Anomalies and lacunae in the treatment of preferential creditors

Michael Gedye, New Zealand Business Law Quarterly, November 2003

In this article, Mike Gedye identifies what he considers are significant defects in the preferential creditor regime following implementation of the Personal Property Securities Act 1999 (the PPSA). These defects could have adverse consequences for creditors.

While the amendments to the preferential creditor regime were not intended to change the existing law, the author considers that they have in fact done so, resulting in creditors being unable to adequately value collateral that includes inventory and accounts receivable.

The article contains arguments for amendments to the regime, including:

• Possibilities for certain assets to fall into more than one category of personal property, resulting in different treatment on insolvency - for example:
  
  
  • depending on circumstances, a bank account could be categorised as either an investment security, or an account receivable; and
    
    
  • depending on circumstances, a hire purchase agreement could be categorised as either chattel paper or as evidence of an account receivable.
    
    

  Because the new regime requires secured creditors and insolvency administrators to pay preferential creditors from accounts receivable (and inventory) but not from other asset types, the categorisation of assets such as these becomes important to different classes of creditors.
  
  

• The potential for the definition of inventory to include goods held for lease, meaning that, because preferential creditors are payable in priority to general secured creditors from inventory that is not subject to a purchase money security interest, such assets may not be available to general secured creditors.
  
  
• The need for complex accounting for payments made to establish what assets are subject to purchase money security interests where some, but not all assets, have been purchased using a loan advance, or where some, but not all assets, purchased under retention of title terms have been paid for.
  
  
• Anomalies arising from difficulties in reconciling certain provisions of the Property Law Act 1952 with the PPSA.

The author suggests that the problems be addressed by abolishing the concept of preferential creditors and, in its place, to provide employees with the protection of a state insurance scheme. The author also notes that Crown preferences have been abolished in Australia and, more recently, in the United Kingdom and suggests they ought to be abolished in New Zealand as well.

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