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Bailments, liens and the PPS – Yikes!Print This Post

Bailments, liens and the PPS – Yikes!

A bailment describes a situation where one person gives possession to another of some chattel for a limited purpose. It is similar to a lease, but the bailee in possession of the chattel is not entitled to use the chattel for personal use.

Given that the bailment is comparable to a lease, where other conditions under the PPSA are otherwise satisfied (i.e. the bailment is over one year long) the bailor must register their interest to avoid losing claim to the chattel. This would be an odd result under our common law but it is consistent with the “substance over form” approach of the PPSA.

A recent New Zealand case, Rabobank -v- McAnulty [2011] NZCA 212 illustrates some issues with respected bailments in New Zealand.

McAnulty and others had a syndicate which owned a racehorse ‘St Reims’. They entered into an agreement with a stud farm, S, to stable and care for St Reims. Under the agreement, S became a bailee but the syndicate failed to make a registration on the Personal Properties Securities Register. Rabobank provided finance to S and registered a security agreement in respect of all present and after acquired property. When S went into receivership, Rabobank claimed its paramount interest in the horse because the syndicate had an unperfected security interest as bailor.

The agreement provided that S had to look after the horse, provide gear and veterinary services as require and in return S was entitled to the stud fees for 15 “services”. The agreement was stated to be for 3 years – well over the “more than 1 year” requirement for the purposes of the New Zealand Act.

It was argued that since the syndicate had never before bailed any goods, it could not be said to be in the business of doing so and the Court noted that the question is particularly difficult where a business is just starting up. In Rabobank, the Court considered that the syndicate was not in the “business of bailing or leasing goods” because it was not seeking to profit from the bailment. By contrast, it was paying the bailee.

Accordingly registration was not required to ensure its priority against the Bank. In any event, the Court acknowledged that under the Australian legislation, gratuitous bailments are excluded – s 13(3).

What about liens and the PPSA? Section 8(1)(b) expressly excludes statutory liens from the ambit of the Act and s 8(1)(c) provides that the Act does not apply to “a lien, charge of any other interest in personal property, which is created, arises or is provided for by operation of the general law”.

However, liens which are expressly provided for by the parties in their agreement fall outside s 8(1)(c) and therefore require registration. This was recently confirm at paras [30] and [46] in Rodney Hansen J’s High Court judgment McKay-v-Toll Logistics (NZ) Ltd, a decision of the High Court of New Zealand.

But what about where a lien arises both under the general law as well as being provided for in the contract?

In McKay, Toll provided warehousing services for DVDs to a company. There was no written agreement in place between the parties until 5 June 2009 at which point some $243, 000 was owing to Toll. Terms and conditions were then drawn up between the parties which included the assertion of a general lien over the goods.

Receivers were later appointed to Toll and Toll claimed that the pre-existing general security agreement encompassed the DVDs in Toll’s possession at the relevant time. The Court said that Toll would have to demonstrate that a general lien arose by virtue of either judicial notice or by “custom of usage” in the context of the relevant industry. Toll could not establish that a general lien was ever part of the custom of the industry in New Zealand and accordingly it could not assert a common law lien.

In light of this outcome the contractual lien created by the June agreement related only to the value of the services provided after that date ($43,000). This contractual lien was clearly a security interest under the PPSA and therefore the bank’s earlier registered security interest took priority over that as well.