Canterbury Law Review

North, Richard --- "The New Zealand Personal Property Securities Act: growing pains" [2005] CanterLawRw 5; (2005) 11 Canterbury Law Review 123

• THE NEW ZEALAND PERSONAL PROPERTY SECURITIES ACT: GROWING PAINS
• I. Introduction
• II. The Past
  • Graham v Portacom New Zealand Ltd
  • Waller v New Zealand Bloodstock Ltd
  • Description of Collateral
  • Sections 36 and 142
  • Section 149
  • Business Law Reform

  THE NEW ZEALAND PERSONAL PROPERTY SECURITIES ACT: GROWING PAINS

  Richard North [*]

  I. Introduction

  The Personal Property Securities Act 1999 ('the PPSA') has radically overhauled the law in New Zealand relating to security interests in personal property. Since coming into force on 1 May 2002, this legislation has established a new priority regime for competing interests in personal property that relies on concepts of attachment and perfection rather than traditional notions of legal title. Additionally, it has broadened the common law conception of a security interest and has implemented a new electronic notice registration system for interests in personal property. This paper critically examines the operation of the PPSA in order to assess its overall functionality and to identify areas where reform is needed. The first part of the paper analyses what has gone before, with particular emphasis on the interesting issues arising out of the recent High Court decision in Waller v New Zealand Bloodstock Ltd.[1] The second part illustrates the disjointed and confused state of the legislation through a consideration of the problems associated with the requirements for collateral descriptions. The third part examines proposed reforms and concludes that they do not go nearly far enough towards rectifying the many defects in the legislation.

  II. The Past

  The PPSA has its structural and functional basis in Canadian legislation, which is itself modelled on Article 9 of the American Uniform Commercial Code ('UCC'). While Ontario was the first Canadian province to enact such legislation, its personal property securities legislation is different in a number of respects to the corresponding statutes in the other provinces. The statutes in other provinces have been termed 'uniform Canadian Acts' by Gedye, Cuming and Wood.[2] The New Zealand statute is more closely based on the uniform Canadian Acts than on the Ontario Act, although the case law from both jurisdictions remains relevant here. Since the PPSA came into force, the New Zealand courts have heard two cases. The first, Graham v Portacom New Zealand Ltd,[3] is indicative of the considerable shift in position from the old law to the new. While its outcome may appear harsh to the uninitiated, it is one that accords with the scheme of the PPSA, rather than with the notions of legal title that existed under the old regime. The second, Waller v New Zealand Bloodstock Ltd,[4] provides a good summation of the law as it now stands, including useful comparisons to Canadian legislation and case law. Waller is consistent with the ruling in Portacom and may again appear harsh in some respects to anyone unfamiliar with the principles of the new law. Regardless of any notions of fairness, these two decisions accord with the words of the statute and Parliament's intention in enacting it. As Roy Goode has stated:

  There is no way in which the principle of fairness in the individual case can be wholly reconciled with the utilitarian principle of the greatest happiness for the greatest number. All we can hope to achieve is a set of priority rules that will commend themselves to the majority of informed people as producing fair results in the typical case.[5]

  Generally speaking, Portacom and Waller are indicative, not of any failings in the legislation, but of a general failure by members of the business community to appreciate the potential ramifications of the PPSA.[6] In both cases, application of the Act was straightforward to the extent that perfected security interests prevailed over unperfected interests. The two cases are discussed below.

  Graham v Portacom New Zealand Ltd

  This is a case that will be well-known to those familiar with the PPSA. At its core is a fairly straightforward analysis of the new legislation. Portacom, the defendant, had leased portable buildings to the second plaintiff (NDG), whose assets were subject to a debenture held by HSBC, the third plaintiff. HSBC appointed the plaintiffs as receivers and managers of NDG's assets. On 28 May 2002, after the PPSA had come into force, HSBC registered its debenture. Portacom, however, did not register its interest. The key issue then was whether HSBC's debenture created a 'security interest' within the terms of s 17( 1) of the Act, thus attracting the full force of the Act's priority regime. Section 17(1) states:

  (a) Means an interest in personal property created or provided for by a transaction
  that in substance secures payment or performance of an obligation, without
  regard to -
  (i) The form of the transaction; and
  (ii) The identity of the person who has title to the collateral; and

  Rodney Hansen J summed up the status of the applicants as follows:

  It is also accepted that the debenture granted by NDG to HSBC is a transaction which secures payment or performance of an obligation. It creates a security interest in any personal property which is charged by the debenture.[7]

  Rodney Hansen J went on to examine the nature of HSBC's interest in order to determine whether attachment had occurred pursuant to s 40(1) of the Act. At issue was whether NDG's leasehold interest in the portable buildings fell within the definition of 'personal property' in s 16 of the Act.[8] Rodney Hansen J's ruling on this point was straightforward:

  A lessee of goods may, by virtue of its possessory interest, grant a security interest in the goods. Section 40(3) provides that a debtor has rights in goods leased to the debtor. A security interest can therefore attach to the lessee's interest in the goods.[9]

  Based on this proposition, it was held that NDG's possessory interest in the portable buildings was sufficient to allow it to provide those buildings as security for HSBC's debenture. While it might seem an odd result that one's property, leased out to another, may be treated as that other's and be lost to a preferential creditor, it is an outcome that clearly accords with the wording of the legislation. Section 17(1)(b) clearly states that a lease for more than one year (as was the case in Portacom) is a deemed security interest. Thus, under s 66,[10] a lessor that fails to register its interest will lose priority to the secured party.[11] As Gedye, Cuming and Wood state, '[i]n effect, the lease is treated as a security agreement, and the lessee is treated as the owner of the leased goods for registration and priority purposes.'[12] The decision of the Alberta Court of Appeal in Sprung v Instant Structures Ltd v Caswan Environmental Services Inc[13] provides a clear example of a failure to recognise the extent of the changes brought about by personal property securities legislation. In similar circumstances to those in Portacom, the Court of Appeal sharply rejected Forsyth J's ruling at first instance that 'if the words of the general charging provision are given their natural and ordinary meaning, it is clear that ownership of the personal property is not required before a security interest will attach.' Rather, the Court of Appeal focused on common law notions of legal title which, under the new regime, have little relevance. The leading Canadian case of Re Giffen[14] affirms the correct approach, which is summarised by Gedye, Cuming and Wood:

