The Personal Properties Securities Act 1999

If you have ever wondered how do you reduce the risk and/or secure yourself against bad debtors who have not paid you, or you have lost property due to someone else saying or claiming – “but it is mine” – even though you thought ownership in the property remained yours until the debt was paid – then you need to read and become very familiar with what follows.

NMSNZ Ltd are well known for expertise in this very specialised area, and can assist from designing more adequate terms of trade, through to the lodgement and management of all of a client’s financing statements on the PPSR. Alternatively, we can set up and instruct your own staff on the procedures and systems to follow, and can continue to oversee the in house process adopted for a very manageable annual fee.

The Personal Properties Securities Act has been around for ages…

Even though this legislation has been in force now for over 14 years now, it never fails to amaze us at NMSNZ Ltd how many people or businesses know very little (or in fact nothing at all) about the Personal Property Securities Act (PPSA) or the Personal Property Securities Register (PPSR).

The impact on businesses when one of their clients defaults on paying their account or goes “bust” can be financially devastating.  If there are outstanding amounts that have not been paid, or goods on site that have not been retrieved, suppliers immediately become at risk of being left out of pocket despite their ‘ownership’ rights which may (or may not) be included under commercial agreements which may (or may not) be in place through terms of trade, finance agreements, leases etc.

Knowing the mechanism the law uses to determine the order of priority of who first gets reimbursed and/or who first gets allowed to retrieve their goods becomes vital when numerous suppliers (generally in hostile situations) are arguing over (in many cases) the same goods.  This mechanism is the Personal Properties Securities Act which applies to creditors either financing or selling goods on credit to customers, or leasing goods or equipment to them (for more than one year or an indefinite term).

While registration under the PPSA does not guarantee you will get what is owed to you when a debtor defaults, it certainly increases your chances by creating a “security interest” over property or goods of the debtor which in turn provides you with a far better financial advantage over unregistered creditors therefore reducing your exposure risk to bad debts.

The Purpose of the PPSA

The PPSA came into force in May 2002 to address the issue of prioritising competing claims over the same property. The Personal Properties Securities Register (PPSR) is an electronic register which acts as a public “noticeboard” accessible through the Companies Office web site, and allows a secured party to register the details of property that they have an interest in. This register records a claim to property (known as a “security interest”), and is the basis for establishing the order of priority against any competing security interests.

The general rule of priority under the Act is that a security interest registered first in time on the PPSR will have priority over any other security interest registered later in time.

While registration on the PPSR is not compulsory, it is the key to you or your business securing priority as a creditor. The PPSR is available for registering and/or for searching for notices of security interests in property on the PPSR.

For example, if a Bank lends money to a company, the Bank will take a charge over the company’s property and register this charge on the PPSR, creating a security interest as recorded on the PPSR by way of a “financing statement”, until the debt is repaid. The Bank therefore gives notice to other parties who may search the register that the Bank has a security interest against the company’s property as recorded on the PPSR.

The purpose of the PPSA is therefore to provide an avenue for individuals or companies who lend money or provide goods on credit to register their interest by way of these registered “financings statements” on the PPSR against the borrowers property as security. The security is registered against the full name of the debtor (an individual or company) and the particular item “secured”, as should always be fully detailed within a complete description of that item including serial numbers if applicable.

Dependent on what the parties agree, the secured party may register an interest against all the borrower’s assets (generally described as “all present and after acquired personal property” ) or against specifically identified separate “collateral” (meaning personal property that is subject to a security interest) under the identification of a “goods” type security such as e.g. a laptop, a car, boat, machinery, or a computer etc.

A financing statement is registered once by a creditor in respect of a debtor and must be renewed every 5 years, or for as long as that relationship with that customer (as a debtor) exists.

Despite the protections offered by the PPSA, we continue to see a large number of individuals as well as companies as suppliers losing priority to competing creditors largely because they have failed to perform the necessary PPSA registration.  This is particularly unfortunate given that registering a security interest on the PPSR is a fairly simple and inexpensive process, and a process that can either be set up with assistance from NMSNZ Ltd so it can be undertaken in house, or the whole process can be independently managed and maintained by NMSNZ Ltd on behalf of the client or company (creditor) on an annual basis for a very manageable fee.

