Personal Property Securities Act Notes
Overview
This Act regulates the creation, perfection, and enforcement of security interests in personal property in New Zealand. It provides a comprehensive framework for registering security interests, thereby enhancing transparency and predictability for creditors and debtors.
Creation: Refers to the agreement between a debtor and a secured party where the debtor grants a security interest in their property.
Perfection: Involves steps taken to make the security interest enforceable against third parties, typically through registration on the Personal Property Securities Register (PPSR) or by taking possession of the collateral.
Enforcement: Outlines the rights and procedures for a secured party to realize on their collateral if the debtor defaults on their obligations.
Key Objectives
To provide a single, comprehensive law for security interests in personal property.
To establish a clear system for priority disputes among competing security interests.
To facilitate secured financing by simplifying the process and reducing uncertainty.
Priorities
Prioritization of security interests is essential in determining the rights of secured parties, especially when multiple creditors claim an interest in the same collateral upon a debtor's default or insolvency.
The general rule for priority is outlined in Section 66 (s 66), which establishes a clear order based primarily on the timing of perfection.
Attachment is a prerequisite for a security interest to be enforceable against the debtor, and for it to be perfected. Attachment occurs when the secured party gives value, the debtor has rights in the collateral, and the security agreement is enforceable against the debtor.
Order of Priorities (s 66)
Perfected Security Interest - A security interest that has been made effective against third parties, usually by registration on the PPSR or by the secured party taking possession of the collateral.
Registration Date: The party who registers their security interest first generally obtains priority over other competing interests, even if their security agreement was established later. The PPSR records the precise time and date of registration, which is crucial for determining priority.
Possession: A security interest can also be perfected by the secured party taking physical possession of the collateral. Perfection by possession generally takes priority from the moment possession is acquired.
Continuity of Perfection: If perfection is achieved by one method (e.g., possession) and then by another (e.g., registration), the security interest remains continuously perfected, and priority relates back to the original date of perfection, provided there's no gap.
Unperfected Security Interest - A security interest that has attached to the collateral but has not been perfected through registration, possession, or temporary perfection provisions.
Priority among unperfected security interests is established by the order of attachment. The first security interest to attach takes priority.
Example Case: The Healy Holmberg Trading Partnership v Grant (2012) highlights that the date of attachment, rather than the date of perfection, governs priority when no security interests are perfected. In this case, neither party registered their interest, leading the court to rely on the sequence in which the security interests attached to determine priority.
Example Scenario: Anne's Loans Against Her Car
Actors: Bert, Carrie, Doris, Eddy - all lenders to Anne having different security interests in the same collateral (her car).
Timeline of Events:
04/09: Bert loans Anne money, does not register his security interest. (Unperfected - Attachment 1)
16/09: Carrie loans Anne money, does not register her security interest. (Unperfected - Attachment 2)
28/09: Doris loans Anne money and registers her security interest, but Anne does not sign the security agreement. (Unperfected initially, as no attachment - s 40 PPSA requires an enforceable security agreement).
05/10: Eddy loans Anne money, does not register his security interest. (Unperfected - Attachment 3)
06/10: Carrie takes possession of Anne's car. (Perfected by Possession - Carrie's priority date is 06/10).
08/10: Eddy registers his security interest. (Perfected by Registration - Eddy's priority date is 08/10).
10/10: Anne signs the security agreement with Doris. (Doris's security interest now attaches and is perfected by registration, priority date 28/09).
Conclusion on Priorities (based on PPSA s 66):
Doris: Perfected by registration on 28/09 (though attachment was 10/10, registration date dictates priority if perfected).
Carrie: Perfected by possession on 06/10.
Eddy: Perfected by registration on 08/10.
Bert: Unperfected, priority by attachment on 04/09 (among unperfected interests).
Purchase Money Security Interests (PMSI)
PMSI Definition: A super-priority security interest that arises when a security interest is taken in collateral to secure the purchase price of that collateral, or the obligation to reimburse a person who gave value for the purpose of enabling the debtor to acquire rights in or the use of the collateral.
PMSIs are given special priority because they facilitate the acquisition of new assets that might not otherwise be available to the debtor, thereby benefiting the economy.
Priority Rules:
A PMSI has 'super-priority' over other non-PMSI security interests in the same collateral, even if those non-PMSI interests were perfected earlier.