  The outcome of a competition between a lessor of goods under a transaction that comes within the definition of a 'security interest' and another secured party is not to be determined by using traditional concepts of title and ownership. Rather, it is a question of priorities that is to be resolved by using the PPSA priority rules.[15]

  The judgment in Portacom provides a solid foundation for further judicial rulings on the PPSA. It properly follows the leading Canadian authority and sends a warning to the business community of the potentially dire effects of failing to perfect a security interest. Portacom has recently been followed, and added to, by the High Court in Waller v New Zealand Bloodstock Ltd.[16]

  Waller v New Zealand Bloodstock Ltd

  The facts of Waller centre on the right to possession of a stallion, 'Generous', and the proceeds from his use at stud. The plaintiffs were the receivers of Glenmorgan Farm Limited ('Glenmorgan'), as appointed by S H Lock pursuant to the terms of its debenture over the assets of Glenmorgan. This debenture was registered under the PPSA on 1 May 2002, the day the Act came into force. New Zealand Bloodstock Ltd ('NZBL'), the first defendant, had engaged Glenmorgan in a lease to purchase agreement in respect of Generous, but Glenmorgan had fallen into arrears in its payments. The agreement was renegotiated and a second lease to purchase agreement was entered into between Glenmorgan and NZBL. NZBL assigned its interest under this second agreement to New Zealand Bloodstock Finance Ltd ('NZBF'), its wholly-owned subsidiary. On 22 August 2003 this agreement was refinanced and its term extended until 28 March 2005. None of these agreements were registered under the PPSA, although Glenmorgan took possession of Generous in August 2001, which it retained until July 2004. On 7 July 2004 the defendants took possession of Generous following the failure by Glenmorgan to comply with its repayments and the termination of its lease to purchase agreement with NZBF. At this time Generous was in the physical custody of a third party transit company responsible for managing his transportation from the Northern Hemisphere to New Zealand for the local breeding season. On 23 July 2004, S H Lock appointed the plaintiffs as receivers of Glenmorgan due to Glamorgan's failure to comply with the terms of its debenture.

  The first cause of action related to the respective rights of the parties to possession of Generous; the key question being 'whether the expression "property" as defined in the debenture [was] sufficiently wide to catch Glenmorgan's interest in Generous pursuant to the lease to purchase agreement.'[17] Clause 2.1 of the debenture stated that '[t]he Company charges in favour of the Debenture holder all its present and future assets as continuing security'.[18] In addition, Clause 1.2 provided that 'any reference to . the "assets" of any person is to be read as a reference to the whole or any part of its business undertaking, property, assets . and revenues (including the right to receive revenues) present or future.'[19] Allan J determined that the term 'property' was of wide application and further noted that at common law the term was generally taken to include all possible interests in property.[20] Following the broad approach of Rodney Hansen J in Portacom, he stated:

  I therefore hold that the charging clause in the S H Lock debenture is sufficiently wide to catch the possessory, contractual and statutory interests of Glenmorgan in the stallion Generous.[21]

  The second cause of action was more contentious. It was submitted by counsel for the defendants that

  where a lease involving a lessor who has retained legal title to goods leased is lawfully terminated and the lessor regains possession, ownership and possession are merged. As such, the lessor no longer possesses a mere security interest but rather the lessor's interest is that of absolute ownership. The PPS A's priority rules have no application to a contest between the holder of a security interest and the absolute owner in possession.[22]

  Unfortunately, this argument was more in line with the reasoning in Sprung Instant Structures v Caswan[23] in its failure to recognise that the contest was one of competing priorities rather than claims to title.[24] The argument places too great an emphasis on otiose notions of legal title and ownership which, as already mentioned, have been superseded by the priority rules set out in the PPSA. Nevertheless, the decision reached by Allan J on this point 'is a reflection of the extent to which the registration regime introduced by the Act has altered long established priority principles grounded in notions of legal title.'[25]

  Allan J is correct in his assertion that both NZBF and S H Lock held security interests according to the terms of s 17(1 )(a) of the PPSA.[26] Both parties had an interest in Generous created by a transaction that in substance secured payment or performance of an obligation. Allan J went on to discuss the nature of attachment and perfection, two of the key concepts under the PPSA. On the facts it was clear that S H Lock's debenture gave it a perfected security interest in respect of Generous, it having fulfilled the three requirements for attachment in s 40 of the Act[27] and having registered its financing statement on 1 May 2002 in accordance with s 41(b)(i). In contrast, NZBF had not registered its interest. However, pursuant to s 41(b)(ii), perfection may occur where the secured party, or another person on its behalf, is in possession of the collateral. As noted by Allan J, 'possession ha[d] indeed been taken, following default by Glenmorgan, but s 41(b)(ii) specifically excludes the taking of possession as a result of seizure or repossession, from qualifying as a perfecting step for the purposes of the Act.'[28] Due to this exception, Allan J ruled that the security interest held by NZBF had never been perfected and that it therefore ceded priority to the perfected S H Lock interest pursuant to s 66(a) of the PPSA. In considering the defence argument above, Allan J provided a useful analysis of the key Canadian decisions to date. As with Rodney Hansen J in Portacom, he strongly dismissed the decision of the Alberta Court of Appeal in Sprung, a decision relied on by defence counsel. The third cause of action in Waller raises some interesting issues as to the interpretation of the PPSA. It related to a claim by the plaintiffs for entitlement to the service fees generated by Generous in the 2004 Northern Hemisphere breeding season. The plaintiffs claimed that Glenmorgan had

  been entitled to the service fees and that as a result the sum of these fees was covered by the S H Lock debenture. The defence argument was twofold. First, that the fees were not caught by the charging clause in the S H Lock debenture so that the assignment of the sum by Glenmorgan to the defendants was effective. Alternatively, that the fees were excluded by the operation of s 23(e)(ix) of the Act thus rendering them payable to the defendants.

