PPSA: The Doctor, The Farm, The Horse & The Ordinary Course of Business

The doctor was a cosmetic surgeon who also had a financial interest in a Farm.

Security Interest Loan
The Farm sought a loan from the Bank so it could do some redevelopment work.  A condition of the loan was for the Farm to grant a security interest to the Bank over all “present and future assets” and undertakings of the Farm.

The Bank registered that security interest on the Personal Property Securities Register (PPSR) and was given a verification statement when it did so. The Bank then gave the Farm notice of that verification statement “in the approved form” (see ss.155-157 of the PPSA).

Horse – Lease – Not Registered
In April 2012, the Farm entered into a three (3) year lease to purchase agreement with the Vendor to acquire a Horse. On 31 April 2012 the Farm took possession of the Horse.
The lease agreement provided that:

• Title to the Horse would at all times remain with the Vendor; and
• in the case of default by the Farm, the Vendor would be entitled to possession of the Horse.

As owner of the Horse, the Vendor did not register the lease under the PPSA.

Termination and Default
On 6 July 2012 the Vendor terminated the lease agreement with the Farm.
On 7 July 2012 the Vendor wanted to take possession of the Horse.

Sale of The Horse
The Doctor made arrangements with the Farm for the Farm to sell him the Horse. There was little paperwork and the consideration was modest, well below market price. The Vendor did not know of the sale and would not have granted permission for the sale if it was given an opportunity to do so.

On 23 July 2012 the Farm defaulted under its loan to the Bank.
The Bank appointed Receivers to the Farm.

After making enquiries as to the state of the estate of the Farm, the Receivers on behalf of the Bank claimed an interest in the Horse and notified the Doctor of that claim.

A priority dispute the arose between the Bank / Receivers and the Doctor over the Horse.

Discussion
The following are issues that may arise under the PPSA

• Was the sale of the Horse from the Farm to the Doctor in the ordinary course of business as required by s.46(1) of the PPSA?
• Can the Doctor take the Horse free of the registered security interest of the Bank?

The Ordinary Course of Business
In Gibson v Stockco Limited (2010) FPPSR ¶700-003; [2010] NZHC 2398 White J set out some criteria to consider as to whether a transaction was in the ordinary course of business.
Similar issues were considered in Rabobank New Zealand Ltd v McAnulty (2011) FPPSR ¶700-005; [2011] NZCA 212; [2011] 3 NZLR 192; (2011) 10 NZCLC 264,850 by O’Regan P, Chambers and Harrison JJ.

•    The assessment is objective.
•    Determine the business of the seller
•    Was the sale made in the ordinary course of that business?

Some criteria for determining whether the sale transaction was made in the ordinary course of that business:
•    How was the transaction:
•    Negotiated;
•    Agreed to; and
•    Implemented;
•    What was the purpose of the transaction?
•    Was the transaction in accordance with the lending arrangements of the seller?
•    Was the transaction properly documented?
•    Was it an unusual transaction?
•    What benefit did the seller receive from the transaction?
•    Did the transaction involve a related party?

Some criteria for considering whether the secured party authorised the transaction:

• Was the secured party aware of the specific dealing; or
• Was the secured party aware of previous similar dealings; and
• Did the secured party previously give express permission; or
• Did the secured party give implied acquiescence to the previous dealings.

• Where the secured party does not authorise the sale transaction, their priority position over the security interest of the transferee is maintained.
• Under the PPSA in relation to property you seize, you cannot dispose of an interest greater than the interest you possess (See s. 133)

Conclusion

• The interest of the Bank was a security interest under the PPSA (See s.18-19 of the PPSA)
• The Farm was not regularly engaged in the business of selling horses
• The Farm did not intend to profit from the sale of the Horse to the Doctor
• The Doctor has a financial interest in the Farm
• The transaction between the Doctor and the Farm was not an arms length transaction
• The sale would not be classed as being in the ordinary course of business of the Farm, so any transfer of the Horse to the Doctor would be subject to the registered security interest of the Bank
• The Vendor has a lower priority to the Bank because it is second in time and not registered (See s.55(3) of the PPSA)
• The Bank would be able to seize the Horse from the Doctor (See s.123 of the PPSA)