PMSI taken by seller/lessor holds priority over other PMSIs (s 76): If there are multiple PMSIs in the same collateral, a PMSI granted to the seller or lessor of the collateral generally has priority over a PMSI granted to a lender that provided funds for the purchase.
Other PMSIs will have priority among themselves according to s 66 (i.e., first to register or perfect by possession).
Specific timelines for perfection related to PMSIs: Failure to perfect a PMSI within these specific timeframes generally results in the loss of its super-priority status, and it will be treated as an ordinary security interest.
10 Working Days from the debtor/lessor taking possession of general collateral (s 73): For goods that are not inventory, the PMSI must be perfected within 10 working days after the debtor obtains possession of the collateral or the equivalent right, for it to maintain its super-priority.
Before the debtor obtains possession in the case of inventory (s 74):
For goods that are inventory, the PMSI often needs to be perfected before the debtor receives possession of the inventory.
Also, under s 74(2), a secured party with a PMSI in inventory must give notice to prior perfected security interest holders who have registered a financing statement over the same type of collateral.
10 Working Days from attachment in the case of intangibles (s 75): For non-inventory intangible collateral (e.g., accounts receivables), the PMSI must be perfected within 10 working days after it attaches.
Example: If multiple PMSIs are involved for differing goods, the PMSI connected to the seller/lessor providing the specific goods takes super-priority for those goods. For instance, a loan to purchase a specific machine (lender PMSI) would be subordinate to a PMSI held by the machine's seller (seller PMSI) if both attached to the same machine.
Terminology
Accessions
Accessions (s 16): Defined as goods that are installed in or affixed to other goods in such a way that they become a part of the whole, but remain identifiable.
Examples include an engine installed in a car, or specific components added to a manufacturing machine.
Secured Interests in Accessions:
A security interest continues in the collateral even after it becomes an accession (s 78), meaning the secured party's rights are not lost simply because the goods are incorporated into another item.
Priorities of security interest when collateral becomes an accession (s 79): This section addresses how priority disputes are resolved when an accession secured by one party is attached to an item secured by another party. Generally, a security interest in an accession that existed before it became an accession has priority over a security interest in the whole that arose before the accession was installed, but only to the extent of the value of the accession.
Processed and Commingled Goods
Definitions:
Processed Goods: Items that have undergone manufacturing or processing, resulting in their physical or chemical modification to create a new product. The original goods lose their identity.
Example: Grapes processed into wine or timber processed into plywood.
Commingled Goods: Items that are intermixed or absorbed with other goods of the same kind so that they cannot be separated back into their original form or are indistinguishable from the mass.
Example: Grain from different farmers mixed in a silo, or raw materials combined in a chemical process.
Security Interests: Security interests in these goods continue in the new product or mass (s 87). The PPSA protects the secured party's interest by extending it to the entire new product or mass.
Priority amongst perfected interests: Perfected interests take precedence over unperfected ones. When multiple perfected security interests exist in the processed or commingled mass, their claims are satisfied pro rata. The prioritized distribution amongst perfected interests is determined by the ratio that their secured obligations bore to the cumulative total of the secured obligations immediately before the goods became processed or commingled.
Mathematically, if secured obligations for party A and B were and , and the total value of the new mass is , then party A's claim would be (assuming no other claims and a sale below total obligations).
Non-Consumer Repossession
Introduction
This section focuses on the rights and procedures for repossessing collateral when the debt is related to business or commercial purposes (i.e., non-consumer transactions). While the PPSA provides the general framework for security interests, several other acts also play a role in repossession, particularly for consumer goods.
Legislation Involved:
Credit (Repossession) Act 1997 (CRA): Primarily deals with consumer goods, setting out specific requirements and protections for debtors, but some general principles can inform commercial practice.
Personal Property Securities Act 1999 (PPSA): The principal Act governing the creation, perfection, priority, and enforcement of security interests in personal property, including establishing the secured party's right to repossess upon default.
Credit Contracts and Consumer Finance Act 2003 (CCCFA): Regulates credit contracts for consumers, including disclosure requirements and hardship provisions, but less directly applicable to non-consumer repossession.
Property Law Act 2007 (PLA): Contains general provisions relating to property and contracts, including some relevant to mortgages over land.