  At this point, further background information is required. The stallion Generous had been leased by Plantation Stud Limited ('Plantation') for each of the 2002 and 2003 northern breeding seasons and its agreement with Glenmorgan had provided an option to renew the lease for 2004. Upon its refinancing agreement with NZBF in August 2003, Glenmorgan assigned to NZBF the stud fees payable by Plantation in respect of the 2004 and 2005 breeding seasons. Subsequently, in December 2003, Glenmorgan and Plantation renewed and varied to a degree their earlier lease agreement for the 2004 and 2005 northern breeding seasons. Under this new agreement Plantation was authorised to pay the rental directly to NZBF. Allan J gave little attention to the first of the defence arguments. He simply referred to s 45 of the Act which provides for the extension of a security interest in collateral that is dealt with or otherwise gives rise to the proceeds of that collateral.[29] Thus, having already established the plaintiffs' priority over other claims to Generous, it logically followed that they must also 'enjoy priority to the "proceeds" of Generous, namely the stud fees for the 2004 northern breeding season.'[30]

  Mike Gedye has pinpointed the description in financing statements of proceeds of original collateral as a particularly problematic area.[31] He notes, however, that where the charging clause in a financing statement includes all assets, both present and after-acquired, there is no difficulty at all:

  As far as all assets financiers are concerned, any proceeds are also original collateral because they are after-acquired property to which the all assets security interest applies.[32]

  Allan J's application of s 45 to this issue accords with Gedye's sound logic. As an account receivable, the proceeds from the stud fees clearly fall within the general terms of the charging clause.

  The focus then turned to the second of the defence arguments where Allan J's reasoning becomes quite complex and, arguably, somewhat distorted. The key question was whether the assignment of proceeds by Glenmorgan to NZBF should fall within the exception in s 23(e)(ix) of the Act, which states:

  23. When Act Does Not Apply This Act does not apply to -
  (e) An interest created or provided for by any of the following transactions: (ix) An assignment of a single account receivable or negotiable instrument in whole or in partial satisfaction of a pre-existing indebtedness.

  In his examination of this issue, Allan J considered the expression 'assignment of a single account receivable'. Counsel for the plaintiff had argued that the August refinancing agreement, having provided for separate breeding seasons,[33] was in effect two accounts receivable. Allan J rejected this argument, ruling that the assignment should fall within s 23(e)(ix) and therefore outside the application of the Act. His Honour also noted, in an obiter comment, that even if the transactions were to be treated together they would probably still fall within the exception in s 23(e)(ix) as two separate assignments of single accounts receivable recorded for convenience in the same document.[34]

  According to Gedye, Cuming and Wood, such assignments in satisfaction of debts 'are excluded from the Act on the basis that they do not involve commercial financing transactions and do not serve as security for the performance of an obligation.'[35] While this seems to accord with the broad objectives of the Act, it also appears to contradict the very definition of a security interest. Section 17(1)(b) includes an interest created or provided for by a transfer of an account receivable (among other things), whether or not the transfer secures payment or performance of an obligation. It is arguable that the inclusion of such a transaction contradicts the exception in s 23(e)(ix) where an account receivable has been assigned in satisfaction of an existing debt.

  There is a strong argument not only that s 23(e)(ix) should not have been applied in this case, but also that the result of its application was somewhat anomalous. First, the lessee had purportedly assigned the stud fees to the lessor. These fees, as assets of the lessee, arguably fell within the debenture holder's charge over 'all its present and future assets as continuing security',[36] which was entered into prior to the purported assignment. The catch-all wording of the perfected security interest created by S H Lock's debenture should have been sufficient to include the proceeds of the horse that was subject to the interest, regardless of any later assignment to a third party. It seems anomalous that the debenture holder with a perfected interest can attain the horse that is subject to the security interest but not the proceeds of that horse. Surely, both the horse and its proceeds are caught within the words 'all its present and future assets', meaning that they should be dealt with together rather than separately. Second, it is possible that Allan J, in focusing on whether the Act should apply, was sidetracked by a provision bearing little relevance to the fact situation before him. A more appropriate reading of s 23(e)(ix) is that the 'interest' referred to in the section is the interest created by NZBF's refinancing agreement (the assignment was in satisfaction of Glenmorgan's debt to NZBF). The section, as read by Allan J, does not apply to the S H Lock's interest; rather it applies to NZBF's interest, that being an assignment of a single account receivable in full or partial satisfaction of a pre-existing indebtedness. In contrast to Allan J's ruling, a strong argument can be raised to the effect that the section should apply instead to the detriment of NZBF. The phrase, '[t]his Act does not apply', means that the benefits of attachment and perfection are negated and the common law rules apply in their place. Therefore, NZBF's interest in the stud fees should have fallen outside the application of the Act and instead been subject to the applicable common law rules. This should not, however, diminish the scope of the perfected security interest possessed by S H Lock, which clearly fell within the application of the PPSA. It was NZBF's interest in the stud fees that should have been excluded from the Act's application; there is nothing in the wording of s 23 to suggest that the actual fees should have been removed from that application as well. It is strongly arguable therefore that Allan J's application of the section was incorrect in the circumstances and that the defence counsel's argument should have been rejected. Instead, Allan J should have simply included the proceeds, pursuant to s 45 of the Act, within S H Lock's entitlement to Glenmorgan's present and after-acquired assets.

