NZ Credit & Finance Institute
Member
Governance New Zealand
Associate Member
RITANZ
New Zealand General Member

How Can I Lose It If It’s Mine?

Perhaps the biggest impact of the Personal Property Securities Act (“PPSA”) on New Zealand businesses is that the concept of title has changed. It is no longer safe to assume that just because some goods are yours and haven’t yet been paid for by a customer that they will automatically be returned to you in an insolvency. This is certainly a departure from the historic position regarding title of goods so what exactly is going on here?

Prior to the PPSA coming into force in 2002 the doctrine of nemo dat quod non habet (one cannot transfer a better interest in an asset than one holds) was the prevailing principle. And this is the basis upon which retention of title (or Romalpa) clauses were introduced into commercial contracts. Title was reserved by the owner until payment was received in full, at which point title transferred to the buyer.

However, with the introduction of the PPSA into New Zealand law in 2002, this has changed. Title no longer guarantees ownership. Buyers now have a possessory interest in your goods when delivered and this means that they can offer a security interest in those goods to third parties despite not holding title. So while it is true that you, as supplier, would still have a security interest in the goods until they have been paid for, a third party, such as a bank, may also have a security interest in those same goods. This generally occurs when a General Security Agreement (GSA) interest is taken by the bank which takes as security all assets, both present and future.

Although this may seem unfair there are ways to protect yourself. If you register your security interest in your goods prior to delivery you not only protect your interest, but you can ensure that you defeat any bank GSA by way of a super-priority Purchase Money Security Interest. You do this by registering appropriately on the Personal Property Securities Register (PPSR).

It is important to note that by not registering you do not forfeit your contractual security interest and it is still enforceable against the debtor. However, you will lose any priority against third parties (such as banks) that have registered properly. This is a crucial point, and it is well worth reflecting on this and applying to your current business arrangements.

But the concept of security interests is wider than just a retention of title. It also extends to any situation where there is an interest in personal property that secures payment or performance of an obligation. This includes, but is not restricted to, finance leases, consignments, operating leases for more than one year, and certain bailments.

So, if you rent out some equipment to a customer and they have the equipment in their possession for more than a year (or for an indefinite period) this is a security interest, even if title is never going to be transferred, and you are at risk of losing the equipment to a third party in an insolvency if you haven’t registered.

This is exactly what happened in Graham v Portacom New Zealand Ltd (2004). Portacom leased five portable buildings to NDG Pine Ltd but did not register their interest on the PPSR. The Hong Kong and Shanghai Banking Corporation had a GSA over the assets of NDG and did register this interest. When NDG went into receivership the bank claimed the portable building as assets of NDG and won. If Portacom had registered their interest properly they would have been able to retain the portable buildings.

For a business owner, it is not necessarily onerous or expensive, in general, to comply with the requirements of the PPSA. But you need to ensure you have appropriate contracts in place and that your PPSR registrations cover all of your security interests. It can, however, be very expensive not to comply – just as Portacom found out.