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THE CHARTERED ACCOUNTANT AS A BUSINESS PARTNER
Chartered Accountants think of themselves as something quite different from bookkeepers. They regard themselves as business partners who can and do add value to the business of their clients. If they are sincere in this, they need a good working knowledge of company law, commercial law and the law of meetings and need to be in a position to advise their clients accordingly. They need to have the judgment to know when the services of a solicitor are required and need to be able to select the requisite solicitor.
A FAILING OF THE CHARTERED ACCOUNTANT AS A BUSINESS PARTNER
Our firm specialises in insolvency. That discipline gives us a good insight as to the skill level and quality of advice of many chartered accountants. It is fair comment that many accountants have not brought themselves up to speed with the Personal Property Securities Act ("PPSA") and consequently have offered no advice to their clients.
In acting as liquidators and receivers we have seen the clients of accountants suffer considerable losses because of ignorance of the PPSA. There must be many more who face potential losses. Even an elementary knowledge of the PPSA by the company and its professional advisers could have averted such losses.
THE PERSONAL PROPERTY SECURITIES ACT 1999
The Act came into force on 1 May 2002. The full title of the Act tells what the Act is all about: -
"An Act to reform the law relating to security interests in personal property and, in particular, -
(a) To provide for the creation and enforceability of security interests in personal property; and
(b) To provide for the determination of priority between security interests in the same personal property; and
(c) To provide for the determination of priority between security interests and other types of interests in the same personal property; and
(d) To provide for the enforcement of security interests in personal property other than consumer goods; and
(e) To provide for the establishment of a register of security interests in personal property"
The effect of the Act is to change the accepted view as to what is property of a company. It can also change in the event of liquidation and receivership the order of priority of secured creditors and the rights of suppliers of stock and/or assets who seek to recover goods relying on reservation of title provisions incorporated in trade terms.
WHAT GOES WRONG - RESERVATION OF TITLE
In the past clients have commonly issued terms of trade which provide for reservation of title in goods they have sold until such time as the goods have been paid for. In the event of liquidation or non-payment, the clients have simply uplifted their goods or stock. Matters are now not so easy.
It is clear that if they have not registered their security interest on the Personal Property Securities Register, those goods in the event of receivership or liquidation may not come back to them, but will be available for a debentureholder or someone else with a security interest in those goods. Even worse, if they happen to uplift "their" goods prior to receivership or liquidation those goods may still be available to any debentureholder. Incidentally, we don't call them debentures any more, we call them General Security Agreements or GSAs.
WHAT GOES WRONG - CONSIGNED GOODS
In the past the matter of consigned goods was always clear. They were never the property of the consignee. In law and in practice, the consignor could uplift the goods whenever he wished. Such is no longer the case. Where both the consignor and the consignee deal in such goods in the ordinary course of business, then unless the consignor registers his interest, the goods come under the charge of any registered debentureholder of the consignee.
In the event of receivership or liquidation of the consignee, unless there are other assets to satisfy the debenture the consignor will lose his goods. This can happen even though the goods are uplifted prior to the receivership or liquidation. The reasoning for this is that the goods having become subject to a registered security interest of a debentureholder, that interest takes priority over the unregistered interest of the consignor. Uplifting of the goods does not release the goods from the charge of the debentureholder.
WHAT GOES WRONG - HOLDERS OF GSAs - DEBENTUREHOLDERS
Because of the Personal Property Securities Act private debentureholders have to be particularly aware that the old rules no longer apply. In the past the first debenture to be executed ranked first unless specific accommodation had been given to a subsequent debentureholder. The second debenture to be executed came second and so on. All of this no longer applies. The date of execution of a debenture is now irrelevant when working out priorities. What matters now is the date of registration on the Personal Property Securities Register. The first debenture to be registered ranks first. An example might help.
Your client lent money to a company more than five years ago. The debenture has the usual clause that no subsequent debentures are to be entered into without your clients consent. The company despite this borrows more money and the new lender registers his debenture. At the time the PPSA came into force your client took no action. It is clear that in such circumstances the new debenture, which is the first to be registered ranks first, and your client's debenture ranks second.
WHAT GOES WRONG - LEASED GOODS
Leased goods pose a particular danger. The following categories of leased goods come under the Act.
• Leases which in effect secure payment (finance leases);
• Where a lease is for a term of more than one year;
• Where a lease is for an indefinite term;
• Where a lease for a term of one year or less is automatically renewable.
In all these cases the lessor must register his interest in the goods. Unless he does so, his goods even though leased, will come under the charge of any debenture.
Again, in the event of receivership or liquidation the lessor stands to lose his goods. This can happen even though the leased goods were uplifted prior to receivership or liquidation.
THE PERSONAL PROPERTY SECURITIES ACT AND CASE LAW
There are two widely reported cases on the PPSA. Both cases demonstrate clearly the pitfalls in the legislation and the need for directors, accountants and solicitors to have a working knowledge of the Act.
The first case -
Graham and Gibson v Portacom New Zealand Limited, High Court, Auckland,
17 March 2004 CIV 2003-404-5577 Rodney Hansen J
We all know what portacoms are. They are those portable buildings usually used as offices on construction sites. They are not purchased but are leased from Portacom.
NDG Pine Limited leased five portacoms from Portacom. These five buildings were delivered by Portacom between April 1998 and September 2002. The PPSA came into force on 1 May 2002. On 28 May 2002 the Hong Kong and Shanghai Banking Corporation Limited registered its debenture. NDG Pine Limited was placed in receivership on 26 June 2003. Portacom did not at any stage register its interest in the buildings.
The Court determined -
• The Personal Property Securities Act applied.
• The bank had registered its security under the PPSA and Portacom had not.
• The bank's security had priority over Portacom's unregistered security interest.
• The receiver had the power to sell the buildings for the benefit of the debentureholder.
The second case -
Waller v New Zealand Bloodstock Limited, High Court, Auckland, 2 December 2004 CIV 2004-404-4093 Allan J ("Waller")
The facts
• S H Lock held a debenture over Glenmorgan Farm Limited. The debenture was registered on the PPSR.
• Glenmorgan owed in excess of $3 million to S H Lock.
• On 31 August 2001 Glenmorgan entered into a lease to purchase in respect of a stallion "Generous" which was owned by New Zealand Bloodstock.
• Glenmorgan took possession of Generous on or about 31 August 2001. Generous was repossessed by New Zealand Bloodstock on 7 July 2004 on grounds of non-payment.
• On 23 July 2004 Glenmorgan was placed into receivership.
The findings of the Court
The Court found that the fact that New Zealand Bloodstock could have legal title to Generous was irrelevant in a situation where S H Lock held a registered security interest and the interest of New Zealand Bloodstock was not registered. The lessee although not holding legal title to Generous was capable of granting a valid security interest which covered the leased asset. The fact that New Zealand Bloodstock retook possession of Generous prior to the appointment of the receivers was of no relevance.
The horse Generous was able to be sold by the receivers for the benefit of the debentureholder. The horse at the time was worth approximately $2 million. New Zealand Bloodstock lost out on this all for the sake of a $3 filing fee.
CONCLUSION
The Personal Property Securities Act is here to stay. It is of such significance that it is not appropriate to put one's head in the sand and ignore it.
Every accountant has a duty to clients to bring them up to speed on the matter. They can't do that unless they are up to speed themselves.
At this stage we give a word of warning -
Many solicitors even though they might be commercial solicitors are not up to speed either. If you get legal advice on the Act, make sure your solicitor has an in-depth knowledge of the Act.
If you have any doubts, we could furnish a shortlist of solicitors who can help.
DISCLAIMER
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.