Possession is nine-tenths of the law: court finds that possession can override ownership

In the first decision under the Personal Property Securities Act 1999 (the PPSA), the High Court has found that a lessor of goods can lose ownership of those goods if a third party holding a registered security interest over the lessee's property enforces that security interest.

The decision will surprise many leasing companies, who might have assumed they could not lose ownership of goods simply by leasing them. This case makes it clear that this can occur even where there are provisions in the lease preventing the lessee from charging the goods or using the goods as collateral.

Before the advent of the PPSA, only the true owner of goods could pass title to them, except in limited circumstances.

In this case1, NDG Pine Limited (NDG) leased five portable buildings from Portacom New Zealand Limited (Portacom).

No lease period was specified - under the PPSA, a lease that lasts longer than a year or is for an indefinite term is deemed to be a "security interest" and can be registered on the PPSR.

In addition, the lease terms and conditions acknowledged that the interest was registerable - but Portacom failed to register its interest.

Problems arose when NDG defaulted on its obligations to The Hongkong and Shanghai Banking Corporation Limited (HSBC). HSBC had lent significant funds to NDG and held a debenture over all of NDG's assets. The default led to the appointment of a receiver of NDG's assets.

A dispute then arose over who had priority to the portable buildings: was it HSBC or did Portacom retain ownership of the buildings?

The court considered the provisions of the PPSA and cases decided under the equivalent Canadian legislation and found that a lessee of goods may grant a security interest in goods - even though it does not own them. The dispute as to who had priority in the buildings was therefore determined under the PPSA's priority rules. Crucially, as HSBC had registered its interest on the PPSR and Portacom had not, HSBC had priority and its receivers had the right to sell the buildings and for HSBC to retain the proceeds.

Portacom's lawyers also argued that the terms used in the debenture granted in favour of the bank were not wide enough to cover the interest created by the PPSA, as the debenture was in a form used prior to the implementation of the PPSA and did not use the definition of "all present and after acquired property" referred to in the PPSA.

However, the court decided that, although the exact style in the PPSA had not been used, it was clear that the charging clause was wide enough to cover the leased goods. This is good news for banks and others who have been granted debentures prior to the passing of the PPSA and have not had them updated to reflect the PPSA's provisions.

However, the decision only relates to the specific wording of the debenture in this case. It is quite possible that the wording in another charging clause may not be wide enough to obtain an interest in leased goods not owned by the debtor.

The moral of this story is that the decision would have been entirely different if Portacom had simply registered its interest under the leases when the buildings were leased. This is a very straightforward task and requires payment of a $5 fee. Leasing companies should review their leases and any other arrangements where third parties take possession of goods that the leasing companies own to ensure that they have protected their interests.

Owners should register their interest on the PPSR as soon as possible in order to maximise the chances they will retain priority and ownership, and to prevent a lessee or person with possession granting a prior ranking security interest to a third party.

Murray Tingey, a senior associate with Bell Gully, represented Ferrier Hodgson, the receivers of NDG, in the case described in this summary.

A summary of the timing and information requirements for registering security interests of lessors at the PPSR follows.

PPSA REGISTRATION - A BRIEF GUIDE TO THE RULES

Timing of registration

The general priority rule under the PPSA is "first to register wins". However, the interest of a lessor of goods under a lease for a term of more than one year (which includes leases for an indefinite term) falls within the definition of "purchase money security interest", which has a better priority than prior registered general security interests, if the interest is registered within the following time frames:

Nature of collateral Timing for registration Inventory Goods that are: Held by a person for sale or lease, or that have been leased by that person as lessor; or To be provided or have been provided under a contract for services; or Raw materials or work in progress; or Materials used or consumed in a business Prior to, or at the time, the debtor takes possession of the collateral Collateral other than inventory or intangibles Not later than 10 working days after the day on which the debtor obtained possession of the collateral Intangibles Not later than 10 working days after the day on which the security interest in the intangible attached

Accordingly, if a lessor ensures that registration has properly been completed before the goods are supplied to the lessee, it should have a purchase money security interest that will defeat the interest in the leased goods of a prior registered secured party.

Information required to register

In order to register a security interest in your favour on the PPSR you will need to have: registered as a secured party group; and collected the following information2 about your debtor: *Full name(s) (by reference to the Companies Office, for companies, or to a passport, driver's licence or similar, for individuals) *Date of birth (for individuals) E-mail address Fax Contact telephone Contact address *Full name of person acting on behalf of debtor *Contact address of person acting on behalf of debtor Please feel free to contact Rachel Gowing if you would like more information on how to register. Alternatively, click here to link to the Ministry of Economic Development's training materials for using the PPSR.

1 Graham and Gibson and Ors v Portacom New Zealand Limited (High Court, Auckland, CIV 2003-404-5577, 17 March 2004, Rodney Hansen J)

2 Only those details marked with an asterisk are mandatory - the other information is optional.

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.