Liens can entitle a creditor to hold goods hostage until payment has been received, and in some cases to assert this right in priority to secured creditors with security perfected under the PPSA. This Insolvency and Restructuring Update highlights two recent cases that considered circumstances where liens could take priority over a registered security interest.

As a general rule a perfected security interest has priority over all other unperfected security interests in the same collateral, under section 66 of the Personal Property Securities Act (PPSA).

However, this is not always the case. Under section 93 of the PPSA, a common law or a statutory lien over goods lives outside the PPSA priority regime and has priority over all security interests in those goods if:

  1. the materials/services provided which gave rise to the lien were provided in the ordinary course of business;
  2. no other Act prevents the lien from having priority; and
  3. the holder of the lien did not know that a security agreement relating to those goods prohibited the creation of the lien.

Generally speaking, a lien allows a person to retain possession of another's property pending satisfaction of the lien holder's claim against that person.

Examples of statutory liens include the unpaid seller's lien under the Sale of Goods Act 1908, and the carrier's lien under the Carriage of Goods Act 1979.

Common law liens can be 'general' or 'particular'. A 'general' lien allows a person to retain possession of goods until all sums payable by the owner of the goods are satisfied, and not just sums payable in respect of work performed on those goods held hostage.

These are relatively rare and must be established by strict proof of custom or usage - an example is a solicitors' lien which allows a solicitor to retain a client's documents until payment of all debts owed to the solicitor by the client.

In contrast, a 'particular' lien only secures obligations that are incurred in respect of the hostage goods. An example is a 'workers lien' in respect of payment for work done to improve a chattel, such as a mechanic's right to hold your car until you have paid for the work done on it.

Two recent cases considered liens and their place in the personal property securities pecking order.

McKay v Toll Logistics (NZ) Limited (HC) [2010] 3 NZLR 700; Toll Logistics (NZ) Limited v McKay (CA) [2011] NZCA 188

This was an application by the receivers of Scene 1 Entertainment for directions under section 34 of the Receiverships Act 1993. DLA Phillips Fox successfully appeared on behalf of the receivers in both the High Court and Court of Appeal.

Toll provided DVD warehousing services for Scene 1. A formal agreement between Toll and Scene 1 containing a contractual lien over the DVDs was entered into over a year after Toll commenced providing the services.

Subsequently, receivers were appointed to Scene 1. The ASB Bank claimed a security interest over the DVDs under its general security agreement. ASB's security interest had been registered on the Personal Property Securities Register before Toll commenced providing the warehousing services.

Toll claimed that its interest in the DVDs had priority over ASB's security interest pursuant to section 93 of the PPSA. Toll's interest was claimed to be a contractual lien (from the time of its formal agreement) and/or a general common law lien (from the time it commenced providing services).

In the High Court, it was established that section 93 is limited to liens which are not security interests - that is, common law and statutory liens only. Contractual liens are a security interest for the purposes of the PPSA and are therefore subject to the PPSA priority rules.

As ASB's general security was perfected first in time before Toll's contractual lien, ASB's security ranked first for the purposes of the PPSA. This aspect of the case was not appealed.

Toll's claim in the Court of Appeal therefore rested on the ability to prove a statutory or common law lien which would rank in priority to ASB's security interest.

Toll asserted the existence of the common law 'packers' lien', relying on antiquated authority dating back to the 18th century. Both the High Court and the Court of Appeal found that New Zealand law did not recognise a general 'packers' lien', leaving Toll with only its contractual lien over the DVDs, which was perfected (by possession of the goods) after ASB's security interest. Toll's interest was therefore found to be subordinate to ASB's registered security interest.

Stockco v Walker HC Napier CIV-2011-441-110, 24 June 2011

Capehorn Farming Co procured cattle on behalf of the plaintiff, and entered into separate arrangements with farm owners to raise and fatten the cattle. The plaintiff registered a security interest to secure its interest in the cattle.

The defendant farmer was engaged by Capehorn to raise and fatten some of the cattle until they were ready for processing. Importantly, the defendant's remuneration was based on the weight gain of the cattle.

Capehorn was placed into receivership, owing money to the defendant farmer.

The plaintiff sought to uplift the stock from the defendant, who in turn claimed a common law possessory lien over the stock in the nature of a 'worker's lien'.

Such a lien allows a person to retain possession of goods that they have performed work upon, until they are paid for that work.

The High Court found that the essential elements of a common law possessory lien existed:

  • The defendant's obligations under her contract required 'improvement' of the stock, as opposed to mere 'maintenance'. This was important because there can be no lien of this type for simply maintaining a chattel or preventing its deterioration. This condition was satisfied because the defendant's remuneration was based on the extent to which the cattle were 'improved' by gaining weight while on her property.
  • The defendant was entitled to maintain possession of the stock until she was paid - nothing in her contract with Capehorn required her to part with possession prior to receiving payment. This was essential because a common law lien is lost if the lien-holder is required to part with possession of the goods prior to receiving payment.
  • As the requirements of section 93 were also met, the defendant was entitled to maintain a common law lien over the stock until she received the outstanding payment, and her rights ranked in priority to the plaintiff's registered security interest.

Practical tips

  • Secured creditors should ensure that their written security agreements prohibit the creation of liens over the secured property and, where commercially practical, could give notice of such prohibition to any third parties that commonly take possession of assets for improvement from the debtor.
  • Where an owner passes possession of goods to another party in order for that party to work on or improve the goods, the owner may prevent a lien from arising by ensuring that the obligation to pay for the improvements arises after the goods are returned.
  • The High Court has confirmed that gaining weight can be considered an 'improvement' - don't let anyone tell you differently.

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