Published: Fri, Dec 14th, 2012 by Mike Newdick
Since 2002, New Zealand has had a universal register on which parties are able to register any security taken over assets (other than land) called the Personal Property Securities Register (‘PPSR’).
Security comprises rights in respect of an asset granted to a creditor to support obligations to them. These rights commonly include the right to take ownership or control of the asset if the debtor does not meet its obligations. Anyone can register a security (called a ‘financing statement’) for a small fee. The financing statement identifies the debtor (the party giving security), the secured party (creditor), and the collateral (the assets to which the security applies). The priority of competing security interests depends on when the security interest was registered. Generally priority relates to the date of registration, even if the underlying security agreement was completed much earlier. If a financing statement is not registered, registered securities take priority. Therefore prompt registration is key.
Impact on Terms of Trade
Before the PPSR, it was common for a supplier’s ‘Terms of Trade’ to include a clause recording that ownership of the goods remains with the seller until payment for the goods is made in full (commonly known as a ‘Romalpa clause’). However, the Terms of Trade alone will not protect against parties who have registered security. To obtain priority over other registered creditors, a financing statement must be registered on the PPSR.
Consequences on liquidation
When a business goes into liquidation, the assets of the business are realised to repay as much of the debt as possible. Where there are competing creditors, the order in which they receive their share of any proceeds is determined by their ‘priority’. Secured creditors have priority over unsecured creditors but even amongst secured creditors there is a pecking order. A creditor with a registered security interest takes priority over a creditor with unregistered security. Furthermore, a creditor with an earlier registered interest takes priority over a later one.
Since it is common for a bank to have a registered security interest over a trading company’s present and future property, a supplier of goods or services on credit with an unregistered security interest takes a big risk. Purchase Money Security Interests Fortunately, there is an exception to the normal priority rule. A Purchase Money Security Interest (‘PMSI’) is possible when personal property is taken as collateral to ensure the payment of the purchase price, and can apply to Terms of Trade type situations. A PMSI can take priority over an earlier general security. In order to ensure the priority of a PMSI the supplier needs to ensure that:
- the buyer has agreed in writing to the security interest, and
- the security interest is registered within 10 days of the buyer taking possession.
A supplier is not required to register a separate financing statement every time it supplies goods, but rather can register a fi nancing statement to secure goods supplied from time to time on credit.
Financing statements expire after five years. Once they expire the original registration date is lost, and with it priority is lost. Prior notice of a pending expiry is not given by the PPSR. It is up to the secured party to monitor their registered security interests to ensure they are renewed before they expire.
If you would like further advice on the PPSR, or to review your terms of trade to ensure that they are up-to-date, please contact one of the Commercial team at Turner Hopkins – Mike Newdick, Kirsten Murfitt, or Matthew Cho.