  It is notable that s 23(e)(ix) has no equivalent in Canadian personal property securities legislation, it having been taken instead from Article 9 of the UCC.[37] In addition, the section is criticised by Gedye, Cuming and Wood as being inaccurate in some respects. They see no reason why the exception should apply to an in substance security interest,[38] a statement which seems to accord with the intention of Parliament in enacting such a broad definition in s 17. Allan J acknowledged this view in a statement that may have created possible grounds for a future appeal:

  I have noted the misgivings expressed by Gedye, Cuming and Wood as to the extent of the reach of the subsection . However, the issues raised by the authors were not touched upon by counsel and I have simply construed the language chosen by the legislature.[39]

  Waller provides both an excellent summary of the PPSA's priority regime on the one hand and a somewhat dubious ruling on the other. While the first two issues follow the logical path trod by the High Court in Portacom, the third illustrates some of the potential difficulties within the Act and provides an indication that legislative change may be required in order to achieve greater functionality in the future. Perhaps Mike Gedye was premature in suggesting (pre-Waller) that 'New Zealand courts are well capable of understanding the principles of the Personal Property Securities Act and are willing to apply them.'[40]

  III. The Present

  Waller and Portacom provide merely a glimpse of how the PPSA is likely to continue operating in practice. As one commercial practitioner recently commented: 'We need another downturn in the economy so that the PPSA can get a few more cases under its belt.' The high-profile concepts of attachment and perfection seem to have created little difficulty for the courts, although there are a number of other areas where problems are likely to arise. Gedye, Cuming and Wood (both together and individually) have noted, through a number of articles, texts and seminars, the numerous defects in the New Zealand Act. While it is not the purpose of this paper to either review or restate such observations, a discussion of one of the major deficiencies, that being the description requirements under the Act, will illustrate the extent to which one area of personal property securities law in New Zealand has diverged from established Canadian authority with uncertain results. An appreciation of the structural weakness of parts of the Act is pertinent to the ensuing consideration of likely reform.

  Description of Collateral

  This heading encompasses several sections of the PPSA, each with its own issues. The description of collateral in both the security agreement and financing statement is a critical area of personal property law in which the New Zealand Act is at times quite unclear. The collateral description in a security agreement will often differ from its description in the corresponding financing statement. It is only the latter which is registered and therefore accessible to third parties. There is also difficulty over the requirement that a description in the security agreement must enable the collateral to be identified. This is in contrast to the lack of any such requirement for a financing statement. Finally, the use of the phrase 'seriously misleading' in ss 149 and 150 creates uncertainty as to the circumstances in which a registration may be invalidated and raises questions over the framework of the electronic registration system in New Zealand.

  Sections 36 and 142

  In order to be able to enforce a security agreement against a third party in respect of particular collateral, s 36 of the PPSA requires either that the collateral be in the possession of the secured party[41] or that the debtor has signed or assented to the agreement.[42] This second option demands either an adequate description that enables the collateral to be identified[43] or a statement that an interest is taken in all of the debtor's present or after-acquired property.[44] The latter requirement is the more common in that it allows the taking of a comprehensive security interest that is easily documented and assessed.[45] However, in light of the decision on the third issue in Waller, discussed above, the certainty of such a catch-all phrase seems to have been eroded somewhat in circumstances where proceeds of collateral are deemed to be an assignment of a single account receivable in satisfaction of a pre-existing indebtedness.

  The requirement in s 36(1 )(b)(i) that the description of collateral must enable that collateral to be identified indicates a more onerous approach by the New Zealand legislation in terms of describing the subject matter of a security agreement. This is in contrast to the uniform Canadian Acts which contain no corresponding requirement. Section 36 is to be read in conjunction with s 177, which compels a secured party to provide certain information relating to its security interest upon request by the debtor and a number of other parties.[46]

  The New Zealand legislation becomes slightly confused at this point. It follows the uniform Canadian Acts in allowing broad descriptions of collateral by kind but then follows the Ontario Act in its qualification that the description of collateral must be sufficient to enable it to be identified. Clearly this only applies to collateral that falls outside the catch-all phrase contemplated by s 36(1)(b)(ii) and referred to above. In order to be properly functional, the PPSA needs to allow for a simple documentation process by which such a broad class of collateral (for example, the circulating inventory of a retail outlet) can be easily recorded. In comparison, s 142 of the New Zealand Act requires only 'a description of the collateral' in the registration of a financing statement. There is no suggestion that this description must enable the collateral to be identified as in s 36. Instead, the specifics required under s 142 are listed in the Regulations to the Act. Under cl 8 of the First Schedule to the Regulations, the party registering a financing statement must describe the collateral in terms of one of 13 options. One or more options are to be selected from a list that includes several different classes of 'goods', along with a range of options from 'negotiable instruments' to 'all present and after-acquired property'. Clause 8(2) goes on to require that 'a further description must be provided for all collateral. ; that has not been assigned to the option of "present and after-acquired property ”’ . There is no guidance, however, as to how much further such collateral must be described. It is at this point where the collateral description requirements in a security agreement diverge from those in the corresponding financing statement; the former must be identifiable while the latter requires a 'further description' to that provided by selecting one or more of the 13 options. The concern in this regard is of the potential for divergence between the details of a security interest and a financing statement respectively, such that a third party searching the register may be misled as to the exact details of the security interest. For example, a security interest in one of two identical antique tables may outline aspects of that table, such as identifiable marks or scratches, that enable it to be distinguished from the other table. Such a description would seem to satisfy even the strictest interpretation of s 36. In the financing statement for the table, however, the secured party would simply need to check the 'goods: other' box and then 'further describe' the collateral as 'one antique table,' or perhaps even simply 'one table,' in order to satisfy the wording of s 142 and its corresponding regulations. A third party searching the register will not be able to tell which table is subject to the security agreement.

  Mike Gedye argues that broad descriptions of collateral should be permitted for the policy reason that 'registration is only intended to warn third parties of potential security interests in certain kinds of a debtor's assets.'[47] A third party wanting to delve further into the details of the security interest can invoke s 177. In addition, it may be possible to adduce extrinsic evidence to determine the exact items that are subject to a security agreement rather than requiring a strict approach whereby any item falling within the agreement must be identifiable from the wording of that agreement.[48]

