The issue of whether all bailments1 of more than one year qualify as security interests under the Personal Property Securities Act (PPSA) has been clarified by a Court of Appeal decision.

In Rabobank New Zealand vs McAnulty and others2, the Court ruled that bailments will qualify only if the person in possession of the goods pays the owner for the use of the goods.

This Brief Counsel discusses the Court’s decision.  Click here for a copy of the decision.

Leases and bailments for more than a year are deemed, by the PPSA, to be security interests.  The owner of the goods under such a lease or bailment must register their interest on the Personal Property Securities Register (PPSR) in order to not lose priority to a general secured financier of the lessee. 

Until now, it has been uncertain whether all bailments are deemed to be security interests, or only those where the person receiving the goods pays for the use of those goods, in a manner similar to a lease.  In many cases, there either is no payment (the goods are merely loaned as part of a wider commercial relationship), or the payment flows the other way (the person in possession is paid a fee for looking after the goods).

The Court has now confirmed that a bailment will be subject to the PPSA only if the bailor (the owner) profits from the bailment itself.  It is not enough that the owner is going to profit from the wider transaction.  There must be a “payment for the use of the goods”. Many bailments, although commercial in nature and lasting for longer than a year, will not qualify as security interests.

We agree with the Court’s decision.  However, by excluding gratuitous bailments of goods from the scope of deemed security interests, the Court has headed in a different direction from at least one of the leading texts, and perhaps commercial practice.

The case

McAnulty and others, known as the February Syndicate (the Syndicate), owned a stallion, St Reims.  Stoney Bridge Limited agreed to stable and arrange service nominations for St Reims.  The Syndicate agreed to pay a fee to Stoney Bridge for those services.  As a result, Stoney Bridge became the bailee of the stallion. 

It was a gratuitous bailment as Stoney Bridge did not pay the Syndicate for the use of the stallion.  Instead, the payment flowed the other way.

The Syndicate did not register any financing statement on the PPSR.

Stoney Bridge granted a GSA to Rabobank, which perfected its security interest by registering a financing statement on the PPSR. 

Rabobank claimed that its perfected security interest extended to St Reims, and had priority over the Syndicate’s interest in the stallion.  Rabobank alleged that the Syndicate’s interest as bailor of St Reims was a security interest to which the PPSA applied, and that interest had not been perfected.  The Syndicate had clearly bailed St Reims to Stoney Bridge.  Rabobank argued that, because the bailment had by then lasted for more than a year, it was a “bailment of goods for a term of more than 1 year” which the PPSA deems to be a security interest.  In a contest between two security interests, the perfected interest has priority over the unperfected.

In response, the Syndicate said that its bailment of St Reims was not a security interest and therefore the priority rules in the PPSA did not apply.  Although the arrangement was a bailment, it was a gratuitous bailment.  The Syndicate also said that it was not regularly engaged in the business of leasing or bailing goods (the definition in the PPSA expressly excludes “A lease by a lessor who is not regularly engaged in the business of leasing goods”.)

Bailments will be caught by the PPSA only if similar to leases

The Court decided that the arrangements between the Syndicate and Stoney Bridge were not a “lease for a term of more than 1 year” and that the Syndicate therefore had the superior right to St Reims.  The Syndicate was not regularly in the business of bailing goods; it was in the business of maintaining and profiting from the stallion.  The cost of looking after the horse was an incidental expense, not the business itself.

The policy reason for treating leases of more than one year as security interests is because it is otherwise too difficult to distinguish between operating and finance leases.  Instead, Parliament set out a clear, albeit arbitrary, distinction.  If a lease is, or could be, longer than one year, it is caught by the PPSA.

There is no need for gratuitous bailments to be drawn into that net, as they could not possibly be confused for finance leases.  So bailments where there is no rent or similar payment for the use of the goods are not security interests under the PPSA.  This means our Act is consistent with the Australian PPSA, which makes the same point expressly:

"This section only applies to a bailment for which the bailee provides value”.

The Court was satisfied that the exclusion of leases by lessors not regularly engaged in the business of leasing goods was not limited to leases.  It applied to bailments as well.

The Court also commented that, for a creditor to be “regularly” engaged in the business of leasing goods there must be some element of repeated dealing.  It strains the language to say that “regular” includes a single, isolated transaction.