An overly broad financing statement is not misleading

The Court of Appeal1 has agreed with the High Court that an overly broad financing statement is not misleading for the purposes of section 149 of the Personal Property Securities Act (the PPSA).

We commented on the High Court's decision in the Autumn 2006 issue of Financial Services Quarterly.

In summary, two financing statements were registered at the Personal Property Securities Register (PPSR):

1. first, by a bank in respect of a general security agreement over all of the company's assets; and
   
   
2. secondly, by the supplier in respect of goods supplied on retention of title terms.

In determining which security interest had priority, the court had to consider whether the supplier's financing statement contained an adequate description of the collateral or whether the collateral type and description did not properly reflect the security interest and therefore did not perfect it.  In other words, was the financing statement seriously misleading, rendering it invalid?

The High Court held that the financing statement perfected the security interest and was not seriously misleading. The collateral description may have been overly broad, but the supplier's valid security interest was confined to the goods and proceeds described in the terms of trade.

The Court of Appeal considered the following three questions:

1. Did the supplier's written terms of trade create a security interest?
   
   
2. If so did the supplier perfect its security interest?
   
   
3. Was the perfected security interest restricted to goods supplied but not paid for?

Agreeing with the High Court's decision, the Court of Appeal decided that the answer to each of the questions was yes, noting:

1. Section 17(3) of the PPSA expressly states that an "agreement to sell subject to retention of title" constitutes a secured transaction.
   
   
2. While the collateral description was overly broad, this was not a significant error invalidating the perfection of a security interest.  There was nothing that was "seriously misleading".  Anybody searching the PPSR was put on notice and checking the document would have revealed that the security interest was not as broad as it might have been thought to have been, but that is not seriously misleading.
   
   
3. This was a non-issue.  Registration does not create any interest different from that which exists in the security interest itself.

 

 

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