  In terms of the day-to-day functioning of the Act, however, a broad approach may lead to uncertainty. This is particularly so where a security agreement is intended to cover only certain items within the class of after-acquired assets or where several of a debtor's assets are the same as, or similar to, the assets described in the agreement. In such cases a more detailed description of the collateral should be encouraged in order to avoid confusion over exactly which assets are to be covered. Abroad approach to collateral description also seems to contradict the wording of s 36, which appears to have arisen from the Law Commission's implication that a 'reasonably specific description'[49] should be required.[50] While Gedye identifies the dubious origins of this requirement and the lack of any clear policy justification[51] as reasons for preferring a broad approach to descriptions, there is an equally plausible argument to the contrary. A test of whether a reasonable person would be able to identify the collateral from the description provided not only creates certainty but accords with the legislature's apparent desire to narrow that description. For certainty, registering parties should be encouraged (or forced) to provide as much detail as they are able in order to illustrate to a third party the true extent of the security interest. The greater scope for potentially invalidating errors should not be a reason for allowing a broad approach. A secured party should take heed of the requirements and describe the collateral accordingly, taking care to avoid errors. In light of the issues outlined above, the precise amount of detail required in the collateral description of both security agreements and financing statements is unclear. Certainly, the requirements appear more onerous in relation to a security agreement,[52] although a strong argument has been raised by Mike Gedye in favour of a broader treatment than the onerous wording seems to allow. Clearly, Parliament needs to intervene by restating s 36. Whether such a change should remove the identification requirement or define it further is debateable. The situation must be considered in light of the ensuing discussion of s 149 and the deficiencies in the electronic register.

  Section 149

  A further issue relating to description of goods can be found in the wording of s 149 of the Act, which states that registration of a financing statement will be invalid where it contains a defect, irregularity, omission, or error that is seriously misleading. The Act does not, however, go on to define the term 'seriously misleading'. Again, under s 150, a registration may be invalid if it contains a seriously misleading defect, irregularity, omission, or error in either the name of any of the debtors as required by s 142[53] or in the serial number of collateral of a kind that is required by the regulations to be described by serial number. As with s 149, the extent to which the phrase 'seriously misleading' will apply in a given case is not altogether clear. The problem is one of degree. Where is the line drawn between an error that is simply misleading and therefore (presumably) acceptable and one that is 'seriously misleading'? An examination of Canadian legislation and case law provides some guidance, although, as will be seen, this cannot be totally relied upon in New Zealand.

  Section 149 is taken directly from s 43(6) of the Saskatchewan personal property securites legislation and the other uniform Canadian Acts. Cases from these jurisdictions provide an indication as to the judicial treatment of the phrase 'seriously misleading'. As will be seen, the issue of whether an inaccuracy at registration in one of two specified search criteria is 'seriously misleading' has proved particularly problematic. In Ford Credit Canada Ltd v Percival Mercury Sales Ltd and Henke (Bankrupt) (No. 1),[54] a financing statement had been registered under Saskatchewan's personal property securities legislation but the document identified only the business name of the bankrupt debtor, rather than her own personal name. The document did, however, identify the serial number of the leased vehicle correctly. The Court noted the 'particular importance'[55] of a vehicle's serial number and held that a prudent person would have searched the register using this number. Therefore, the omission of the debtor's personal name in the financing statement was not seriously misleading. This implies that an error in the recording of the serial number coupled with a correctly entered debtor name would have been seriously misleading. Professor Cuming was highly critical of this ruling,[56] stating that the 'collateral serial number registration-search criterion [merely supplements the] debtor name registration-search criterion; [it is not a substitute for it]'. This proposition seems to accord with the wording of both s 43(7) of the Saskatchewan personal property securities legislation and the equivalent s 150 of the New Zealand Act. These provisions cluster together seriously misleading defects, irregularities, omissions, or errors in both the name of a debtor[57] and the serial number of collateral or equipment of a kind that is required to be described by its serial number.[58] It is not clear why the legislatures of either jurisdiction would couple these conditions if they did not intend for them to be treated on an equal footing. It seems contradictory for the courts to suggest, on the one hand, that a defective serial number would seriously mislead a reasonable person, but a debtor's name entered inaccurately would not. Clearly the former will only affect those parties with knowledge of the existence of a security interest or of a serial number, while the latter will affect anyone searching the register by a debtor's name in order to establish the extent to which that debtor's personal property is encumbered.

  In Gold Key Pontiac Buick (1984) Ltd v 464750 BC Ltd (Bankrupt),[59] the British Columbia Court of Appeal followed the approach taken in Ford Credit. 464750 BC Ltd, operating under the name 'Pinecraft Furniture Manufacturing', had leased five vehicles from Gold Key for business purposes. Gold Key registered financing statements in relation to each of the vehicles, pursuant to the British Columbian personal property securities legislation.[60] These statements correctly identified the serial numbers of each of the vehicles, but referred to the debtor as 'Pinecraft Furniture Manufacturing'. No mention was made of 464750 BC Ltd. Newbury JA stated:

  A reasonable person searching the register would have searched by serial number and would have become aware of Gold Key's filings and would not have been 'seriously misled' by the error in the debtor's name . Where the goods are serial-numbered, such a [reasonable] person would surely carry out at least a search by serial number. He or she would be unlikely to feel safe in relying merely on a name search, which would leave many possibilities uncovered—the existence of previous owners, possible assignments, theft of the collateral, change in use, etc.[61]

  With respect, this is dubious reasoning which only considers those with an interest in the cars. It does not consider the needs of other potential creditors who would search the register by the debtor's name in order to establish the extent to which that debtor's personal property is encumbered with debt. These potential creditors would not necessarily know the serial numbers of the cars, the debtor being the subject of their enquiry instead. In addition, where two search criteria are available there is nothing in the legislation to suggest that one should prevail over the other in terms of its ability to render a registration 'seriously misleading'. Surely, in such circumstances, the test should be whether a reasonable person searching under either criterion would have been seriously misled. It seems logical that 'seriously misleading' must simply require that a reasonable person would not be able to identify the security interest from the search criterion adopted. This point was endorsed by the Alberta Court of Appeal in Case Power & Equipment v 366551 Alberta Inc (Receivership). Following Re Kelln (Bankrupt),[63] the Court of Appeal ruled that:

  if the name of the debtor is seriously misleading taken alone, it does not cease to be so because the description of the chattel, complete with serial number, is accurate. And that is so whether or not these are serial number goods.[64]

