Stock Securities - perils and pitfalls

3 April 2016

There are numerous perils and pitfalls that can arise when taking and realising security over property, such as livestock. The plaintiffs in a recent case [1] fell victim to some of those perils and pitfalls: the plaintiffs’ security agreement was not well drafted and the plaintiffs and their receivers seized stock not covered by the agreement. This did not result in a happy ending.

The hunter becomes the hunted

In this case the plaintiffs had lent money to the defendants. The defendants had signed a General Security Agreement (GSA) giving security for the loan over their livestock. When the defendants failed to repay the loan, the plaintiffs appointed receivers, as they were entitled to do. The receivers uplifted stock, which they believed were owned by the defendants, from three different properties. The receivers obtained valuations for some of the cows that had been seized and sold them to the plaintiffs at the valuations.

The plaintiff issued proceedings seeking recovery of the money they claimed was still owing. The defendants counter claimed against the plaintiffs. The defendants claimed that some of the livestock that had been seized was not included in the GSA. They also claimed that the stock that had been lawfully seized had been sold at undervalue to the plaintiffs.

The Court found that the GSA had been drafted in such a way that the plaintiffs only had security over the stock listed in the GSA and not over their progeny or any other stock added to the herd. This meant that some of the stock uplifted from the one of the properties and all of the stock uplifted from two of the properties were not secured by the GSA.  Therefore the plaintiffs and the receivers had not been entitled to seize this stock.

The Court upheld the defendants’ claim that the receivers had breached their legal duty to sell the livestock for the best price reasonably obtainable. In setting the sale price, the receivers had relied upon valuations of the herd as an unrecorded dairy herd, whereas the herd should have been valued as a recorded dairy herd (i.e. a herd that had an established breeding and production history).

The Court also found that the plaintiffs had uplifted stock from one of the properties as a “self help” measure. The plaintiffs were not entitled to retain these animals and were therefore liable to the defendants in conversion.

Finally, the defendants were successful in their counter claim for consequential losses in the form of lost income from milk the converted stock had produced after it had been seized by the plaintiffs.

In summary, the Court held that the balance owed to the plaintiffs by the defendants was $26,606 and the amount owed by the plaintiffs to the defendants for the converted stock and lost milk production was $238,690.  To add insult to injury, as the defendants were the more successful party, the Court made a costs award against the plaintiffs in the defendants’ favour.

What is the takeaway from this?

Security documents must be carefully drafted. This is not a job for an amateur. The security holder must be very careful to seize only property that is covered by the security agreement. The process for realising the security set out in the security document and required by the law must be strictly followed. Unless you know what you are doing, it is very risky to seize stock covered by a security agreement and sell it without obtaining legal advice.

[1] McCollum v Thompson [2016] NZHC 28


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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.