not want to find yourself in a situation where you are unable to recover your losses because this has been inadequately provided for in your contract. Some points to consider are:
- a time frame to show when you want ownership of the goods to change;
- wording that shows clearly that possession of goods does not necessarily mean ownership;
- a clause to ensure that the agreement authorises you or your company to enter premises to seize goods when there has been a breach of contract;
- a statement that goods are not to leave New Zealand unless paid for in full.
A clause designed to keep ownership of the goods with the creditor, although possession of the goods has gone to the buyer, is called a ‘Romalpa’ or ‘Retention of Title’ clause. If the buyer defaults on payment, the creditor is allowed to retake possession of the goods sold. As it is a form of security, it needs to be registered on the Personal Property Securities Register to ensure appropriate priority is recognised. Although the Act will apply whether or not a financing statement has been registered, by registering your interest in the goods you should take priority over any other creditor.
The retention of title clause must have been brought to the attention of the customer before the goods were purchased. For the clause to be effective, there is a requirement that you can identify the goods and prove that they belong to you when invoking this condition. If your goods are mixed or incorporated into another product this identification becomes more difficult.
The clause that actually authorises you to enter the debtor’s premises is also important. You will generally only have authority to enter the debtor’s premises; debtors usually cannot authorise entry onto a third party’s premises. Only in extraordinary circumstances would you be able to repossess goods located on the premises of a third party.
The six-step process
Once you have established that you do have the authority to repossess the goods, there are six basic steps that must be followed.
- Send a pre-possession notice
- Repossess the goods
- Send a post-possession notice
- Debtor has 15 days to pay up
- The goods can be sold if there is no action from the debtor
- Statement of account to be sent within 10 days of sale.
Before taking possession of the goods, you must have served on the debtor, and on every guarantor of the debtor, a notice explaining the nature of the default and the amount owing, and requiring the debtor to remedy the default within a certain period (no less than 15 days after service of the notice on the debtor).
A pre-possession notice does not need to be served if you have reasonable grounds to think the goods have been, or will be, damaged or removed. ‘Reasonable’ is not defined in the Act, but just means that common sense should be used, taking into consideration the individual circumstances of each case.
If no payment is made after the period given to remedy the default, then you may repossess the goods.
You are able to enter the debtor’s premises yourself, or you may appoint an agent to do so on your behalf.
Anyone can act as a repossession agent as long as they have not been convicted of a crime of violence or dishonesty in the past five years, sentenced to 10 years in prison, or released from prison within the last year.
The repossession agent can only enter the debtor’s premises between 6 am and 9 pm on a Monday to Saturday, and not on a public holiday unless the debtor has consented in writing to their premises being entered outside these times.
That word ‘reasonable’ is used again where the Act states that the creditor must enter the premises in a ‘reasonable manner’. You are expected to take care and cause as little damage as possible.
When you enter the premises you must produce a copy of the pre-possession notice, as well as evidence establishing your authority to take possession of the consumer goods (for example, written proof that you are, or are working for, the creditor).
If applicable you must also produce the debtor’s written consent to entry outside the prohibited hours.
If the occupier of the home is not present, you are still able to enter the premises to take the goods, but must take steps to ensure that the premises are not left obviously open. As well as leaving a copy of the documents stated above, you must also leave in a prominent place a notice stating that the premises have been entered, the date of entry and a list of the consumer goods that you have taken.
Special rules apply if the goods you are taking are accessions – ie, installed in, or affixed to other consumer goods as there may be other people who have an interest in these goods. If you damage an accession, then YOU may be liable to reimburse for the damage caused. You must give notice to anyone who has an interest in the accession, and they are able to refuse permission to remove any goods unless you have given them adequate security for the reimbursement.
After the goods have been taken, you must serve a post-possession notice on the debtor within 21 days of repossession.
The notice must state that, to get the goods back, the debtor must within 15 days pay the money due under the contract, or arrange another option with you.
Now is the chance for the debtor to contact you about entering into another agreement. As the debtor has this time, you must not sell the goods before the 15 days given under the post-possession notice has expired.
The debtor has a right to reinstate the original contract. They must pay the amount owing on the debt, costs incurred by you in repossessing, as well as remedying any other default. You must then return the repossessed goods to the debtor. A point to note before returning the goods is that you cannot repossess them a second time for the same breach if they have already been returned to the debtor.
If the default is not remedied, then you are able to sell the repossessed goods.
This may be done by auction, tender, or private sale as long as you use all reasonable efforts to obtain the best price for the goods.
The debtor should be given notice of any auction or tender, unless the goods are perishable or liable to drop in value quickly.
When the goods have been sold the creditor must give the debtor a statement of account within 10 days showing the sale proceeds, costs of the sale, and the balance owing to or from the debtor.
Conclusion
As unpaid debts and the necessity for repossession may become more common during these hard financial times, creditors need to make sure the process is carried out correctly. As this article gives only a brief outline of the repossession process, it would be wise to pay a visit to your lawyer to ensure you have the appropriate authority at every step of the way.
© Webb Ross
Email: rowena.smith@webbross.co.nz
Website: www.webbross.co.nz