New Zealand: High Court Confirms The Importance Of Registering A Security Interest

Last Updated: 20 January 2008
Article by Craig Edwards and Nilan Ekanayake

On 21 November 2007, Justice Stevens of the High Court, confirmed the importance of a supplier of goods registering a purchase money security interest (PMSI) under the Personal Properties and Securities Act 1999 (PPSA) to obtain a 'super priority' over a secured creditor.

The Facts

In September 2006, Feltex Carpets went into receivership and then subsequently into liquidation.

Prior to that time, Feltex had arrangements in place with JS Brooksbank & Co (Australasia) Ltd (JSB) for the purchase of wool. The terms of supply between JSB and Feltex provided that upon receipt of notification of cleared funds, unconditional ownership of the wool passed to Feltex.

The usual process was that Feltex would purchase the wool and on receipt of cleared funds JSB would send a 'buyer delivery order' to the wool broker holding the wool as agent for JSB at which time the wool would be delivered to Feltex. Feltex, JSB and the wool broker (the agent) were all aware of the terms of supply. Due to a series of mistakes, a number of wool brokers released wool to Feltex which had not been paid for. Although JSB realised that the wool had been released, it did not register its interest on the Personal Property Securities Register (PPSR). Feltex subsequently went into receivership then liquidation and JSB remained unpaid for the wool. JSB issued a proceeding against Feltex and its receivers for damages for conversion of the wool. JSB submitted that Feltex converted the wool by taking possession of the wool without any legal entitlement to do so as the wool had not been paid for.

Feltex submitted that the contract for supplying the wool was a conditional sale agreement and as such amounted to a 'security interest' under the PPSA. Further, JSB's security interest was subject to ANZ bank's earlier registered security interest in all of Feltex's present and after acquired property.

The Issues

The Court had to consider whether Feltex was liable for conversion of the wool and whether JSB had a 'security interest' in the wool under the PPSA and if so, which party possessed priority under the PPSA.

The Outcome

The claim in conversion failed because JSB's agent voluntarily delivered the wool to Feltex. The actions of its agent were binding on JSB.

Although JSB argued that Feltex had no interest in the wool as JSB retained title to it, the Court found that a security interest in the wool existed. Additionally, although the transfer of the wool did not occur in the way that JSB intended, the supply contract was carried out. Once the wool was supplied to Feltex, there was a debt, which Feltex agreed to meet. His Honour found that the supply contract fell within the definition of a conditional sale agreement, which involved an agreement to sell the wool subject to the retention of title.

The attachment of the security interest in the wool arose when Feltex had rights to the collateral. Pursuant to section 40(3) of the PPSA, that occurred no later than when Feltex obtained possession of the wool. As such, JSB had an unperfected security interest, which was subject to the priority of ANZ bank's registered interest.

The Court noted that had JSB perfected its security interest over the wool by registration, it would have amounted to a PMSI that would have taken priority over ANZ bank's earlier perfected security interest.

This case is a further reminder that creditors who have a retention of title clause (PMSI) should take steps to protect their security interest in the goods by registration.

Australia Considering Adoption Of New Zealand Personal Property Securities Law

The Australian Attorney-General recently released a third discussion paper on personal property securities reform. It is noted that Australia's personal property security laws are currently contained in more than 70 pieces of State, Territory and Commonwealth legislation.

The Australian Government recognises the practical benefits in harmonising Australia's personal property security laws into one Commonwealth Act and developing a single national online register of personal property security interests.

The discussion paper raises the possibility of adopting legislation modelled on our Personal Property Securities Act 1999. It is noted that adopting New Zealand's model would be consistent with the goal of achieving closer economic relations between the two countries.

Given the different levels of government in Australia and the recent federal election this seemingly mammoth task may take some time to complete.

Phillips Fox has changed its name to DLA Phillips Fox because the firm entered into an exclusive alliance with DLA Piper, one of the largest legal services organisations in the world. We will retain our offices in every major commercial centre in Australia and New Zealand, with no operational change to your relationship with the firm. DLA Phillips Fox can now take your business one step further − by connecting you to a global network of legal experience, talent and knowledge.

This publication is intended as a first point of reference and should not be relied on as a substitute for professional advice. Specialist legal advice should always be sought in relation to any particular circumstances and no liability will be accepted for any losses incurred by those relying solely on this publication.

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