Queue-jumping shock for finance sector creditors

A recent High Court judgment could create “massive uncertainty” for New Zealand businesses and the finance sector in particular, a commercial law expert has warned.

A recent High Court judgment could create “massive uncertainty” for New Zealand businesses and the finance sector in particular, a commercial law expert has warned.

Professor Mike Gedye of the University of Auckland is an expert on the Personal Property Securities Register (PPSR) and has written books on the topic.

He has raised concerns about some aspects of the February 24 judgment by Associate Judge Tony Christiansen in a case involving security agreements registered on the PPSR.

The applicant, the Healy Holmberg Trading Partnership, sought an order that it was a secured creditor holding registered securities over various items of property owned by LBD Civil Limited at the time LBD was put into liquidation.

The first respondents were the liquidators of LBD, Damien Grant and Stephen Khov from Waterstone Insolvency, who did not recognise Healy Holmberg’s claim because they had doubts about its integrity and preferred the claim of the second respondents, RIGA.

Suspicious of signed security agreements provided by Healy Holmberg that were dated December 29 2005 and September 25 2006, the liquidators called in a police document examiner, Trish James, to analyse them.

Her conclusion was that indentations showed the pieces of paper came from the same bundle and were probably signed together, making the dates on the agreements unreliable.

Associate Judge Christiansen dismissed Healy Holmberg’s application, saying it was “more than probable” the documents in question were not completed before the liquidation.

Professor Gedye said, although he disagreed with this conclusion, the judgment could be supported on the grounds that after a company is put into liquidation only a liquidator can contract on behalf of the company.

However, he highlighted paragraph 38, where Associate Judge Christiansen said, “Therefore unless HH’s security interested was perfected before 17 August 2007 then it does not have priority over the security claim of RIGA.”

This, the professor said, is “just completely wrong” because priority is supposed to go to whoever registers a security interest on the PPSR first, rather than whoever perfects (signs) a security agreement first.

That aspect of the judgment would probably be ignored but if it wasn’t it could create big problems, he said.

“If it wasn’t just ignored this it would create massive commercial uncertainty. Businesses would need to bring in handwriting experts to determine when it was entered into and everything.”

Although the current PPSR system isn’t perfect it is at least relatively simple, Mr Gedye said.

“If this does take root, lenders will increase their interest rates because it increases uncertainty,” he said.

“They will also restrict lending and enter into more complex arrangements to get around it. It will be bad for the whole business community.” 

1 comment
Login in or Register to view & post comments