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2012 Developments Under the Personal Property Securities Act

Written by Caroline Harris, PARTNER; Mark Sullivan, PARTNER on July 2nd, 2012.    

Developments under the Personal Property Securities Act – the first six months of 2012

During the first half of 2012 the Courts have delivered a number of decisions that will be of interest to Insolvency Practitioners and commercial creditors who deal with the Personal Property Securities Act 1999 (PPSA).
This update summarises the more significant decisions relating to:

  • Subordination agreements and PPSR registration – what determines priority?
  • Priority of creditors who receive debtor-initiated payments – the scope of section 95 of the PPSA.
  • Priority to rental income from real property – the contest between registered mortgagees and GSA creditors.
Subordination agreements and PPSR registration – what determines priority?

Gibbston Downs v Perpetual Trust [2012] NZHC 1022 (28 May 2012)

In the recent Gibbston Downs case, the Court confirmed that the terms of a subordination agreement between secured creditors will determine priority to collateral, not registration on the PPSR.
The Court was asked to determine priority between two secured creditors who had entered into a subordination agreement. Gibbston had registered its security interest on the PPSR ahead of the second secured creditor, Perpetual Trust. The parties entered into a subordination agreement whereby Gibbston agreed to subordinate  its  interest granting the second secured creditor first ranking priority.
The subordination agreement was recorded on the PPSR by amending Gibbston’s financing statement. The financing statement had an existing registration expiry as is required by the PPSA Regulations.  The financing statement expired in March 2010.
Gibbston argued that the subordination agreement expired once the expiry date on the PPSR had passed. The effect of this would have been to restore Gibbston to first ranking priority. The Court did not accept this argument.
The Court found that the subordination agreement remained operative as between the two parties and was not affected by the expiry of the PPSR financing statement. The priority agreement reached was not limited in its duration and remained operative, despite expiry of the PPSR registration.
The result was that the second secured creditor retained priority under the subordination agreement.

In this case, the terms of the subordination agreement were relevant to the Court’s finding. Whether a subordination agreement will remain operative in similar situations will require a review of the priority arrangements reached between the parties.

Debtor-initiated payments under section 95 of the PPSA - IRD beats secured creditor to GST payment

Commissioner of Inland Revenue v Stiassny & Ors [2012] NZCA 93
(** this decision has been appealed to the Supreme Court)
CIR v Stiassny concerned the scope of section 95 of the PPSA and when a payment will be regarded as a “debtor-initiated payment” so as to confer priority on the recipient creditor ahead of the interests of secured creditors.
In this case the Court of Appeal found that the IRD was entitled to retain a sizable GST payment of $123 million in priority to the secured creditor. Because the receivers’ payment of the GST was held to be a debtor initiated payment under section 95, the secured creditor lost its priority. This was despite the Court’s finding that the receivers were under no obligation to make the GST payment.
Read more…
Section 95 of the PPSA
Section 95 confers priority on creditors who receive payment of a debt through a debtor-initiated payment over other security interests in the funds paid.
This section provides a limited exception to the general priority rule that a secured creditor will have priority over an unsecured creditor. Section 95 applies regardless of whether or not the creditor had knowledge of the competing security interest at the time the payment was made.
The policy behind section 95 is to facilitate trade and protect the integrity of the payment system so that payments to creditors that have been initiated by the debtor are left free from competing security interests.
In this case, the IRD argued that despite the source of the funds being subject to a security interest (which would otherwise have had priority over the IRD debt), the payment  had been initiated by the debtor, therefore, section 95 gave the IRD priority over the payment ahead of the secured creditor’s interest in the funds.
The Court of Appeal accepted this argument entitling the IRD to retain the $123 million.
On receivership, the receivers assumed positions on the debtor’s management board, effectively controlling the management board of the debtor. While in receivership, the debtor sold assets realising USD $621 million plus GST.  The sale attracted GST of $123 million.
The sale proceeds were not sufficient to repay the secured creditor or the unsecured IRD debt.
The secured creditor claimed priority to the sale proceeds ahead of the IRD’s unsecured claim for the GST that was payable on the sale. The receivers wrote to the Commissioner claiming priority to the sale proceeds ahead of the Commissioner.
Subsequently, the receivers became concerned by the risk that the receivers would be personally liable for the GST arising from the asset sale and the exposure to significant penalties if the GST payment was not made when due. With the agreement of the appointing creditor, the receivers drew a cheque for the $123 million in favour of the IRD.

The receivers later filed proceedings in the High Court seeking to recover the GST payment on the basis that it was paid under a mistake of law – namely, the mistaken belief that the receivers would have been personally liable to pay GST.
Both the High Court and the Court of Appeal accepted that the Receivers were not personally liable to pay the GST. However, the Court of Appeal did not require the IRD to return the payment to the secured creditor.
It was accepted that if the payment was a “debtor-initiated payment”, then section 95  would accord priority  to  the  IRD over the security  interest of the secured  creditor. The issue  was whether the payment was a “debtor-initiated payment” or whether the payment was effected by the receivers.
The Court of Appeal found that the GST payment was a debtor-initiated payment within the meaning of section 95 on the basis that the receivers, as agents for the debtor, initiated the payment to the IRD. The receivers, the secured creditor and debtor all agreed that that GST payment should be made and authorised the receivers to make the payment.
This case is significant for receivers as it confirms that payments to creditors by receivers may fall within section 95, thus altering the general order of priorities and potentially to the appointing secured creditor’s detriment.

Priority to rental payments – Mortgagee v GSA creditor?

Marac Finance Ltd v Greer [2012] NZCA 45
Marac was a case decided earlier this year and concerned a contest between a GSA holder and a mortgagee lender to collect rental income from real property.
The Court of Appeal has confirmed that a creditor with a registered general security interest in personal property is not entitled to rental income from real property which is subject to a registered mortgage.
Rental income from real property is part of the registered mortgagee’s security – not a general security interest under the PPSA.
Read more…
Marac entered into a loan facility which was secured by a general security interest over all present and after acquired property of the debtor. The general security interest was subsequently registered on the Personal Property Securities Register.
The debtor owned two commercial properties which were already subject to registered mortgages to another creditor when Marac’s general security interest was registered.
When the debtor defaulted, Marac appointed receivers under the terms of its general security. Ten days later, the mortgagee appointed a receiver over the rental income that the debtor received as lessor of the buildings.
Marac claimed that as first ranking security holder over the debtor’s personal property (including rental), it should receive the rental income.
The mortgagee argued that the PPSA does not apply because rental payments are excluded from the PPSA regime by section 23 of the PPSA.  The Court of Appeal agreed with the mortgagee.
Section 23 specifies particular rights and interests to which the PPSA does not apply.  In particular, section 23 states that the PPSA does not apply to an interest provided for by a transfer of a right to payment “that arises in connection with an interest in land”.

The terms of the mortgage provided that the security operated as an absolute transfer and assignment of all the debtor’s rights to the assigned property. The Court of Appeal accepted that the right to payment of the rental arose “in connection with an interest in land” and was therefore caught by the exclusionary ambit of section 23.
The PPSA continues to present complex challenges for experienced Insolvency Practitioners and creditors. For more information and advice about the Personal Property Securities Act 1999 contact our Litigation specialists.


The information contained in this publication is of a general nature and is not intended as legal advice.  It is important that you seek legal advice that is specific to your circumstances.
All rights reserved © Jackson Russell 2012

Caroline Harris Publications2
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Mark Sullivan Publications2
Mark Sullivan,



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