What exactly is owed to a vendor PMSI holder when the purchaser goes into receivership?

In this case, the High Court determined how to calculate what was owed to a vendor PMSI holder ahead of a general security holder after receivers were appointed.

This case¹ was summarised in the Autumn 2006 issue of Financial Services Quarterly in the context of whether or not an overly broad financing statement was misleading. The determination was that it was not and that the vendor, who had a purchase money security interest (a PMSI), had priority over the bank, which had a subsequent ranking general security interest.

This hearing, in the High Court at Auckland, was about how the amount payable to the vendor PMSI holder ahead of the general security holder should be calculated. The case was brought by the receivers who argued that the onus was on the vendor to identify the goods it had supplied and for which it had not been paid, which was impossible, and that, therefore, the security was worthless.

The receivers argued that the party seeking to enforce a security interest must be the party to establish what property was subject to that security, citing a pre-Personal Property Securities Act (PPSA) decision². The judge did not consider that the PPSA had made a material change requiring the general approach of that pre-PPSA decision to be distinguished.

The arrangement was a standard vendor-purchaser retention of title relationship where the purchaser paid rounded amounts as and when it could. The purchaser was generally in arrears, both before the PMSI was perfected by registration on the Personal Property Securities Register, and for the six months between registration and appointment of the receivers. The judge determined that it was appropriate to infer that oldest debts (i.e. for stock supplied first) would be paid first, the default position based on Clayton's case³.

The receivers argued that, if this usual presumption was applied, there would need to be a "ruling off" of the indebtedness as it existed on the date of registration of the PMSI so that all payments made by the purchaser after that date were applied to indebtedness incurred after that date.

An analogy was made with section 293 of the Companies Act 1993. Section 293 provides that a charge over any property of a company is voidable by a liquidator if the charge was given within one year of the liquidation and, at the time the charge was given, the company was unable to pay its debts. However, subsection (4) provides that this rule does not apply to charges securing the unpaid purchase price of property. Subsection (5) goes on to provide that, for the purposes of subsection (4), where a charge was given within one year before liquidation, all payments received by the guarantee of the charge (in this case, the vendor) after it was given are deemed to have been appropriated towards payment of property sold on or after giving the charge. The court decided that, in the absence of the retention of title arrangement, sub-clause (5) would have applied. The retention of title arrangement meant that the property in question was owned by the vendor, and not the purchaser, so could not apply to the purchaser.

However, the court conceded that post-PPSA jurisprudence has acknowledged the need for symmetry between the PPSA and the Companies Act. Specifically, the Court of Appeal⁴ recognised the need to treat property in possession of the purchaser, but subject to retention of title by the seller, as "owned" by the purchaser for the purposes of the PPSA. On this basis, the court decided that the analogy with section 293 of the Companies Act was valid and agreed with the "ruling off" requested by the receivers.

The amount owed to the vendor was therefore calculated as the cost of sales to the purchaser in the period following registration of the PMSI, less amounts paid by the purchaser to the vendor during that period.

The judge noted that the outcome was potentially detrimental to PMSI holders. This is because its application would mean that, if a purchaser becomes insolvent within one year of a PMSI being perfected, amounts owing at the time of perfection of the PMSI could only be recovered after full payment of amounts owing after perfection of the PMSI.

¹ Re Service Foods Manawatu Limited (in receivership and liquidation): New Zealand Associated Refrigerated Food Distributors Limited v Simpson and Walton High Court, Wellington, CIV 2007-485-1563, 24 April 2008

² Geal Investments Limited v Ivil Hotels (1992) 4 NZBLC 102,899

³ Devaynes v Noble, Clayton's Case (1816) 1 Mer 572

⁴ in Dunphy v Sleepyhead Manufacturing Co Limited [2007] NZCA 241

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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.