PPSR Alert – New Zealand case creates possible defence for guarantor if supplier failed to register its retention of title arrangement on PPSR

Facts:

In Haar v Eastland Tyres Ltd [2013] NZHC 692 an appeal was brought by a former director-shareholder (‘the Director’) of Gisborne Haulage in the New Zealand High Court, following winding up of that company.

Gisborne had entered a credit agreement with a supplier (‘the Supplier’) under which the Director agreed to guarantee Gisborne’s debts. The credit agreement included an acknowledgment that Gisborne was granting a registrable charge under the Personal Property and Securities Act 1999 (NZ) (NZ PPSA) over its property, in the form of a retention of title arrangement in favour of the supplier.

When Gisborne subsequently went into liquidation the Supplier sued the Director under the personal guarantee.

The Director sought to argue that it was discharged from the obligation to pay the Supplier on the grounds that the Supplier had failed to register its interest against Gisborne, prejudicing the Director’s right of subrogation against Gisborne.

Judgment:

The NZ PPSA Argument

The Director’s  argument was that the Supplier had a duty to register its charge – in failing to do so, and subsequently exercising its claim against the Director for the whole of Gisborne’s debt the Supplier had injured the Director’s  right of subrogation against Gisborne.

Right of Subrogation Explained

The right of subrogation can be explained briefly as follows:

  1. The Supplier suffered a loss caused by Gisborne (failure to repay the debt);
  2. When Gisborne did not repay its debt, the Supplier had a secondary right to claim the debt from Gisborne’s guarantor (the Director), which it did;
  3.  After paying the Supplier the Director is entitled to ‘stand in the shoes’ of the Supplier (i.e. Gisborne would then owe the debt to the Director). The Director is then entitled to the benefit of any security held by the Supplier for the debt.

The reason that Courts grant a right of subrogation is founded in the law of unjust enrichment – if the Director did not have a right against Gisborne to be repaid then Gisborne would have enjoyed:

  1. the benefit of the credit agreement, and
  2. the benefit of not having to repay the amount owing under the credit agreement.

Courts would see the avoidance of repaying the debt as a valuable benefit in the hands of Gisborne (a cost saving) at the expense of the Director – a form of ‘additional’ benefit that Gisborne cannot be permitted to retain. Therefore the Courts will act to ensure that Gisborne does not retain that benefit by permitting the Director to recover the amount paid.

Supplier’s Failure to Register – Injury to Subrogation Rights Argument

In summary, based on the principles explained above, the Director argued that the Supplier had damaged  the Director’s ability to recover the debt from Gisborne (in subrogation) by failing to secure the property that was subject to the charge in the credit agreement, on the basis that:

  1. failing to take proper steps to secure Gisborne’s debt so that it could recover at least some of the debt directly created a greater liability for the Director to repay the entire amount; and
  2. failing to claim assets that could then be released to the Director when they paid the full balance of the debt to the Supplier also created a greater liability for the Director.

 

Finding

The Court found that the argument made by the Appellant had merit. However, whilst the Supplier did have a duty to register the charge the Director was unsuccessful in avoiding its obligation to pay the Supplier because the Court was unable to determine the amount of damage suffered.

Being unable to determine how much the secured property would have been worth the Court was unwilling to compromise the Supplier’s entire right to repayment  and opted to allow full recovery by the Supplier.

Implications for  Suppliers

The Australian Personal Properties Securities Act 2009 (Cth) (PPSA) is modelled on the NZ PPSA and the law of subrogation in Australia closely parallels that in New Zealand.

Haar v Eastland Tyres Ltd is likely to be significant in any Australian case where a secured party fails to register its security and subsequently seeks to recover a debt from a guarantor. The case highlights the significant impact of the PPSA on the obligations of a secured party to take steps to protect its interests.

Parties suing on personal guarantees should be mindful that the law of subrogation creates rights in 3rd party guarantors that may inadvertently impact their ability to recover against that guarantor if a security interest such as a retention of title arrangement had not been perfected by registration on the PPSR.

A well drawn guarantee can minimise the risk associated with any failure to register. We recommend that all suppliers review their guarantees to ensure that, so far as possible, such failures do not affect recovery against guarantors. Pointon Partners would be pleased to assist with such review.

If you would like to find out how the PPSA may apply to your business, either as a guarantor or secured party please feel free to contact Laszlo Konya, Anthony Pointon or Michael Bishop of our office on 03 9614 7707.

[email_link]