The Personal Property Securities Act

David Craig, Partner and David McPherson, Partner | August 2001

This is the third in our series of newsletters dealing with the Personal Property Securities Act 1999 (the PPSA). The PPSA is significant new legislation affecting all parties who deal with personal property, such as financiers, trade creditors and lessors of personal property. In this newsletter, we consider the rules that will determine when a secured creditor has priority over other claimants.

Commencement Date Announced

The commencement date of the PPSA has been announced as 1 May 2002. From that date, a six-month transition period will apply. During that transition period, existing security interests may need to be perfected by registration under the PPSA if they are to retain their existing priority.

Previous Newsletters

In previous newsletters, we discussed the meaning of the term "security interest". This is a fundamental concept in the legislation, since the PPSA will only apply to creditors seeking to claim a security interest in personal property.

We noted that the first question for any creditor is whether it has a "security interest". If the answer is yes, the second question is whether the security interest relates to personal property. This is because the PPSA only applies to security interests in personal property and not other types of property (such as land). We then considered the types of personal property in which a security interest can be taken.

In this newsletter, we consider the priority rules that determine which of two competing creditors will have priority.

Priority - Issues to consider

There are two issues that a creditor must consider when determining whether it has priority over other creditors.

The first issue is whether the creditor has "perfected" its interest in the personal property. The second issue is, even if that interest is perfected, does the PPSA confer priority on another party?

Issue One - Perfection

Perfection is a concept fundamental to the operation of the PPSA. Once a security interest is perfected, the secured party acquires certain rights in the collateral under the PPSA. Perfection is different from priority. Perfection occurs when a creditor has taken all the necessary steps set out in the PPSA to protect its position as between itself and its debtor. By definition, it is possible for a number of creditors to have taken all those steps and therefore have a perfected security interest in the same collateral. Priority reconciles the competing claims of those creditors who have perfected security interests. Only one party can have priority.

The method of perfection

There are two main ways to perfect a security interest:

1. Perfection by possession; or
2. Perfection by registration.

Although other limited methods to perfect exist, they are not discussed in this newsletter.

Perfection by possession

The taking of possession of collateral by a secured party (or an agent on its behalf) will perfect a security interest in that collateral. Obviously, some types of collateral cannot be perfected by possession, for example an intangible right (such as a book debt or goodwill). In the case of these types of collateral, perfection must be by another method (usually by registration). The PPSA contains special rules specifying how a secured creditor may take "possession" of certain intangibles, such as shares.

The PPSA does not define what action a creditor must take to gain "possession" of collateral. However, the PPSA makes it clear that leaving collateral in the possession or control of the debtor is insufficient "possession" by the secured creditor to constitute perfection. At the least, a secured creditor will need to alert a third party to the fact that the debtor has given a security interest in the collateral to another person.

Perfection by registration

The most common method of perfecting a security interest in collateral will likely be by registration of a financing statement on the Personal Property Securities Register.

Registration is the only method of perfecting a security interest in all types of collateral. There is nothing to prevent a secured party from perfecting both by registration and by possession.

Under the PPSA, the general rule is that the first creditor to register or take possession has priority. This rule is different from the rule that applies under the existing law. Currently, if a company created two charges in favour of two separate creditors, it is the creditor whose charge was created first that takes priority (so long as that creditor has registered within the 30-day period required by the Companies Act). The general rule under the PPSA is that first to register or take possession takes priority no matter which charge is signed first. One consequence is that creditors, such as banks, are likely to require registration of a financing statement as a condition precedent to advancing funds to a debtor.

As a security interest may be perfected by possession, a creditor searching the Register cannot assume that all perfected security interests are disclosed on the Register.

Issue Two - Exceptions to the general rules

There are a number of exceptions to the general rule that the first creditor to register a financing statement or take possession of collateral has priority. We will only deal with one of these exceptions in this newsletter, that of the purchase money security interest (or "PMSI").

Broadly, a PMSI is a security interest that is taken in collateral to secure payment of the collateral's purchase price. The best example of a PMSI is a retention of title clause, where a seller retains title to secure amounts owing when that seller supplies inventory on credit. Another example is money advanced by a bank to a debtor to assist that debtor to acquire a vehicle. To the extent that the money advanced by the bank is actually used to acquire the vehicle, the bank has a PMSI in that vehicle. A PMSI need not arise under a specific security agreement such as a charge over a vehicle. If a bank takes a general security agreement over all of a company's assets and advances funds for the purpose of making an acquisition, the bank will have a PMSI in the assets acquired by those funds so long as it can show the relevant advance was made for the specific purpose of acquiring the asset in which a PMSI is claimed.

The general rule that the first creditor to register a security interest or take possession takes priority does not apply to where a creditor has a PMSI in the collateral. As long as a creditor claiming a PMSI has complied with the procedural requirements of the PPSA, the PMSI will take priority over all other security interests, even if those security interests were registered, or possession was taken, earlier in time.

The intention of PMSIs is to permit debtors to seek alternative sources of funding when acquiring new assets without the need to require existing secured lenders to execute priority agreements. Using PMSIs should increase the funding options available to borrowers and perhaps make financing cheaper and easier. As PMSIs generally extend only to the value supplied by the PMSI holder, prior secured parties are not usually harmed by the priority given to PMSIs.

PPSA on-line

Bell Gully will shortly be introducing an on-line PPSA guide.

This will include:

• Frequently asked questions.
• A question and answer facility.
• A glossary of PPSA terms.
• Information and details of upcoming PPSA events and seminars.
• Profiles on our PPSA specialists.

Information you should be collecting now

If you don't have certain information, you can't re-register once the PPSA takes effect. The more of this information you collect now, the easier your job will be later.

Debtor details

The information required to be registered is likely to include:

• the name of the debtor,
• the person acting on its behalf (if an organisation),
• the address of the debtor,
• the date of birth of the debtor (if an individual) or incorporation number (if a company).

The Regulations will set out which documents can be relied on in order to establish a debtor's name.

These are likely to be a New Zealand driver's licence, birth certificate, passport or certificate of citizenship.

Secured party details

• the name and address of the secured party,
• if an organisation, the name of the organisation,
• the person authorised to act on behalf of the organisation,
• if a security interest is being re-registered, details of the prior registration.

Collateral details

• a description of the collateral,
• in the case of certain collateral (mainly aircraft and vehicles), a serial number.