The law books are full of cases deciding who is going to get the goods (and get paid) when a business fails. In the light of the decision in Stockco Limited v Walker, both graziers and financiers would be well advised to review their paperwork and procedures and take legal advice as to how best to protect their interests.
Stockco Limited v Walker
Capehorn Farming Company Limited borrowed money from Stockco to buy stock and grazed that stock on Mrs Walker’s farm. Stockco took security over the stock for the borrowing and registered that security on the public register created under the Personal Property Securities Act 1999 (commonly called the PPSA).
Capehorn was placed into receivership. Both Mrs Walker and Stockco looked to 200 bulls grazing on Mrs Walker’s property to secure payment of what was owed to them. Stockco claimed it was entitled to the bulls because it had a registered security interest. Mrs Walker claimed that she was entitled to retain possession of the bulls until she had been paid under a common law lien.
A common law lien
A lien is the right of one person to retain possession of property belonging to someone else until the owner has satisfied his or her obligations to the lien-holder. For example, a garage (the lien-holder) has the right to retain your car until you have paid for the repairs. A common law lien is one that has been created by cases which have come before the courts. It will be lost if the lien-holder gives possession of the property back to the owner. Liens can also be created by agreement or by statute - for example, an unpaid seller has the right to retain goods under the Sale of Goods Act 1908.
A lien will not arise if the lien-holder is maintaining chattels or preventing their deterioration, as distinct from improving the chattels. This can be a difficult distinction to make. For example, a person who trains a horse will have a lien, whereas a person who merely keeps a horse in a livery stable will not. A grazing contract will not normally support a claim to a common law lien.
Who should have first claim to the bulls?
The judge in Stockco v Walker decided that Mrs Walker had a common law lien because the contract between her and Capehorn was not a grazing contract, but a contract for improvement of the bulls. This was because Mrs Walker would only be paid if the bulls gained weight.
Having decided that Mrs Walker had a common law lien, the judge had to decide which claim had priority – Mrs Walker’s lien, or Stockco’s security interest.
The judge considered the PPSA. Under the PPSA a lien will have priority over a security interest if certain conditions are met, one of which was that Mrs Walker did not know that her lien was prohibited by Stockco’s security interest. The judge found in favour of Mrs Walker. She was entitled to retain the bulls until she had been paid.
Please email me at [email protected] with your ideas for future articles. Keep an eye out for next month's column, where I will discuss another relevant rural legal issue.
Barbara McDermott is a partner of Norris Ward McKinnon, specialising in commercial and rural law. With offices in Hamilton and Huntly, we have friendly, expert legal advisors ready to help you with your business and personal legal matters.