Key Terms:
Mortgage: Defined broadly as any charge over property for securing the payment of money or the performance of an obligation (s 4 PLA). While traditionally associated with land, security interests under the PPSA are analogous to mortgages over personal property.
Security Interest: An interest in personal property created by a transaction that, in substance, secures payment or performance of an obligation (s 17 PPSA). This broad definition captures various forms of security, including charges, liens, chattel mortgages, and conditional sales.
Rights to Repossess (s 109)
A secured party can repossess collateral if one of two conditions is met:
The debtor is in default: This typically means the debtor has failed to make payments as agreed in the security agreement, breached other covenants (e.g., failure to maintain insurance, unauthorized sale of collateral), or violated any material term of the agreement.
The collateral is at risk: Even if the debtor is not yet in default, the secured party may repossess if they have reasonable grounds to believe that the collateral is in jeopardy.
At-Risk Definition: A secured party must have reasonable grounds (an objective test) to believe that the collateral will be damaged, destroyed, abandoned, substantially depreciated in value, removed from New Zealand, or otherwise improperly disposed of by the debtor. This condition allows proactive action to protect the secured party's interest.
Taking Possession
Legal Framework: While the PPSA grants the right to repossess, it does not specify how repossession must occur. Therefore, common law principles and other statutes (like the Trespass Act 1980) guide the process.
Section 78 PLA states that if the PLA applies, it supplements the PPSA but does not override it. The PLA contains provisions on the exercise of powers by mortgagees which can be relevant by analogy.
Peaceful Repossession: The secured party must repossess without using force or threat of force, in accordance with reasonable commercial standards. This means there should be no breach of peace, no intimidation, and no entry into premises against the will of the occupier. Often, this requires repossession when the collateral is accessible in a public place or with the debtor's express permission.
Entry onto premises to effect repossession requires either consent from the occupier or a court order.
Notifications and Selling Procedures
After repossession, the secured party has obligations regarding notification and the sale of the collateral.
Notice Requirements:
S 114(1) requires notice of sale to be given at least 10 working days before the sale to the debtor and any other secured parties who have registered financing statements describing the repossessed collateral. This notice informs them of the secured party's intention to sell and provides an opportunity to redeem the collateral or ensure a proper sale.
The notice must include specific details, such as a description of the collateral, the amount required to satisfy the obligation, and information about the proposed sale.
Selling Methods: The secured party must act in a commercially reasonable manner when selling the collateral (s 113). This includes obtaining a fair market value for the collateral.
Methods include auction, tender, or private sale. The choice of method depends on what is most likely to achieve the best price under the circumstances.
Distribution of Proceeds:
The net proceeds from the sale must be distributed in a specific order (s 116A):
Reasonable expenses of seizure, holding, preparing for sale, and selling, including reasonable legal fees.
Satisfaction of the obligation owed to the repossessing secured party.
Satisfaction of obligations owed to any higher-ranked (senior) secured parties who have registered their interests and made a demand.
Satisfaction of obligations owed to lower-ranked (subordinate) secured parties who have registered their interests and made a demand, according to their priority order.
Any surplus must be paid to the debtor.
Retention of Collateral: The highest-ranked secured party (or another secured party with consent) may propose to retain the collateral instead of selling it, in full or partial satisfaction of the obligation (s 120-124). This proposal must be sent to the debtor and other secured parties. If no objection is received within 20 working days, the collateral can be retained.
Redemption and Reinstatement
Redemption (s 132):
The debtor or any other secured party may redeem the collateral at any time before it is sold or retained by the secured party.
To redeem, the redeeming party must tender fulfillment of all obligations secured by the collateral (including all principal, interest, and any other amounts due) and pay the reasonable expenses incurred by the secured party in exercising their rights (e.g., repossession, storage, legal costs).
Reinstatement (s 133):
The debtor can reinstate the security agreement and resume their rights in the collateral (as if default had not occurred) if they remedy their defaults within certain timeframes before the sale or retention of the collateral.
This typically involves paying only the overdue sums (arrears) and remedying any non-monetary defaults (e.g., obtaining insurance), plus the secured party's reasonable expenses.
Reinstatement is generally available only once in the lifetime of a security agreement. It differs from redemption, which extinguishes the debt, whereas reinstatement continues the original contract.