The Personal Property Securities Act 1999 (‘PPSA’) has been in force since 2002 but many people remain unaware of the changes it has made to traditional concepts of rights in personal property. Ownership is now irrelevant in many situations. The recent increase in insolvency events highlights the need for better understanding and new business practices as outraged suppliers compete with receivers and liquidators of insolvent businesses.
Scope of the Act
The PPSA governs security interests in personal property. Personal property is defined broadly and includes essentially anything other than large ships and land.
What is a security interest?
A security interest is an interest in personal property that is created whenever you enter into a transaction that uses personal property to secure payment or performance of an obligation. The PPSA also deems certain other transactions to be security interests.
Common situations where the PPSA applies include:
- supply of goods on credit (even where you have retained title);
- goods sold on your behalf by a retailer;
- leases of goods or equipment;
- goods stored in someone else’s possession.
The Personal Property Securities Register (‘PPSR’)
The PPSR is a public register where security interests over personal property may be registered and searched. For a small fee anyone can use the PPSR 24 hours a day seven days a week. The PPSR website address is www.ppsr.govt.nz.
Why register?
Registering a financing statement records your security interest on the PPSR. A financing statement contains information about your security interest. You are not required to upload your security agreement or terms of trade online or required to provide any financial information of any kind.
If you do not register your security interest and your debtor is made bankrupt or is put into receivership or liquidation, other secured creditors’ claims will have priority ahead of you in relation to that property even where you may in fact own that property.
While registering a financing statement does not always guarantee you will get what is owed in an insolvency event, it increases your chances and puts you in a better position than creditors who have not registered.
Essential steps
Before you supply any goods on credit to a customer you should take the following steps:
- Ensure that you have up to date terms of trade that include a retention of title clause and clauses dealing with PPSA matters.
- Ensure that these terms are signed by the debtor.
- Register a financing statement on the PPSR.
The order in which you complete steps 1 to 3 does not matter so long as all the steps are completed before you supply the goods.
Priority rules
In general a registered security interest takes priority over all unregistered security interests.
If there is more than one registered security interest the party who was first to register will normally take priority.
If you have completed steps 1 to 3 when you sell goods on credit you can obtain in certain cases a ‘super priority’ ahead of a bank or other lenders which have a prior registered general security agreement.
The PPSA provides special rules of priority for:
Liens for repair work and other services supplied in relation to goods
If you supply materials and services in respect of goods (for example, a garage that repairs a car) you may have priority ahead of all security interests. However, there are some rules governing liens; for instance, you must keep the goods in your possession until you receive payment or you could lose your priority position.
Goods attached to other goods
If goods become attached to other goods they become an accession; this means they become absorbed into those other goods. For example, you supply a new motor on credit that is installed in your customer’s boat. Unless you have completed steps 1 to 3 before you supply the motor you could lose priority to prior and even subsequent security interests registered over the boat.
Goods attached to land
Goods are often installed in such a way that they become permanently attached to land. For example, steel supplied to construct a hay barn becomes part of the land once it is permanently attached. It is no longer personal property, and even if you have registered your security interest on the PPSR, you will lose your priority over the steel to a mortgagee of the land. To protect your interest in the steel, you may need to take security over the land as well.
Mixed goods
If you have a security interest in goods that become mixed with other goods so as to become indistinguishable from the whole mass your security interest continues in the whole. For example, suppliers supply eggs, sugar and butter to a biscuit factory on a retention of title basis. If they all have signed terms of trade and have registered financing statements on the PPSR their security interests will continue in the biscuits. They will be able to claim a share in the value of the biscuits. Special rules apply to determine each supplier’s share in mixed goods.
Transfer of goods
If the goods are sold or leased in the ordinary course of the debtor’s business the person buying or leasing those goods normally takes the goods free of your security interest. However, your security interest may continue in the proceeds of any inventory sold.
If the debtor transfers the secured goods other than in the ordinary course of business (for example, they sell their business to someone else) you must update the debtor details on the PPSR within 15 days from the day you become aware of the transfer to retain your priority.
Ownership is irrelevant under the PPSA – examples
A retention of title clause is no longer in itself effective against third party claims. This means that if you supply goods on a retention of title basis but do not have signed terms of trade and a financing statement registered on the PPSR, you will lose out if a receiver or liquidator is appointed over the debtor and there are insufficient funds available to pay all creditors.
Other examples of circumstances where ownership of goods is irrelevant are:
- You supply on commercial consignment. Businesses supplying goods on commercial consignment such as designers and artists are vulnerable during insolvency events. For example, when Auckland homeware store Eon went into receivership many suppliers lost their battle to claim back the furnishings they had supplied on commercial consignment. They had retained ownership of the goods but the secured creditor who had registered a general security agreement over all the assets of Eon had priority ahead of the suppliers who had not registered. Angry scenes erupted in the Auckland store when counter staff were confronted by furnishing suppliers demanding the return of their goods. Enraged blog comments followed with some suppliers blaming their professional advisers for not informing them about the implications of the PPSA.
- You supply goods under a lease for a term of more than one year or for an indefinite term. For example, Portacom New Zealand Ltd leased portable buildings to NDG Pine Ltd for four years but failed to register on the PPSR. Portacom lost out to NDG's bank which had registered its general security interest on the PPSR. The bank’s registered security interest had priority ahead of Portacom’s unregistered security interest (Graham v Portacom New Zealand Ltd [2004] 2 NZLR 528).
- You leave your goods stored with someone else for more than a year. For example, grape growers may entrust their grapes to a winery for processing and subsequent storage of the wine produced. If produce is left in the possession of the processor for more than a year a security interest is deemed to be created in the produce. The owner's interest may be ‘trumped’ by another party with a better (registered) security interest in the produce. If the owner of the grapes has not registered on the PPSR they may find that when the processor goes into receivership the receiver will claim the right to sell their goods. Some uncertainty surrounds such situations, as at the time of writing New Zealand courts have not yet considered the question. To avoid uncertainty, before supplying the produce to the processor the owner should enter into a written security agreement with the processor and register a financing statement on the PPSR that describes both the produce and the final products.
Conclusion
The PPSA is probably the most significant change in commercial law during the lifetime of any business owner alive today.
You can no longer rely on Romalpa clauses alone to protect your interests when you supply goods. Suppliers who ignore the need for up to date terms of trade and who fail to register financing statements on the PPSR risk losing any right to claim back their goods if their debtors go into receivership or liquidation.
If you have questions about the PPSA or registration on the PPSR talk to your Lawlink lawyer.
© Anderson Lloyd
Email: marie.callander@andersonlloyd.co.nz
Website: www.andersonlloyd.co.nz