Until recently, the PPSA did not give second and subsequent ranking secured creditors a statutory right to take possession of collateral in the event of default. The PPSA has recently been changed to allow all secured creditors to exercise this right. The recent case of Glenmorgan v New Zealand Bloodstock [2011] NZCA 672, however, confirms that all secured creditors can also rely on contractual rights to take possession of collateral. Secured creditors should ensure that their security documents clearly give them this right.

In addition, the case confirms that if a debtor wishes to challenge a secured creditor's actions in taking possession, it can sue on the tort of conversion. However, the debtor must provide evidence of loss. In Glenmorgan the debtor failed to do so, resulting in its claim for conversion being dismissed.

Background

Glenmorgan purchased a breeding stallion called "Generous" with financing from Lock (as first secured lender) and Bloodstock (as second secured lender). Lock registered its interest on the PPSR, but Bloodstock failed to do the same.

Glenmorgan defaulted on its payment obligations to Bloodstock. As a result, Bloodstock took possession of Generous. Glenmorgan sued, alleging, among other things, that Bloodstock's repossession amounted to conversion of Generous (that is, an illegal interference with Glenmorgan's rights to the horse). Substantial damages were sought, but the High Court dismissed Glenmorgan's claim. Glenmorgan appealed.

Was Bloodstock entitled to take possession?

At the time, the PPSA gave a secured creditor "with priority over all other creditors" a statutory right to take possession and sell items subject to a security agreement. Bloodstock could not rely on this, because it was a second-ranking secured creditor (as noted, the PPSA has now been amended to give subsequent security holders a statutory right to take possession).

Bloodstock instead relied on a contractual right in its security agreements to justify taking possession. The Court ruled that the parties had validly contracted out of the previous requirement in the PPSA that only allowed first ranking secured creditors to enforce. In other words, Glenmorgan and Bloodstock had agreed that Bloodstock had a right to take possession and sell, whether as a first or subsequent ranking security holder.

Accordingly, the Court of Appeal found that Bloodstock's taking possession of Generous was legal and did not amount to conversion. The Court's decision confirms that parties to a security agreement can in some circumstances contract out of the PPSA.

Did Glenmorgan suffer loss?

The Court of Appeal's decision also provides a reminder that a party can only succeed in a claim in tort such as conversion if that party has suffered loss. Glenmorgan claimed it had suffered capital and consequential losses of NZ$7.4 million (being the market value of Generous on the day that Bloodstock took possession of the stallion and the loss of profits for six years).

While it found that Bloodstock's taking possession of the stallion was legal, the Court of Appeal ruled that even if the taking of possession was illegal, it did not cause Glenmorgan any loss.

While Bloodstock took possession of Generous, it did not sell him. Bloodstock in fact gave up possession of Generous 18 days later to receivers appointed by Lock, who sold Generous. Because the receivers are deemed to be the agents of Glenmorgan, the sale was by Glenmorgan, not Lock or Bloodstock.

Given that Generous was sold by the receivers and the loss of possession did not equate to a loss of ownership, Bloodstock was at most responsible for a temporary interference with Glenmorgan's possession of Generous. As a result, Bloodstock's damages would have been limited to losses flowing from the small window in which Glenmorgan was deprived of possession. Unfortunately for Glenmorgan, the evidence did not establish that Generous's earning capacity was diminished in the 18 day period he was in Bloodstock's possession. In addition, because there was no challenge to the receivers' authority to sell, Glenmorgan was treated as accepting that its agents sold the stallion for the best price reasonably obtainable.

Finally, the evidence showed that Glenmorgan was likely to fail financially in any event. The Court concluded that it was a "forgone conclusion" that receivers would be appointed to Glenmorgan and that Generous would be sold as part of the receivership. Because Bloodstock's actions were not a substantial or proximate cause of Glenmorgan's loss, its conversion claim could not succeed.