  This seems to be a more logical application of the wording of the section and one that accords with the views of Professor Cuming described above. Where a reasonable prospective car buyer would be expected to search the personal property securities register using the serial number of the car, a reasonable potential creditor would likewise be expected to search the potential debtor's name to establish the extent of that debtor's obligations to third parties.[65] Both search criteria are equally pertinent to the effective operation of the register, although each for different circumstances. A material defect in either, therefore, should be capable of being 'seriously misleading'. The recent case of GMAC Leaseco Ltd v Moncton Motor Home and Sales Inc[66] affirms this approach and is an excellent analysis of the point in issue. Robertson JA avoids the approach from Gold Key Pontiac, preferring instead the decisions in Case Power and Re Kelln. He outlined the applicable rules as follows:

  An error in a financing statement, tied to either the debtor's name or the serial number of collateral, is 'seriously misleading' if a search using the correct information fails to reveal an exact or close match. It is expected that a search that offers a list of close approximations, may well trigger an obligation on the searcher to conduct further searches. The question is whether the reasonable searcher would ignore the close matches or pursue at least those which are so similar that it would be imprudent for the reasonable person to ignore them .
  A seriously misleading error in either [the serial number or debtor's name] is fatal to a registration's validity.[67]

  A further problem with the use of Gold Key Pontiac as an authority in New Zealand lies in its failure to deal with the subjective approach to the phrase 'seriously misleading' taken by the courts in Ford Credit. In that case, an omission in the collateral description on a financing statement was held to be not seriously misleading because no-one had actually been misled. Thus, when Newbury JA in Gold Key Pontiac refers to the 'reasonable person' from Ford Credit,[68] he actually seems to be referring to a 'reasonable person having actually been misled'. Section 151 of the New Zealand Act expressly negates this subjective test, casting a shadow over the judgment in Gold Key Pontiac in relation to the meaning of 'seriously misleading'.

  The recent decision of the Alberta Queen's Bench in Harder (Trustee of) v Alberta (Treasury Branches)[69] is also problematic. In that case, an error in a serial number required for description purposes by the personal property securities legislation in Alberta was held to be not 'seriously misleading' on the basis that actual knowledge of the security interest was obtained by the relevant third party from a search of the debtor's name. Close-match searching had failed to identify the interest by its serial number. This decision seems to contradict the objective test for determining when an error is 'seriously misleading',[70] as referred to above, and should be rejected on these grounds.

  The question that will inevitably face the New Zealand courts is precisely how to deal with these Canadian decisions. By adopting the approach taken in Gold Key Pontiac, the courts would effectively be promoting the serial number criterion above all other debtor information, to the extent that a material defect in the former would be deemed 'seriously misleading', while such a defect in the latter would not.[71] It is strongly arguable that this result will only serve to increase uncertainty over the meaning of the phrase. It also seems anomalous that the debtor's name as a search criterion should be capable of seriously misleading a third party when it is the only criterion available, while it will not necessarily be so capable when a serial number criterion is also available.

  The New Zealand Law Commission, in the commentary to its draft PPS A, seemed to propose a broad definition of 'seriously misleading', under which it appears that any error in the debtor's name or the serial number would fall within the meaning of the phrase:

  In the case of equipment subject to serial number registration, subsection (7) [of clause 37 of the draft bill][72] requires that both predicates for a potential search, that is, the debtor's name and the serial number, be correctly identified in the register. Consider the prospective creditor who obtains a search result which reveals an outstanding security against a particular debtor but not against particular serial number equipment. This creditor should not be forced to speculate whether the equipment has been registered under an erroneous number or whether, for example, the security interest has been discharged.[73]

  Under this broad approach, it seems that entry of one of the predicates for a search need only be incorrect, rather than 'seriously misleading', for the registration to be invalidated. It is doubtful that Parliament, in enacting the altered s 150,[74] intended such a broad approach that would effectively leave the phrase 'seriously misleading' redundant. It should be remembered at this point that s 149 is a curative provision, with the aim that minor defects should not invalidate a registration. However, as will be seen, the search system in use in New Zealand makes it difficult to distinguish in practice between an error that is 'seriously misleading' and one that is simply 'misleading'. The Canadian statutes, upon which the New Zealand ss 149-151 are modelled, operate in the context of computerised search software that produces both exact and inexact matches to a search.[75] Thus, a search by either debtor name or serial number would produce both exact and inexact matches, so that a reasonable person should generally be able to overcome minor misleading errors. For example, in PEI Lending Agency v Island Petroleum Products Ltd,[76] DesRoches J stated that 'the similarity between the correctly described vehicle and the wrongly described vehicle is so overwhelming that a reasonably objective person would have concluded that they are likely the same vehicle.'[77] It seems that under the Canadian system, a 'seriously misleading' defect is one that does not enable a reasonable person properly searching the register to identify a security interest by either debtor name or serial number, while a simply 'misleading' defect is one that can be overcome by a reasonable person searching the register and considering close matches.

  In New Zealand, the electronic register provides exact search results only. The smallest inaccuracy in one of the search criteria will therefore leave the party searching the register unable to find the correct results. In GMAC Leaseco Ltd, Robertson JA considered the implications of an error under the Ontario search system, which, like New Zealand, only provides exact matches. His Honour stated:

  in Ontario, any error or omission whatsoever in the registration of a debtor's name or birthdate invalidates the registration. This is because a specific-name search in the Ontario system discloses only those names and dates that precisely match the information entered by the searcher.[78]

  While the Ontario equivalent of s 149 of the New Zealand Act is worded differently[79] (a reasonable person must be likely to be 'materially misled' rather than 'seriously misled'), there seems little difference in practice between the two. In fact, given the limitations of their respective search systems, it seems that any error in a search criterion will be considered 'seriously' or 'materially' misleading, making the registration invalid.

  The situation in New Zealand and Ontario places a far heavier burden on the party registering a financing statement to ensure that the details are absolutely correct than in the other Canadian provinces. The approach in these latter jurisdictions is certainly preferable to that in New Zealand, where a severe penalty (invalidation of a registration) is imposed for what may be the smallest of typographical errors. It is difficult to conceive why a register modelled on the uniform Canadian software has not been employed in New Zealand. Without close-match searching the benefit of using Canadian decisions as authority for a definition of 'seriously misleading' is significantly diminished and the rationale behind the inclusion of the phrase in the New Zealand Act is questionable.

