Study Notes on Personal Property Laws 332

Introduction

• The Personal Property Securities Act 1999 (PPSA) governs security interests in personal property in New Zealand, providing a unified and comprehensive regime for securing credit.

• It is crucial for understanding how creditors can secure interests in various types of movable property, ranging from goods to intellectual property and accounts receivable.

• The Act aims to simplify previous complex common law and statutory rules, enhancing predictability and efficiency in secured transactions.

After-acquired Property (Sections 43, 44)

• Definition: After-acquired property refers to personal property that a debtor acquires after a security agreement (which creates the security interest) has been entered into. This allows a single security agreement to cover present and future assets.

Security Interest in After-acquired Property (Section 43)

• A security interest can be specifically established in after-acquired property, which is vital for creditors, especially in financing arrangements where the collateral changes or increases over time (e.g., inventory, future receivables, equipment upgrades).

• This provision enables a "floating" charge concept, allowing the security to attach to a changing pool of assets without requiring new documentation for each acquisition.

Attachment in After-acquired Property (Section 44)

• Key Point: The attachment of security interests in after-acquired property is contingent on specific conditions, primarily that the debtor acquires rights in the property.

• Attachment signifies the point at which the security interest becomes enforceable against the debtor.

• For after-acquired property, the security interest generally attaches when the debtor obtains possession or ownership rights in the new property, provided all other attachment requirements (value given, security agreement) are also met.

Distinctions Between Consumer and Non-consumer Goods

• The PPSA distinguishes between how security interests attach to after-acquired consumer goods versus non-consumer goods due to differing policy considerations (consumer protection vs. commercial efficiency).

• Non-consumer Goods:

  • For non-consumer goods (e.g., business inventory, commercial equipment), a security interest in after-acquired property automatically attaches without specific appropriation.

  • This means the security interest automatically extends to and is triggered as soon as the debtor acquires new non-consumer goods, without the need for the parties to take further steps (like identifying specific new items) to make the security interest enforceable against those new assets. This is fundamental for inventory and revolving credit facilities.

• Consumer Goods:

  • For consumer goods (goods acquired primarily for personal, domestic, or household purposes), a security interest in after-acquired property automatically attaches without specific appropriation only under specific, limited conditions:

    • Accession: When the after-acquired property becomes an accession (i.e., physically united with other goods in such a manner that the identity of the original goods is not lost, but the value is enhanced).

    • Replacement: When the after-acquired property replaces an item that was originally subject to the security interest (e.g., a new washing machine replacing an old one under the same financing agreement).

    • If the security interest is a Purchase Money Security Interest (PMSI): A PMSI arises when a security interest is granted to secure an obligation to pay for the purchase of the collateral itself. For consumer goods, a PMSI can attach to after-acquired consumer goods if those goods are the subject of the PMSI.

  • In all other cases, for a security interest to attach to new consumer goods acquired by the debtor, a new security agreement or a specific appropriation of the new goods under the existing agreement is required. This limitation protects consumers from unintentionally granting broad security interests over all future household purchases.

Perfection of Security Interests

• General Principle: If the original security interest in after-acquired property is properly perfected (typically by registration on the PPSR – Personal Property Securities Register, or sometimes by possession or control), all interests in subsequent after-acquired property, which attach automatically without specific appropriation, are also perfected from the time the original financing statement was registered.

• Perfection provides priority over unperfected security interests and certain other creditors, making it crucial for securing the creditor's position.

Interaction with Collateral (Section 45)

• Key Concept: A security interest generally continues in collateral despite its sale, lease, license, exchange, or other disposition, unless the secured party authorized the dealing free of the security interest. This continuity is a fundamental principle of the PPSA.

• Extension to Proceeds: The security interest also automatically extends to the proceeds derived from that dealing. This ensures the secured party's interest shifts from the original collateral to whatever is received in exchange for it.

• Limitation: The security interest in proceeds is limited to the value of the collateral at the date of the dealing ($S.45(2)$). This means the secured party cannot claim an amount of proceeds greater than the value of the original collateral when it was disposed of. Any appreciation in value of the proceeds above the original collateral's value at the time of dealing may not be covered by the security interest.

• Definition of Proceeds: Any identifiable or traceable personal property derived directly or indirectly from dealing with collateral or proceeds of collateral, as broadly defined in Section 16 of the Act. This includes cash, cheques, deposit accounts, chattel paper, accounts receivable, and other goods received upon sale or exchange of the original collateral.

Restrictions on Certain Consumer Goods (Section 83ZN CCCFA)

• Consumer Credit Contracts: The Credit Contracts and Consumer Finance Act 2003 (CCCFA), specifically Section 83ZN, imposes significant restrictions on taking security interests over certain essential household consumer goods and critical documents in consumer credit contracts. This aims to prevent lenders from seizing items vital for a debtor's basic living or identity in case of default.

• Restricted Consumer Goods: Lenders cannot take security interests over specified consumer goods, typically those deemed necessary for basic living standards. These include, but are not limited to:

  • Beds and bedding (essential for rest)

  • Cooking equipment (e.g., stoves, microwaves – essential for food preparation)

  • Medical equipment (e.g., wheelchairs, prosthetics – essential for health)

  • Portable heaters (essential for warmth)

  • Washing machines (essential for hygiene)

  • Refrigerators (essential for food storage)

• Documents that are restricted: Security interests cannot be taken over critical personal and identification documents, as their retention could severely impact a person's ability to function in society:

  • Travel documents (e.g., passports)

  • Identification documents (e.g., driver's licenses, birth certificates)

  • Bank cards (e.g., debit/credit cards)

• Note: These restricted goods can still be subject to a Purchase Money Security Interest (PMSI) under specific conditions. This exception allows a lender to take a security interest over a restricted item if the credit was specifically used to purchase that item. For example, a loan taken out to buy a new refrigerator can be secured by that specific refrigerator, even though refrigerators are generally restricted.