Business

Owners beware of the Security Interests in Personal Property Act

Legal Notes

With MALIACA WONG

Wednesday, February 19, 2014    

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THE full effect of the recently passed Security Interests in Personal Property Act, 2013 ("SIPP") is yet to be tested locally. However we can expect some litigation when the inevitable tug of war over personal assets begins.

In the case of such a battle Jamaican Courts can look to guidance from case law emerging in Canada, New Zealand and Australia which all have similar legislation.

Of note is the 2013 Australian case of Maiden Civil (P&E) Pty Ltd & Ors v Queensland Excavation Services Pty Ltd & Ors which followed a line of cases out of Canada and New Zealand and has created grave concern for owners who hire their equipment to third parties, giving control of the equipment and thereby placing the equipment at risk.

The facts of this case are, like the Australian Personal Property Securities Act ("PPSA") 2009, quite complicated. In summary the central facts are that some equipment namely two Caterpillar excavators and one wheel loader were purchased by a company called Queensland Excavation Services Pty Ltd ("QES"). The purchase was financed as follows:

*A deposit was made from funds received from a company called Maiden Civil (P&E) Pty Ltd ("Maiden");

*Part of the balance purchase price was made from funds received from a company called Esanda which went to the purchase of one of the three equipment; and

* The final balance purchase price was made from funds received from a company called Westpac which went to the purchase of the other two equipment;

The Caterpillar equipment was then leased to Maiden which took possession of the equipment for use in construction works. Maiden in turn made payments to QES which payments corresponded with payments then made by QES to Esanda and Westpac. Through this means the Esanda debt was fully discharged but the Westpac debt remained partially outstanding.

Sometime later, Maiden sought and accessed financing from a company called Fast Financial Solutions Pty Ltd ("Fast") and entered into loan and security agreements by which Fast registered a security interest over the Caterpillar equipment.

There was default under the loan and security documents with Fast thereupon Fast appointed a Receiver and sought to take enforcement action against the Caterpillar equipment.

Litigation ensued among several parties which raised issues as to whether the security interest of Fast took priority over the unregistered interest of QES.

There was a great deal of discussion over the true ownership of the two excavators and the wheel loader as between QES and Maiden. The Court found that two of the Caterpillar equipment were owned by QES which was still indebted to Westpac for the finance charges for those equipment whilst ownership of the other equipment -- which was the one in which the Esanda finance monies were paid out -- had passed to Maiden.

The question then arose as to whether security interests in the Caterpillar equipment were created and in that event which interest had priority.

The Court had to construe the several provisions of the PPSA including sections 12 and 8 which like sections 2 and 3 of our SIPP, provide that a "security interest" is created when by a transaction an interest over personal property is granted which secures the fulfillment of an obligation without regard to the form of the transaction and the identity of the person who has title in the personal property. Both the Australian and Jamaican legislation list categories of transactions to which the respective Acts apply and include leases, hire purchase agreements, assignments and consignments to name a few.

The Court determined that a security interest was created in the caterpillar equipment to Fast, and then had to determine the question of enforcement of the security interest against the debtor and third parties.

Sections 19 and 20 of the PPSA provide that a security interest can be enforced against third parties if the security interest: attaches to the collateral which occurs when the grantor has rights in the collateral or the power to transfer rights in the collateral to the secured party; and either the value is given or the grantor does an act by which the security interest arises

The secured party possesses or controls the collateral or has a security agreement providing for the security interest in the collateral.

These sections represents the equivalent of section 5 of our SIPP which is worded slightly differently in that for enforcement against third parties there must be a value given and the debtor must have rights in the secured property or power to transfer such rights and either the secured property is in the possession or control of the secured creditor or the debtor has a signed contract for the secured property.

After construing the relevant provisions of the PPSA and the facts of the particular case the Court concluded that QES had a security interest in the two Caterpillar equipment as a lessor and that QES had not registered its security interest on the Register accordingly QES's security interest was unperfected and Fast's security interest in the Caterpillars had priority over QES's unperfected security interest in them.

The significant feature of the legislation is that a person who owns title to property, which property is in the possession of another person by some dealing — for example, a lease which once registered, can in the event of default of an obligation to a third party by the person in possession, look to the property ahead of all others to satisfy his claim; but if that interest is not registered, it is vulnerable, even though rooted in title to the goods, because a third party may derive an interest in the same goods by virtue of some dealing with the person in possession of them and may become entitled to priority ahead of the person holding the unregistered security interest to look to the goods to satisfy a claim.

The lesson which can be learnt from this case is that failure to register your interest (even as a lessor) can enable a third party like Fast, being a secured creditor of the lessee, to register its interest and gain priority over your interest.

Maliaca Wong is a Partner at Myers, Fletcher & Gordon and is a member of the firm's Litigation Department. Maliaca may be contacted via maliaca.wong@mfg.com.jm or www.myersfletcher.com. This article is for general information purposes only and does not constitute legal advice.

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