Ensure security agreements are signed by the debtor

This was an appeal of a case brought by a supplier of goods whose debtor had not signed the underlying security agreement. Liquidators for the debtor refused to allow the supplier to repossess goods that had not been paid for and did not account to the supplier from the proceeds of sale of the goods.

The High Court¹ concluded that the liquidators were liable for conversion of the goods because they refused to hand them over to the supplier and because they refused to account to the supplier for the proceeds of their sale.

The liquidators appealed the High Court decision and the Court of Appeal identified the following issues for consideration:

1. Was the supplier attempting to enforce rights between the parties to the security agreement?

The court first had to determine whether the supplier's security interest had attached to the goods by considering sections 40 and 36 of the Personal Property Securities Act (the PPSA). Section 40 provides that a security interest attaches:

• when value is given by the secured party; and
• when the debtor has rights in the goods; and
• except for the purpose of enforcing rights between the parties to the security agreement, the security agreement is enforceable against third parties within the meaning of section 36.

Section 36 provides that a security agreement is enforceable against third parties if the secured party is in possession of the goods or the debtor has signed or otherwise assented to the security agreement.

There was no question that the requirements of paragraphs (a) and (b) of section 40 were met. The question was whether the requirements of paragraph (c) were met - that is, was the supplier's enforcement of its security agreement after the appointment of the liquidator an enforcement of rights "between the parties to the security agreement"?

The Court of Appeal determined that the liquidator was an agent of the debtor and that, accordingly the liquidation did not result in a change to the parties to the security agreement. In addition, the court could see no reason why a security interest that was enforceable pre-liquidation becomes unenforceable against the debtor at the moment of liquidation.

The liquidator was therefore wrong to refuse to recognise the supplier's security interest. In the absence of any superior interest, the supplier would have been entitled to possession of the goods subject to its security interest under section 248(2) of the Companies Act.

However, in this case, there was a superior interest given under a general security agreement in favour of a bank.

2. Were the liquidators acting as agents for the bank?

The court concluded that the liquidators were acting as agents for the bank, and as such, were entitled to possession of the goods subject to the bank's security interest. The liquidators were entitled to reject the supplier's attempt to take possession of the goods. Accordingly, the liquidators were not liable to the supplier for conversion of the goods.

3. Did the liquidators have an obligation to account to the supplier?

Because the liquidators were acting as the bank's agents, they were obliged to comply with the duties imposed on the bank by Part 9 of the PPSA. This included the obligation to distribute the surplus according to section 117 of the PPSA.

The court concluded that the liquidators had failed to account to the supplier for the proceeds of sale of the goods subject to the supplier's security interest and so the appeal was dismissed.

If the security agreement had been signed by the debtor, these arguments would not have arisen.

¹ Dunphy & Anor v Sleepyhead Manufacturing Company Limited CA63/06[2007] NZCA 241

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