  Having been left with the 'seriously misleading' quandary, it is unclear exactly how the New Zealand courts will respond. Assuming that the approach of the New Zealand Law Commission is too broad and that the Canadian approach from Gold Key Pontiac is unsatisfactory, some middle ground must be reached. The approaches from Case Power & Equipment and Re Kelln are preferable in their more logical application of relevant statutory wording. However, those decisions derive from the context of close-match searching. Action is clearly needed in this area of the law to install a more effective search facility based on the uniform Canadian systems. Alternatively, legislative amendment should define precisely what is meant by 'seriously misleading' in such a way that recognises the differences between the New Zealand and Canadian registers.

  IV. The Future

  It is difficult to envisage exactly where the PPSA is heading in the short term. The two decided cases to date have delved only slightly into the numerous problematic areas in the legislation. Leading PPSA commentators have uncovered dozens of errors, both in the wording of the Act and in its intermingling of provisions from the Law Commission's Draft Bill, the Ontario Act and uniform Canadian Acts.[80] Each of these is represented in the preceding discussion of the problems associated with collateral descriptions and other errors that invalidate financing statements. Parliament has recognised the need for continuing legislative amendment in a wide commercial setting and in so doing has supported the concept of regular business law reform bills that 'include both policy and technical amendments to commercial and securities legislation.'[81] The latest Business Law Reform Bill, at least as it relates to personal property security, is discussed below.

  Business Law Reform

  Part 9 of the Business Law Reform Bill amends several sections within the PPSA. While most of the proposed changes are relatively minor (for example, the addition of the term 'collateral' to most references to goods), others are quite substantial. The meaning of 'security interest' in s 17 is amended by adding, for the avoidance of doubt, five specific occasions where a beneficial interest in personal property held by a creditor of a person is not a security interest.[82]

  The Bill goes on to insert a new s 17A, which clarifies the position of a ('senior') creditor in relation to an insolvent debtor. The senior creditor's beneficial interest is not to be deemed a security interest if the insolvent debtor's property has been distributed by the Official Assignee or a liquidator to another ('subordinated') creditor, who, under the terms of its security, must hold the personal property on trust for the senior creditor and subordinate its own right to performance of all or any part of an obligation of the insolvent debtor to the senior creditor.

  Both of these additions to s 17 are for clarification purposes and have been drafted to remove any confusion as to the use of a trust to circumvent the priority rules in the PPSA. They form part of a wide proposal to specifically exclude subordinations from the application of the Act.[83] Gedye, Cuming and Wood state that 'if the transaction creates a trust and not a security interest, the regulatory regime of the Act is not applicable to it.'[84] This principle is well established in Canadian case law[85] and would likely be followed by the New Zealand courts. Legislative clarification of some of the more detailed peripheral aspects of the general rule can only be beneficial. Clause 59 of the Bill amends s 19(1) of the Act by further clarifying the meaning of 'knowledge' within the PPSA. Section 19(1), as it stands, describes the circumstances under which both an individual and an organisation can be said to know of a fact in relation to a particular transaction. It does not, however, extend these descriptions to government departments, leaving open the question of when these will be deemed to have knowledge of a fact in relation to a transaction. The Bill inserts a third paragraph to s 19(1) that imposes an objective test of knowledge on a 'senior employee of the government department with responsibility for the matters to which the fact relates.'[86] The alteration brings the New Zealand provision in line with its Saskatchewan counterpart. Other changes in the Bill appear to be nothing more than a tidying up of the sloppy phrasing in several sections of the Act. For instance, the substitution in cl 61 of the words 'commercially reasonable manner'[87] to 'in accordance with reasonable standards of commercial practice' is unlikely to have any significant impact on a sensible reading of the section. Rather, it is simply intended to bring the heading of the section in line with ensuing text. Clause 62 of the Bill provides another point of discussion. It amends s 28 of the Act, which allows temporary perfection of a security interest in collateral that has been moved to New Zealand, despite the interest having not been perfected under the law of its home jurisdiction. The amendment removes the anomalous requirement that such an interest be temporarily perfected by registration.[88] This requirement would essentially make the section redundant, given that registration in New Zealand would generally perfect the interest anyway. In the face of this proposal, it is contended instead that s 28 should be removed from the legislation entirely. There are two sound reasons for this. Firstly, the wording of the section appears to limit its application to jurisdictions with similar personal property securities legislation to New Zealand. For example, a security interest created in Australia would not be able to achieve temporary perfection under s 28 because it would not have attached to the collateral 'under the law of the jurisdiction in which the collateral was situated', for the simple reason that the notion of attachment does not exist under Australian personal property law. This argument can also be applied to s 27 of the Act, which provides for continuity of perfection where perfected goods are moved to New Zealand. The wording seems to apply only to goods arriving in New Zealand from Canada, the United States, or any other jurisdiction with corresponding personal property security legislation. Secondly, there seems little reason to perfect a security interest arriving in New Zealand when it has not been perfected in its home jurisdiction. As Gedye, Cuming and Wood state:

  One would have thought that if the secured party had not bothered to perfect under the rules of the foreign jurisdiction it should not enjoy automatic temporary perfection in New Zealand.[89]

  The first of these arguments may be easily refuted by determining that the interest does not need to have attached to the collateral in the original jurisdiction by virtue of personal property securities legislation. Instead, it need only have satisfied the prerequisites for attachment in New Zealand, namely that value is given by the secured party and that the debtor has rights in the collateral.

  The second argument, however, is more difficult to refute. Exactly why an unregistered interest should achieve perfection simply because it has been moved to New Zealand is not clear. Neither the draft PPSA produced by the Law Commission[90] nor the present Act provide any justification for allowing temporary perfection. It is notable that the equivalent section in the Ontario personal property securities legislation states that an unperfected security interest may be perfected in Ontario,[91] not that it is temporarily perfected as in the PPSA. The difference is that the former clearly requires some act of perfection to occur, namely the registering of a financing statement or the fact of possession by the secured party, while the latter seems to provide for automatic perfection. Without any obvious rationale for perfecting an otherwise unperfected interest, Parliament should remove s 28 altogether.

