Dunphy v Sleepyhead Manufacturing Co Limited [2007] NZCA 241
One of the first cases to consider the Personal Property Securities Act 1999 (PPSA) has recently come back before the courts. Sleepyhead Manufacturing Co Limited (Sleepyhead) supplied bedding goods to retailer King Robb, a retailer, on the basis of retention of title clauses printed on invoices, although no formal security agreement was ever signed by King Robb and Sleepyhead. The absence of a security agreement meant that, while the security interest was enforceable between King Robb and Sleepyhead, it was not enforceable against third parties. Notwithstanding the absence of a security agreement, Sleepyhead registered a financing statement on the Personal Property Securities Register (PPSR). In the course of its business, King Robb had also granted a security interest to the Bank of New Zealand in all of its present and after acquired property which the BNZ registered on the PPSR creating a perfected security interest.
Unfortunately, King Robb went on to experience financial difficulties leading the company’s shareholders to pass a resolution putting King Robb into voluntary liquidation. The appellants were appointed liquidators. Immediately following the beginning of liquidation, Sleepyhead sought to repossess the goods it had supplied King Robb which hadn’t been paid for. The liquidators refused Sleepyhead and subsequently sold all of the King Robb’s goods.
Proceeds from the sale of King Robb’s assets were used to discharge the BNZ’s security with the remainder going towards repayment of preferential creditors. Sleepyhead subsequently sued the liquidators in conversion arguing that the liquidators were not a third party for the purposes of the PPSA and the security interest between King Robb and Sleepyhead was also effective as between the liquidators and Sleepyhead.
In essence, the Court was asked to determine the relationship between liquidators and the company being liquidated. After reviewing the authorities, the Court held liquidators are, in effect, the company and, therefore, not third parties for the purposes of the PPSA. Concluding that the PPSA does not, unlike pre-PPSA law, provide any special position to liquidators, the unperfected security interest was enforceable against the liquidators by Sleepyhead.
The Court went on to find that liquidators serve two capacities. Firstly, as the company and secondly, as agent for the security holder enforcing its security interest, concluding it ‘will usually (if not always)’ be the case that liquidators selling property subject to a charge will be an agent of the secured party. If the situation were otherwise, they could not have dealt with the property other than with the consent of King Robb.
Despite having found that the security interest between King Robb and Sleepyhead was enforceable vis-à-vis the liquidators, the effect of the Court’s second conclusion was that the liquidators were only liable in conversion for those goods which were not part of BNZ’s security interest. The Sleepyhead case illustrates, once again, the change introduced by the PPSA. Under the previous system, retention of title provisions would have been effective. Now, unless there is a concluded security agreement, the security interest of a creditor runs the risk of being defeated. Similarly, the case affirms that registration of a financing statement, in and of itself, is insufficient to create a perfected security interest. |