Stiff penalty for ignoring law

By IRENE CHAPPLE

The lack of $5 worth of paperwork has cost a company $50,000 in the first court ruling under new securities legislation, sounding a harsh warning for those ignoring the revamped legal landscape.

The case, decided in the High Court at Auckland last week, showed that effective ownership of property can pass to another party - without the original owner's consent or knowledge.

The judgment by Justice Rodney Hansen was made under the Personal Property Securities Act, introduced in May 2002, which significantly altered previous property law.

Portacom, which leased five portable office buildings to Wanganui timber-milling operation NDG Pine, lost ownership of its property because it neglected to register its interest as required by the act, a simple process which costs $5.

The case arose when NDG was put into receivership by banker HSBC. The bank held a debenture over the company's assets and had registered its interest under the new law.

The receivers argued for the right to sell the portable buildings - to settle NDG's debts with the bank - even though they were owned by Portacom, not by NDG.

The difference between HSBC's and Portacom's claims came down to the $5 registration of interest under the act. HSBC had it; Portacom didn't.

Portacom did have a contract with NDG that made its interest in the buildings clear.

But the law overrode that contract and passed ownership of the buildings - understood to be worth more than $50,000 - to the receivers.

Harsh? Yes, says Murray Tingey, senior associate with Bell Gully and the lawyer for the winning side. Portacom declined to comment on the judgment.

According to Tingey: "It is a hard rule and an expensive rule. [Not registering] is a big mistake to make.

"For a $5 fee you lose ownership of property you did own."

Bad law then? "No," says Tingey. "This gives certainty. So I don't think this is bad law but it is a big change. If you own personal property, you can lose ownership of it. NDG didn't own the buildings but it can pass ownership to the bank - and it has done that."

He says the judgment will be a warning to many businesses who may have leased out their property and not registered an interest.

Tingey says the Personal Property Securities Act revolves around the idea of "apparent possession".

It gives lenders the comfort of knowing that a borrower owns all assets that do not have a charge registered against them under the act. Those interests can be checked online.

The act replaced the Chattels Transfer Act and the Motor Vehicle Securities Act, but it does not cover security interests over land.

The act is based on Canadian law and some lawyers regard it as the most significant piece of legislation to be enacted in New Zealand in recent years.