  Clause 64 of the Business Law Reform Bill amends s 50(c) of the principal Act by qualifying the term 'bailee' with the phrase '(being a person who is not the debtor)'. While there seems little in this alteration to cause alarm, it is interesting to note that only paragraph (c) is to qualify the term 'bailee'. The question then is whether, by omission, it can be implied that paragraph (b), which also refers to the bailee, will include a person who is the debtor. Surely, this must be the case, or else the Bill would extend the qualification to the whole section instead of just paragraph (c). Clause 69 of the Bill seeks to amend the heading of s 93 of the Act by removing the term 'perfected'. Gedye, Cuming and Wood note that, 'despite the heading to section 93, it applies whether or not the PPSA security interest is perfected',[92] so that the alteration is clearly another attempt to repair incongruent wording in the principal Act.[93] It is more interesting to note, however, that the Bill does not alter the requirement in s 93(a) that '[t]he materials or services relating to the lien were provided in the ordinary course of business'; wording that is duplicated in s 53. The difficulties associated with the 'ordinary course of business' requirement have long existed in the sphere of companies legislation in relation to voidable preferences and in the context of floating charges. Mike Gedye suggests that the correct approach in relation to the PPSA is to treat the phrase somewhere in between its limited application under voidable preference law and the traditionally broad approach seen in the context of floating charges.[94] Perhaps then, amendments to the legislation reflecting this notion would be wise. In accordance with Gedye's assertion that 'the ordinary course of business' in the PPSA context is 'clearly used subjectively',[95] the reworded ss 53 and 93 should refer instead to 'the ordinary course of the seller's or lessor's business'. By specifically including the seller or lessor, the phrase becomes subjective and removes doubt as to whether it might refer to the ordinary course of business generally.

  Clause 75 of the Bill states that the data required to register a financing statement[96] is not to be limited by s 149, which renders registration invalid if it is seriously misleading.[97] This amendment broadens the scope of what might be considered 'seriously misleading' under s 149 by clarifying that its application is not limited simply to the essential registration data. This creates a situation where, for added certainty, a secured party may wish to describe the collateral subject to the security agreement with more detail than is required under s 142, but is deterred from doing so by the greater likelihood that some extraneous description will contain a seriously misleading error. Such a situation does not provide adequate reason to limit the scope of s 149. Any data recorded on a financing statement should make registration invalid where it is seriously misleading.

  Clause 78 of the Bill creates another potentially interesting situation. It amends s 170 of the Act[98] by allowing the removal of data from the register 'if the Registrar is satisfied that the data is frivolous or vexatious.'[99] Gedye, Cuming and Wood note that the design of the computerised registration system is such that once a financing statement has expired or been discharged, only a search by financing statement registration number will disclose the details of that statement. A search using the debtor's name or the serial number of collateral so identified will not provide any information of the prior interest.[100] While reinstatement is available pursuant to cl 78(4), the temporary removal of an interest from the register may cause problems. For example, a prospective car buyer may search the register using the car's serial number and find that no security is registered against the vehicle. Without the prospective buyer knowing, a security interest that had been registered against the car but subsequently removed by the Registrar, may be reinstated so that the buyer would unwittingly purchase the car subject to the security interest. This situation is unlikely to eventuate in practice, considering the short period of time between removal from and reinstatement to the register and the rarity of the Registrar actually having to use his or her power under the section.

  Clause 80 of the Bill inserts two additional grounds for being able to search the Personal Property Securities Register. At present, s 173 of the principal Act allows a person to search the register for a purpose relating to the debtor's security interest, but not for a purpose relating to a company that is associated with the debtor, such as a subsidiary or sister company. The purpose of the amendment is to extend s 173 to permit such searches.[101] Other proposed amendments, such as clauses 83 and 84 of the Bill, which replace and amend ss 197 and 198 of the Act respectively, appear to be simply an attempt by legislators to reword some of the sloppy drafting within the Act. The fact that such alterations are necessary is a clear indictment of Parliament's departure from the recommendations of the Law Commission and its, at times, careless intermingling of provisions from North American legislation.

  V. Conclusion

  Personal property securities law in New Zealand is still in its infancy. The two decided cases to date have explained key aspects of the new legislation and its vastly different priority regime. There are, however, many more issues likely to come before the courts in the near future. The most recent case, Waller v New Zealand Bloodstock Ltd, illustrates a difficulty with the wording of s 23(e)(ix) of the Act, but this is not the only section of the Act where inconsistency abounds. Throughout the Act, sections, phrases and reasoning are taken (and often altered) from different North American statues and the New Zealand Law Commission's draft PPSA. In doing this, Parliament was obviously attempting to take the best approaches from each of the existing jurisdictions with personal property securities legislation and develop them into a uniquely New Zealand statute. However, for reasons that remain unclear, the approaches of the different jurisdictions have in many areas been intermingled and adopted in such a way that inconsistencies have become prevalent. One particular example of this is in the PPSA requirements for collateral descriptions in financing statements and security agreements, which have been extracted from the uniform Canadian Acts, but which rely on an inadequate electronic search mechanism that is not used in those Canadian provinces. Through the Business Law Reform Bill, Parliament goes some way toward rectifying many of the small drafting errors within the Act, although a far more comprehensive reform will be needed in order to amend the glaring policy flaws and inconsistencies that have been uncovered. It is important that such reform addresses the need for close-match searching of the electronic register in order to clarify the requirements for collateral descriptions. In the meantime, it will be interesting to watch the New Zealand courts' approach to future cases, in particular any appeal of the decision in Waller.

  [*] BCom (Management). Law Student, School of Law, University of Canterbury.

  [2] M Gedye, R Cuming & R Wood, Personal Property Securities in New Zealand (2002) 1.

  [5] R Goode, 'The Modernisation of Personal Property Security Law' (1984) 100 Law Quarterly Review 234, 236.

  [6] At least in regard to the issues of attachment, perfection and priorities.

  [8] Section 16 defines 'personal property' so as to include 'chattel paper, documents of title, goods, intangibles, investment securities, money, and negotiable instruments.'

  [10] Section 66(a) provides that a perfected security interest has priority over an unperfected security interest in the collateral.