Personal Property Securities Act – Back to Basics – Dukesons Business Law – Business Lawyer – Commercial Lawyer – Contract Lawyer

October 2020

This Blog isn't legal advice – if you need legal advice on any business law, commercial law, or contract law issue, please contact me. I'm business lawyer or commercial lawyer in Auckland who provides advice on a wide range of business law or commercial law issues including contract law issues.

Traders, who sell goods on credit, may be particularly interested in this blog. Financiers and other parties who need to know about the Personal Property Securities Act (PPSA) will have in-house lawyers or regular access to external lawyers.

The PPSA is at odds with traditional legal concepts. Ownership of goods may count for little if a debtor becomes insolvent. Creditors that have a security interest over the debtor’s property may be entitled to treat an unpaid creditor’s goods as being the debtor’s. An equipment lessor may in effect be treated as a creditor rather than as a lessor. How can this be?

The PPSA deals with security interests over personal property (basically, property other than interests in land). A security interest will include a charge or mortgage over personal property.

But the PPSA goes further – some interests that have the same effect as a charge or mortgage are treated in the same way as charges or mortgages. The classic example is a reservation of title clause, whereby a supplier reserves title in goods until payment is made.

The PPSA goes even further – some interests that don’t have the same effect as charges or mortgages are deemed to be security interests e.g. an operating lease of goods for a term of more than one year. In all of these cases, the creditor, lessor, etc., are called the secured party and the purchaser, lessee, etc., are called the debtor.

What does this mean for the secured party? If as is usually the case, the debtor has creditors and in particular, secured creditors, the secured party is at risk unless they’ve taken the required steps under the PPSA to ensure that so far as is possible, they will be first in line if the # hits the fan.

Under the PPSA, a secured party should first of all make sure that they have a written contract, or assent in writing to their contract. This means that simply sending out terms or providing a link to terms, even if the terms are in writing, won’t be enough – the debtor must either sign a written contract or assent to it in writing i.e. there must be something in writing from the debtor agreeing to the contract.

Assuming that the form of contract makes it clear that the secured party has a security interest of some kind, the secured party then needs to register a financing statement through the Personal Property Securities Register (PPSR).

To do this, the secured party first has to register through the PPSR as a secured party group. Once done, they can then file a financing statement. To do that, the secured party has to have certain basic information about their debtor and they have to complete correctly the sections of the financing statement that describe what collateral (property) is covered by the security interest.

There are some nuances in describing the collateral in a financing statement, so the secured party may need some education, either from the PPSR staff or from the secured party’s lawyer, to ensure that they complete the financing statement correctly. This can be critical in some respects.

Where the security interest is intended to secure the price of goods supplied, or relates to a lease of goods for a term of more than 1 year, the security interest is known as purchase money security interest (PMSI). (There are other types of PMSI as well.)

A PMSI will usually give the secured creditor a super priority over other secured parties provided that the PMSI is registered within the time set out in the PPSA. Where the secured creditor supplies goods on credit that will be inventory for the debtor, the financing statement must be registered before the debtor takes possession of the goods. If the goods are plant or equipment for the debtor, the financing statement must be registered no later than 10 working days after the date on which the debtor takes possession.

A PMSI gives the secured creditor a super priority for the price of goods supplied on credit. That priority doesn’t extend to money otherwise owing to by the debtor to the secured party. The contract between the parties might confer a general security interest on the secured party for other monies, but the general security interest will be subject to normal priority rules. As between secured parties who have registered financing statements, normally, priority is according to the time of registration – so, the first to register has priority. (PMSIs, if registered within the required time, are an exception to the general priority rule.)

In relation to specific types of goods (at present, motor vehicles), a financing statement is likely to be ineffective if it doesn’t include the serial number information required by the PPSA. This will be so even if the secured party has a PMSI.

In relation to supplying goods on credit to a customer, normally, only one financing statement will be required e.g. where ongoing supplies over time are envisaged.

There’s a lot more that could be said. The matters set out above are selective. There’s some free information on the PPSR. Many lawyers have blogs on their websites about the PPSA (there are several on my website) though the blogs aren’t legal advice. Traders of any sort who want legal advice in relation to the PPSA should consult their business lawyer or commercial lawyer.

For any traders who are surprised or confused by what’s set out above (there are experienced traders who are still unfamiliar with the PPSA, and there will be new traders who will be unfamiliar with it), there's more joy to come. The Government (if re-elected) proposes to extend the current unfair contract terms regime under the Fair Trading Act to small trade contracts. This will introduce some uncertainty into many B2B contracts, as to what terms may or may not be unfair. This is at a time when the Australians are apparently considering wiping the equivalent law in AUS. (Should I also mention, as just one more example of the joys of being in business, the proposal to provide additional sick leave for employees, on top of the recently added domestic violence leave? Perhaps also the joy of having joyously stoned employees at work if recreational cannabis is legalised? Don't worry - reimagine and preferably, re-invent your business, wear a mask, and above all, be kind.)


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