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Financial Services Quarterly
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Sale by receiver extinguishes subordinate security
An appeal is pending following a High Court case that determined that, where a receiver sells personal property of a borrower, the sale automatically releases any security interest in those assets held by subordinate security holders.
This important decision was recently highlighted in our FSQ Bulletin (June 8). A Bill is currently before Parliament that will rectify this effect of the Receiverships Act 1993. However, until the new legislation is passed, a holder of a subordinate security interest over personal property must be very careful to protect its position in any receivership situation.
In this case (1), the debtor company had granted general security interests in favour of a bank and a supplier. Those rights were subject to a deed of subordination and priority, which provided that the bank would have priority up to $2.5 million.
The bank enforced its security by appointing a receiver. The receiver sold the assets of the company for a sum substantially in excess of the bank's priority amount.
The issue for determination by the Court was whether the balance of sale funds realised by the receiver was held for the benefit of the second security holder or held for all creditors. The Court considered the provisions of section 30A of the Receiverships Act 1993. This section was added after the Personal Property Securities Act 1999 had been passed. The Court favoured a literal interpretation of the provision and held that the sale extinguished the supplier's security. This meant that the supplier was relegated to the position of an unsecured creditor in respect of the proceeds of assets sold by the receiver.
This anomaly is being rectified by amendments to the Receiverships Act 1993 made in the Statutes Amendment Bill (No.5) 2005. The Bill has received its first reading but the date upon which it will become effective is currently unknown.
This decision highlights that, until the amending legislation is passed, holders of second ranking security interests cannot rely on their security if a receiver sells the debtor's assets first. However, this case does not apply to registered mortgages over land, only personal property securities.
The decision is subject to an appeal, to be heard on 19 September.
(1) Re Building Depot Ltd (in receivership and liquidation) (CIV 2005-404-1347, High Court Auckland, 19 May 2005 )
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.
Disclaimer
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.