When the PPSA applies

The PPSA applies to transactions between two parties which create or provide for security interests in personal property (a technical term associated with the word “collateral” which generally means all personal property which can be owned by an individual or a company except for land and ships – boats over 24 metres).  These transactions include:

  • General Security Agreements (GSA) (previously known as debentures)
  • Retention of title/ Romalpa clauses
  • Leases of goods/ equipment for more than one year
  • Leases of goods/ equipment for an indefinite term
  • Agreements to provide goods on consignment

A GSA and Romalpa clause (in the supplier’s terms of trade) creates a security interest in personal property on the basis that it in substance secures payment or performance of an obligation owed by the customer.  Leases of goods or equipment (for more than a year or indefinitely) and the provision of goods on consignment, on the other hand, are simply deemed security interests regardless of whether they secure any obligation.

Priority under the PPSA

The general rules of priority under the PPSA are that:

  • Security interests which are perfected by possession or registration on the PPSR have priority over unperfected security interests; and
  • The security interest registered first will take priority over subsequent registrations where there is more than one security interest registered over the same collateral.

Exceptions to the Priority rule under the PPSA:

It is important to note there is one exception to the “priority” rule.  A common and very important exception to the priority rule is what is termed a Purchase Money Security Interest (PMSI). A PMSI is defined as:

(a)  A security interest taken in collateral by a seller to the extent that it secures the obligation to pay all or part of the collateral’s purchase price; or,

(b)  A security interest taken in collateral by a person who gives value for the purpose of enabling the debtor to acquire rights in the collateral, to the extent that the value is applied to acquire those rights; or,

(c)  The interest of a lessor of goods under a lease for a term of more than 1 year; or,

(d)  The interest of a consignor who delivers goods to a consignee under a commercial consignment.

A PMSI is a security interest which gives superior priority over all other interests, even if there has been a financing statement registered against the same property at an earlier date. A PMSI typically exists where a supplier provides goods – or a financier provides funding for goods (usually inventory) on the basis that the secured retains title until the goods are paid for (as generally recorded in the financing agreement or terms of trade and commonly referred to as a Romalpa type clause).  Provided it is registered correctly, a PMSI takes super-priority over all other security interests registered earlier in time over the same collateral.  Practically, this means that the holder of a valid PMSI can take priority over a bank or other lender who has a prior registered GSA over all the customer’s assets.

In all cases, a PMSI must be registered either before possession, or depending on the collateral used as security, within 10 working days from the date the debtor takes possession of the asset (e.g., picks up the new car). However, in most situations ownership is irrelevant when it comes to the PPSR as ownership will not protect either party if the correct perfection rules have not been adhered to.

It is important to also note that a PMSI will only be effective if:

(a)  A retention of title/ Romalpa clause (or an admission that title in the goods remains with the creditor until the debt is paid) must be included in the supplier’s finance agreement or the written terms of trade and this must be accepted by the customer before the funds are advanced or the goods are supplied;

(b)  The customer assents in writing to the terms which clearly indicate the creation of a security interest in the goods to be purchased, or the goods supplied, on credit.

(c)  The supplier registers a valid financing statement before the customer takes possession of the goods (in the case of inventory) and/or within ten working days after the customer takes possession (in the case of other goods).

If a secured party correctly complies with the registration requirements, a PMSI will take priority over all other security interests, including all interests that were registered prior to the PMSI. This means a PMSI “trumps” a standard PPSR security. This is particularly relevant to a security over the proceeds over those goods as may be secured under the PPSR.

Determining a PMSI priority security can be difficult to assess directly from a financing statement, however, the operative word to watch for is “proceeds”.

As a recognised expert in this field, NMSNZ Ltd regularly receives enquiries in respect of placing and maintaining PMSI securities, in addition to challenging the validity of other creditors PPSR securities. If you think you have been “duped” by another creditor, give us a call, we can check it out for you.

Perfection under the PPSA – A WARNING !!:

Some learned authors state perfection occurs when either two events happen, either when registration takes place as recorded on the register, or when the client gains possession (being an interest in the title – ownership) of the goods.

