Graham v Portacom NZ Ltd PDF

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Detailed case brief, including paragraph/page references
Property law: chattels ...

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Graham v Portacom NZ Ltd Area of law concerned:

Personal Property Securities

Court:

Auckland High Court

Judge:

Rodney Hansen J

Date

2004

Counsel: Summary of Facts:

Defendant leased portable buildings to the second plaintiff, NDG. The third plaintiff, HSBC held a debenture over NDG’s assets and appointed the first receiver’s as receivers and managers of NDG’s assets. The receivers claim to have the right to sell the buildings. This is disputed by Portacom. The debenture was registered under the Act, but Portacom’s interest in the buildings was not. The question is whether the debenture holder has priority. Portacom claimed that NDG only had a possessory interest in the buildings.

Relief sought: Issues:

Relevant Statute(s): Procedural History:

(a) Whether the debenture created a security interest in the buildings; and (b) Whether the security interest attached to the buildings in terms of s40(1) of the PPSA PPSA s40- attachment

Plaintiff/Appellant’s arguments Defendant/Respondent’s arguments: Result: Judge’s reasoning:

It is to be noted that s17(1)(b) provides that a security interest includes an interest created or provided for by a lease for a term of more than one year. A lease for more than one year (and other interests referred to in s17(1)(b)) are deemed security interests in that they are subject to the Act regardless of whether they secure payment or performance of an obligation. Interesting application of long-term leases, which seem to become automatic security interests(?) [9] orange

In contrast, a lease for a terms of less than a year will create a security interest only if it in substance secures payment or performance of an obligation. See section 16 [9] green

It is accepted that the arrangements between NDG and Portacom were leases for more than one year. In terms of s16(b)(i), they were for an indefinite term. Portacom therefore had a security interest in the buildings.

[10] pink

It is also accepted that the debenture granted by NDG to the 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. Among the critical issues are whether the leased buildings come within the charge. HSBC’s charge includes personal property, but does this include the leased buildings? [11]

The second important concept in the Act of relevance to this case is that of perfection. It refers to the process by which the holder of a security interest obtains the optimal level of protection offered by the Act. Perfection in the Act. [12] orange

Perfection can be achieved by registration (as in this case), by the secured party taking possession of the goods or by temporary perfection. Section 16 defines ‘perfected by registration’ as meaning ‘the security interest has attached and a financing statement has been registered in respect of the security interest.’ [12]

Two steps are therefore involved to achieve perfection by registration – attachment and registration. Attachment is governed by s40 of the Act. [13] green

S40 relevant bits: [13] blue

It is not in issue that registration of the HSBC’s security took place in accordance with the Act. There is, however, a question as to whether attachment occurred in terms of s40(1). It is accepted that value was given under (1)(a). All good [14] green

It is also acknowledged that NDG had rights in the collateral under subs (1)(b). This is due to s16, under which a debtor includes a lessee under a lease for a term of more than a year and that 40(3) provides that a debtor has rights in goods it leases. A bit more of a stretch, but still good. [14] orange.

There is, however, a question as to the nature of NDG’s interest in the collateral and Portacom further claims that the debenture is not enforceable against it as a third party as required by s40(1)(c). [14] pink

Priority between security interests in the same property is determined under Part 7 of the Act. By s66 a perfected security interest has priority over an unperfected security interest. [15]

It is common ground that Portacom’s security interest had not been

perfected. HSBC’s security interest will therefore have priority, and the receivers the right to sell the buildings, provided they can show that HSBC has a perfected security interest in them. [16]

NDG’s interest in the buildings. 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. [18]

Leases with terms over a year: a security interest is deemed to be created by s17(1)(b) regardless of the identity of the person who has title to the collateral. 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. If the lessor fails to register its interests, it loses priority to a perfected security interest over the leased goods. ! Long term leases should be registered by lessors [19]

The rights of a lessee in leased goods referred to in s40(3) of the Act are not therefore confined to the lessee’s possessory rights. As against the lessee’s secured creditors, the lessee has rights of ownership in the goods sufficient to permit a secured creditor to acquire rights in priority to those of the lessor. Long-term leases are treated as lessee’s property, for the purposes of secured creditors. [28] blue

Does the debenture create a security interest in the building? NDG therefore has both a possessory interest and a proprietary interest in the buildings. It could as a result grant a security interest in the buildings themselves, not just its leasehold interest in them. [29]

What are fixed and floating charges? In my opinion, both the leasehold and proprietary interests of NDG in the buildings are subject to the charge. I see no reason to exclude either interest from the definition of ‘assets.’ The rights to possession and to grant a security interest in the buildings are valuable ones. These rights do count as assets as they are valuable. [31]

I agree that the debenture (clause 3.2) supports the inclusion of all rights arising under the lease of the buildings in the definition of assets. [32]

In terms of cl 3.1, NDG has ‘rights’ of both a possessory and proprietary kind in the buildings. NDG’s interests in the buildings come within the charge. [33]

Conclusion

The debenture created a security interest in the buildings which was perfected on registration. It has priority over Portacom’s security interest. The receivers therefore have power to sell the buildings and I make a direction accordingly.

What can be learned from this case....