Personal Property Securities Act … due diligence still important!

The Personal Property Securities Act, which came into force over 10 years ago, was intended to give greater clarity and certainty to the laws about lending and borrowing money. However, due diligence is still important for parties dealing with security interests, as the following example shows.

Don’s company Supply Co was a regular supplier of goods to Trading Co, and held a general security agreement over Trading Co’s assets to ensure he was paid.

However, Trading Co also had a general security agreement with Big Bank. Big Bank wanted to make sure it could recover its money before other creditors, so persuaded Don to agree that Big Bank’s security interest would have priority.

Don registered a financing change statement confirming that Big Bank’s security agreement would have priority. The details included on the Personal Property Securities Register showed an expiry date of 31 January 2011.

Jenny was the owner of Supply Plus and a good friend of Don’s. When Don one day decided to move to the Gold Coast, she approached him to ask about Supply Co’s agreement with Trading Co. Don agreed to assign to Jenny’s Supply Plus both his supply agreement and general security agreement with Trading Co.

This was a major new contract for Jenny, and she was thrilled. She noticed that Big Bank’s security agreement had priority, but assumed this priority arrangement had ended on 31 January 2011.

Unfortunately, Jenny did not realise that Trading Co was hitting troubled waters, and one day it had to call in the receivers. Jenny was shocked when the receivers agreed with Big Bank that Big Bank would be repaid ahead of her.

Big Bank and the receivers were insisting that the expiry date of 31 January 2011 on the Register did not mean that the priority arrangement had come to an end. After Big Bank had been repaid, there was nothing much left to repay Supply Plus, and Jenny’s company was in serious trouble!

The above example is actually very similar to a recent case that was heard by the Court of Appeal. It shows the importance of making proper inquiries into security agreements, particularly when there are other competing security interests.

In Jenny’s case, rather than make assumptions, she could have tried to find out whether Big Bank and Trading Co would agree to give her a priority interest in just the specific goods she was supplying to Trading Co, which would have better protected her position.

If you have any questions about a security agreement, give Claire Tyler a call on (04) 473 6850.