March 17 2014
Be careful when selling stock
Recently in this newsletter, we have looked at the implications of the Personal Properties Securities Act 1999. Another recent case¹, between the Bank of New Zealand and Waewaepa Station 2002 Limited, highlights the ability of a creditor, who in this case is the Bank of New Zealand, to recover from the purchaser of stock where the seller of stock had given a charge in favour of the creditor.
In the Waewaepa case, Te Rimu Station Limited sold stock to Waewaepa because, according to Te Rimu, they had little foodcover and could not feed their stock. This occurred at the beginning of the drought over the summer of 2012/2013, which was a contributing factor. Te Rimu then transported the stock to Waewaepa who ‘purchased’ the stock by way of setting off its value from amounts that Waewaepa owed Te Rimu. Te Rimu and Waewaepa were ‘related’. Waewaepa owned 50% of Te Rimu.
The BNZ had a general security agreement (GSA) over Te Rimu’s ‘all present and after acquired property’ which included the stock. The sheep in question were delivered to Waewaepa on 21 November 2012, and the book transaction for the purchase of the sheep was dated 9 November 2012. At that point, Te Rimu was not in default under its loan facilities and the BNZ had not made demand under its securities.
Te Rimu subsequently did default and the BNZ made demand on Te Rimu in December 2012 and then successfully sued Waewaepa for conversion in the amount of the value of the sheep that had been sold to Waewaepa and transported off Te Rimu.
Ordinarily, under the Act, a security interest continues whether or not there is a sale. There is an exception to that in s53 which says that “a buyer of goods sold in the ordinary course of business of the seller … takes the goods [the sheep] free of a security interest given by the seller … unless the buyer … knows that the sale … constitutes a breach of the security agreement under which the security interest was created.”
This exception is necessary for any business to trade, so one of the issues in the Waewaepa case was – what is the ordinary course of Te Rimu’s business?
The court referred to earlier decisions where the following factors were important:
- Where the agreement was made?
- Parties to the agreement
- Quantity of goods
- Price charged
- The nature and significance of the transaction
- The reason for the transaction
- Frequency of the transaction, and
- The ‘arm’s length’ nature of the transaction.
One of the arguments raised in relation to the ’ordinary course of business’ of Te Rimu was that dry stock farming is a seasonal business. Changes to the normal pattern of business may arise because of unseasonal changes such as adverse weather conditions. In a drought situation, a farm may be required to destock its farm of capital stock simply because it cannot feed them. This argument was raised in the Waewaepa case.
The court held that the sale of the sheep was not in the ordinary course of Te Rimu’s business. The main factor in the court’s decision was the fact that the two parties were related in that they had similar ownership and the same person, as a director of both companies, implemented the transaction. In addition, there didn’t appear to be any GST invoices for the sale, something which the court believed was certainly outside the ordinary course of business.
However, the case does have a warning signs. What if Te Rimu and Waewaepa were not related parties? A purchaser in that situation should do a PPSR search. If there is a GSA registered (which there invariably is), then written confirmation from the bank that the stock being sold has been released from the security interest should be obtained. In the case of the selling farmer, if you are in the position of having to destock capital stock (for any reason) and you do have a GSA in favour of the bank, then you should obtain consent of the bank as you could be in default under your GSA.
¹ Bank of New Zealand v Waewaepa Station 2002 Limited  NZHC3321