New Zealand Bloodstock loses PPSA appeal

The majority of the Court of Appeal has dismissed a high-profile appeal by New Zealand Bloodstock. In the High Court, New Zealand Bloodstock as lessor of a thoroughbred stallion lost priority in the stallion to the holder of a debenture over the lessee's assets. New Zealand Bloodstock had failed to register its "deemed" security interest under the Personal Property Securities Act 1999 (the PPSA).

Facts

New Zealand Bloodstock leased a stallion named Generous to Glenmorgan Farm for an initial period of three years, on terms specifying that title at all times remained with New Zealand Bloodstock.

A couple of years earlier, Glenmorgan Farm had granted a debenture over "all its present and future assets" to a creditor, S.H. Lock (NZ) Limited. Both arrangements were entered into before the PPSA came into force on 1 May 2002. However, only the debenture was subsequently registered in accordance with the new legislation.

Glenmorgan Farm defaulted on its lease payments and New Zealand Bloodstock terminated the lease and re-took possession of Generous. Glenmorgan Farm also defaulted on its arrangements with S.H. Lock, which consequently appointed receivers in respect of the assets of Glenmorgan Farm and claimed entitlement to possession of Generous.

High Court decision

In the High Court(1), Justice Allan held that S.H. Lock was indeed entitled to possession of Generous. Under the PPSA, a lease for a term of more than one year is deemed to be a security interest. Therefore, New Zealand Bloodstock should have registered its security interest during the transitional period in order to protect its rights.

New Zealand Bloodstock appealed on the basis that Glenmorgan Farm's security arrangements with its creditors should not be able to deprive it of its title to the stallion.

Court of Appeal decision

The majority of the Court of Appeal(2) agreed with Justice Allan and found that the debenture took priority over New Zealand Bloodstock's title to and possession of Generous.

The PPSA effectively subordinated New Zealand Bloodstock's title to the operation of the legislation. In other words, the relevant provisions of the PPSA were found to be a deliberate legislative exception to the principle that no-one can give a better title than he or she possesses.

The Court began by outlining the scheme of the legislation: "the key features of our PPSA...are the adoption of a unitary concept of security (under which the legal forms by which security is obtained become largely irrelevant) and establishment of priority rules which depend primarily on time of registration save for the super priority accorded to registered purchase money security interests (i.e. in favour of unpaid vendors) over prior general securities." It was noted that the PPSA provides for the creation of security interests, as well as for their enforceability, priority rules and a system of registration.

The majority then described the steps taken in its determination in favour of S.H. Lock as follows:

1. New Zealand Bloodstock's lease was a security interest for the purposes of the PPSA and "that being the case, instead of enjoying its previously inviolable title to the stallion, New Zealand Bloodstock's interest...was liable to be overridden by a competing security interest";
   
   
2. under the PPSA, Glenmorgan Farm obtained rights in Generous;
   
   
3. the debenture was, as a matter of construction, effective to cover Glenmorgan Farm's rights in Generous;
   
   
4. S.H. Lock's security interest "attached" to those rights for the purposes of the PPSA - in this respect, the PPSA requires that value is given by the secured party, that the debtor has rights in the collateral, and that the security agreement is enforceable against third parties;
   
   
5. S.H. Lock's security interest was also "perfected" under the PPSA by the registration of a financing statement; and
   
   
6. New Zealand Bloodstock had not perfected its security interest and consequently S.H. Lock's interest took priority.

However, Justice William Young (dissenting) found that, because the debenture was entered into prior to the PPSA coming into force, it did not give S.H. Lock security over Generous. Under the pre-PPSA regime, Glenmorgan Farm would have had no proprietary rights in the stallion by virtue of the lease from New Zealand Bloodstock and, in Justice William Young's view, nothing in the PPSA created a new security interest for S.H. Lock in Generous when the PPSA came into force.

For that reason, the minority judgment concluded that S.H. Lock's security was in Glenmorgan Farm's contractual rights only, and so ownership of Generous at all times remained with New Zealand Bloodstock.

Nonetheless, the dissenting judge noted that "New Zealand Bloodstock could have registered its security interest in Generous during the transitional period provided for by the PPSA and preserved its priority. In light of its failure to do so, New Zealand Bloodstock will have only itself to blame if it loses this case."

Justice Baragwanath, delivering the majority judgment, pointed out that "the major lessons of the case are two-fold: the statutory altering of the proprietary rights of a lessor; and the crucial importance of registration. These are policy choices which have been made and significantly alter what would otherwise have been the position."

Commentators expect the decision to be appealed to the Supreme Court. We will update FSQ subscribers if an appeal is lodged.

(1) Waller and Agnew and Another v New Zealand Bloodstock Limited and Another (CIV-2004-404-004093, High Court Auckland, 2 December 2004)

(2) New Zealand Bloodstock Limited and Another v Waller and Agnew and Another (CA269/04, 21 September 2005)

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