Supreme Court clarifies PPSA regime; confirms 'statutory fixed charge'

The Supreme Court, in its first decision on the Personal Property Securities Act 1999,1 has clarified some fundamental aspects of the regime – in particular that all security interests are fixed in nature. Assets are permitted to circulate by operation of the statutory rules.

One of those rules is the extinguishment of security interests following a "debtor-initiated payment".2

The context

Receivers were appointed to partners in a forestry venture. The forest was in due course sold, for a price that included over $120 million of GST. The receivers arranged for the GST part of the sale proceeds to be paid to the IRD. They did this against the possibility that they might have a personal liability for that GST, in which event they would have incurred significant penalties had it gone unpaid.

However, the unusual facts of the case meant that the Supreme Court accepted (for the purposes of the strike out application) that the receivers were agents of the two partner companies, not agents of the taxpayer partnership, and so were arguably not personally liable for the GST.3

PPSA – an entirely new set of rules

Having reached that conclusion, the Supreme Court needed to consider the priority rules under the PPSA. The secured creditors argued that they were entitled to the proceeds of sale under their security interests and that the Commissioner was merely an unsecured creditor. In effect, they said he had received their money. When the taxpayer received the sale proceeds, it held them for the secured creditors, as bare trustee only.

Justice Blanchard, giving judgment for the Supreme Court, disagreed. The creditors could not rely on any common law or equitable interests to resolve the priority dispute because:

"the PPSA has introduced, in the place of the general law, an entirely new set of rules governing priorities in the case of an insolvency."

Under the PPSA regime, the priority of a security interest, and the secured creditor's entitlements arising from it, depend entirely on those rules. Common law notions of title, equitable notions of beneficial interest and the equity of redemption are simply not relevant. Instead:

"Any secured creditor simply has a security interest whose priority depends upon the rules".

The floating charge is dead – long live the fixed charge

The Court noted that all PPSA security interests are, at all times, fixed in nature, even where they cover circulating assets. This had been widely assumed but it is helpful to have...