However, a word of caution, in the view of NMSNZ Ltd, “perfection” can only occur when each aspect of the whole process has properly been completed namely; 1; possession, 2; the documentation is completed (and must be completed correctly in line with the regulations), and 3; on the proper registration of the security interest on the register.

Just because someone has a registered “financing statement” on the PPSR, this does not guarantee that the security is in fact “perfected” and that the security as recorded is safe.

This means that in establishing the priority between competing secureds, all the relevant information must be assessed and reviewed including all documentation such as the loan agreement, terms of trade or appointment, plus any other relevant documentation to assess “perfection”.

If the security has not been properly perfected, then the financing statement may be removed from the PPSR as a result, and the supposed secured will not only be highly embarrassed, but more importantly, also out of pocket for the resulting loss in value of that security.

NMSNZ Ltd regularly reviews PPSR registrations on the request of clients and will challenge the priority of order of a creditors security using the procedure established within the PPSR if deemed appropriate.

Common risk areas for creditors

General Security Agreements (GSA) – Before the PPSA regime, priority was given to the GSA executed first (with some exceptions). Today, the date that a GSA is signed is irrelevant.  It is the date of registration on the PPSR that is fundamental when assessing priority. This means that regardless of whether a GSA is signed first, if it is not subsequently registered or not registered in time on the PPSR, it risks being defeated.

Retention of title – A retention of title or Romalpa clause included in a finance agreement or a terms of trade affords a supplier no special protection if there is no financing statement registered on the PPSR.  This is because the PPSA ultimately recognises registered security interests over common law ownership.  This distinction is often misunderstood and will result in confusion and frustration (anger) usually when it is too late.

Leased goods – Provided the lessor is regularly engaged in leasing, a lease (for a term of more than one year or of indefinite length) is a deemed security interest in goods but must still be registered on the PPSR.  Ownership of the leased goods will not give lessors super priority unless a PMSI is registered on the PPSR within 10 working days of the customer taking possession.  If the lessor fails to meet this deadline, the registered security interest will simply rank ahead of subsequent registrations over goods in the customer’s possession.  This is where lessors often run into problems.

Consignment stock – The same principle applies to stock supplied on a consignment or sale or return basis. Even though legal title may not have passed to the customer, the consignment simply constitutes a security interest which must be registered on the PPSR within the time limits in order to rank ahead of a GSA holder or other secured creditors of the customer.

Registering a financing statement

To register on the PPSR, you must register a financing statement online including information in relation to the credit, the customer’s name and enough detail to adequately identify the security taken (make, type, age, colour, registration numbers, distinctive features etc).  Full details of both the creditor (secured party) and the customer (debtor) are required.

Like most registers, the PPSR is only as good as the information registered on it.  Information which is incorrect may result in no returns on a subsequent search and could potentially render your financing statement ineffective or redundant.  In this instance, your security interest will only be enforceable against the customer but not against third party creditors.  Registration of an accurate financing statement is critical to securing your priority as against the customer’s competing creditors.

Wrapping it Up:

Under the PPSA regime, ownership/ proprietary interests of a creditor simply gives rise to a security interest which must then be registered on the PPSR.  If not registered, the customer’s possession of the goods or competing registered security interests over the customer’s goods will override your common law ‘title’ in  those goods.

It must also be emphasised that other legal processes generally follow matters involving the security of these types of assets, or the repossession of assets are now controlled under very strict statutory procedures namely, the Credit Contracts and Consumer Finance Act 2003, the Credit Contracts and Consumer Finance Amendment Act 2014, and the Credit (Repossession) Act 1997. These Acts are controlled by the Commerce Commission and strict (and stiff) penalties are imposed on anyone breaching these regulations or Acts including the Fair Trading Act. So a word of caution, do not claim to have security in property that you can’t back up, and do not attempt to repossess items unless you have sought proper legal advice, and always employ the services of a licenced Repossession Agent registered under the Private Security Personnel and Private Investigators Act 2010.

NMSNZ Ltd regularly review clients security interest in goods supplied (particularly those set out in standard terms of trade) for effectiveness and secondly, ensure that such security interest is properly registered under the PPSA to ensure priority over competing interests in goods.

If you would like NMSNZ Ltd to assist you, we are only a phone call away.