A Hoary Chestnut Resurrected: The Meaning of 'Ordinary Course of Business' in Secured Transactions Law

By Gedye, Mike | Melbourne University Law Review, April 2013 | Go to article overview

A Hoary Chestnut Resurrected: The Meaning of 'Ordinary Course of Business' in Secured Transactions Law


Gedye, Mike, Melbourne University Law Review


The purpose of this article is to provide some guidance to practitioners and the judiciary in both Australia and New Zealand on the vital question: when is a sale in the 'ordinary course of business' for the purposes of the Personal Property Securities Acts of Australia and New Zealand? It is not uncommon for the courts to say that in any given case this is a question of fact. But, while not denying the importance of the particular factual circumstances in issue, the author seeks to demonstrate that the analysis will be facilitated by adopting a structured approach that initially recognises the primacy of security interests and that follows sound legal principles developed by the North American courts. Differences between the Australian and New Zealand legislative provisions are analysed to determine whether they lead to different outcomes on either side of the Tasman.

CONTENTS

I     Introduction
II    A Starting Point
III   Defining Buyers
IV    The Role of Ordinary Course Transactions
V     The Buyer's Seller Rule
VI    Australasian Drafting Differences in the Ordinary Course
        Provisions
VII   General Principles
VIII  How Relevant Is Price?
IX    Tubbs v Ruby Revisited: Drafting Strategies to Protect the
       Secured Party
X     Limits to the Subjective Approach
XI    Sales Authorised by the Secured Party
XII   The Australian Twist
XIII  The Impact of Subversive Corporate Structures
XIV   Conclusion

I INTRODUCTION

It is common for a debtor to sell goods that the debtor has previously given as collateral. Often, this will be in conformity with the mutual intention of the debtor and the secured creditor. This would be the case, for example, where the creditor is secured over inventory that both parties expect the debtor to sell at a proper price in the course of the debtor's business. With inventory financing, the secured creditor will commonly expect much of the sale proceeds to be applied towards repaying the secured creditor but, if the debtor is financially distressed or dishonest, this expectation may not be met. If the inventory financier goes unpaid, there will be times when the creditor will look to recover the inventory, even where it has been onsold.

In addition to the sale of inventory, there may be other times when the secured creditor expects, or at least accepts, that the debtor will dispose of collateral. This may be the case, for example, where the debtor regularly acquires new equipment and disposes of obsolete equipment. Conversely, there may be occasions when a secured creditor objects even to the sale of inventory, such as where inventory is sold in suspect circumstances to a party related to the debtor or is otherwise sold on terms unacceptable to the secured creditor.

Whenever the secured creditor disapproves of the sale of collateral, whether it be inventory, equipment or some other type of asset, the scene is set for a conflict between the secured creditor and the buyer. Provisions of the Personal Property Securities Act 2009 (Cth) ('PPSA (Aus)') and Personal Property Securities Act 1999 (NZ) ('PPSA (NZ)') comprehensively deal with such conflicts and determine which of the secured party and buyer prevails) The provisions in the PPSA (Aus) and PPSA (NZ) ('Australasian PPSAs') set out the different instances when buyers of property acquire the property free of any security interests to which the property had been subject. (2) The various provisions may overlap, and a buyer need only come within any one or more of them, but together they comprehensively spell out when a buyer prevails over a secured creditor. If a buyer does not fall precisely within one of these provisions, a creditor that was secured over the property bought will be able to claim it back from the buyer. This article addresses one such provision--s 46 of the PPSA (Aus) and s 53 of the PPSA (NZ)--regarding sales in the 'ordinary course of business'. These particular sections specify when a buyer in the ordinary course of the seller's business takes the property free of any security interest that was attached to the property. …

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