A recent judgment from New Zealand's Court of Appeal has provided useful guidance on an issue that arises frequently in priority disputes between secured parties under the personal property securities regime, and more widely.
In StockCo Limited v Gibson  NZCA 330, the Court discussed the factors that will be relevant in determining whether a transaction is "in the ordinary course of business of the seller" in terms of section 53 of the Personal Property Securities Act 1999. An equivalent expression is found in section 46 of the Australian Personal Property Securities Act 2009, so the decision is likely to be of interest to Australian practitioners. The phrase is also prevalent in other legislation, contractual boilerplate and widely-used forms of trust deeds. It seems likely that the decision will be influential in these other contexts as well.
The case involved a priority dispute between receivers appointed by a consortium of financial institutions (Financiers) and a livestock trading and financing company (StockCo). The Financiers had a security interest over all of the property of four dairy farming companies (Security Group), including their livestock. To raise funds to purchase new dairy farms (which the Financiers had refused to finance), the Security Group entered into sale and leaseback transactions with StockCo. In one of these transactions a member of the Security Group (Plateau) sold 4,000 heifers to Stockco, which then leased them to Nugen (a related company that was not part of the Security Group).
Ordinary course of business?
StockCo argued that the sale of the heifers was in the ordinary course of Plateau's business and (it being common ground that StockCo did not know the sale was in breach of the Financiers' security) StockCo's security interest over the heifers therefore took priority over the Financiers' security interest. Both the High Court and Court of Appeal disagreed.
O'Regan P noted that section 53:
... must be interpreted in a way which meets the commercial objective of facilitating commerce without undermining the equally important commercial objective of ensuring that those who provide credit on the security of the debtor’s goods are not unfairly deprived of the benefit of that security (at ).
He held that "what is required is an objective factual assessment based on all the circumstances of the particular case" but gave the following guidance:
- A two stage process is appropriate: the court will determine what business was being carried on by the seller "in the ordinary course", and then determine whether the transaction falls within that
- When a group of companies is operated as a single business, it may well be appropriate to consider the business of the group as a whole (as on the facts here)
- The fact that security documentation restricts the seller's ability to change its ordinary business is unlikely to be relevant – while altering its business might be a breach of the security agreement, that will not affect the objective determination of what the seller's ordinary course of business is
- The section should not be interpreted "in a way that allows a debtor to make a sudden change of business strategy", broadening the scope of the section and reducing the secured party's protection. Such a sudden change would be "contrary to the concept of the 'course' of business"
The following factors may be relevant:
- agreements made at the seller's usual place of business will be more likely to be in the ordinary course of business. The extra formality here (including negotiations through Plateau's lawyer) and involvement of external advisers did not suggest a sale in the ordinary course of the group's business
- similarly, the nature and significance of the transaction is relevant, such as whether it can be effected by a manager or needs specific authorisations
- the transaction is more likely to be in the ordinary course of business if the buyer is an ordinary everyday consumer rather than a dealer or financial institution
- the fact that the sale was of a large quantity (perhaps forming a "substantial proportion of the stock of the seller") is an indication it is not in the ordinary course
- that the price is discounted from the fair market price will also suggest a sale not in the ordinary course. So, too, will the fact that a transaction is not at arm's length
- the reason for the transaction is relevant, such as if it is in response to financial difficulties or in suspicious circumstances
- the court will consider the frequency of the transaction, the phrase "ordinary course of business" involving "some anticipated repetition of business activities". Here, StockCo sought to rely on what the Court found to be "one-off transactions that were not capable of becoming a business which would be operated in the ordinary course".