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16th August 2011


Lien or Lean: Get Your Priorities Right, or Get Ready to Come Last

By George Fraser

From about the end of October 2011 how a thoroughbred stud enforces its interest in a horse is going to change. We would all be familiar with (or at least vaguely aware of) the concepts of lien and power of sale that appear in most agistment contracts. A lien is created where someone agists your mare, or gets her in foal or otherwise expends effort on her in return for expected payment. If the bills are not paid then the farm holds onto her by asserting a lien, until the debt is paid or the mare is sold. The power of sale also appears in most agistment contracts allowing for the creditor farm to sell the mare to recoup its fees.

From about 27 October 2011, the law relating to how a farm asserts an interest in a horse is going to be regulated by the Personal Property Securities Act (‘PPSA’), and the supporting Personal Property Securities Register (‘PPSR’). The old law that governed liens and the like dictated that unsecured debts (i.e. debts that were not specifically attached to property) ranked behind secured debts (like a registered mortgage) when it came time to divide up the assets of the debtor. In the old regime, the bank got the first chop, the other secured creditors the next chop, and the poor old agistment farm, the last or no chop.

The New Regime

Under the new PPSA, creditors, like agistment farms and stallion owners, will be able to register an interest in a mare that has been agisted on the agistment farm, or served by the stallion station. The registration process will be simple and can be done online for a fee. Once the interest is registered, it ranks in priority based on its date of registration. For instance, if a mare is financed by a bloodstock leasing company and the lease is not registered with the PPSR,  and she is served by a stallion, and the stallion proprietor then registers an interest in her with the PPSR, then if the mare owner goes broke, or otherwise does not pay for the mare, the stallion owner has first priority over her, even above the bloodstock leasing company. Confusing what, and scary.

A Personal Property Security regime has operated in the USA, Canada and New Zealand for a while now, and reflects the thinking behind the Uniform Commercial Code, which will become more prevalent over the ensuing years as globalisation marches inexorably forward. Recently, the New Zealand Personal Property Security regime got involved with the thoroughbred industry with surprising results.

The New Regime and the Bloodstock Industry

New Zealand Bloodstock financed the purchase of the stallion ‘Generous’ and entered into an arrangement with Glenmorgan Stud to lease the horse for a fee, with a buy-out provision at the end of the lease. New Zealand Bloodstock did not register its lease with the NZ Personal Property register. A finance company called S H Lock entered into a separate arrangement with Glenmorgan to provide finance for general purposes, and did register its interest with the NZ Personal Property register. When Glenmorgan became unable to pay its debts, S H Lock came in and took the stallion. Understandably, New Zealand Bloodstock were unimpressed and took the matter to court. The proceedings wound their way through the New Zealand Court system, with the ultimate inescapable conclusion that S H Lock got first priority over Generous because their interest was registered, and New Zealand Bloodstock’s wasn’t.

The Australian PPS regime will not be markedly dissimilar to the New Zealand PPS regime, and similar result would be likely to occur in Australia.

How Will I Be Affected?

So what will thoroughbred farm owners need to be aware of once the new PPS regime starts in Australia. The basic rule is going to be, if a debt is owed in relation to a horse,  that debt needs to be registered with the Personal Property Security Register. Once the debt is registered or ‘perfected’ it ranks in priority with other debts based on its time of registration. In essence it works out as “first in, best dressed”.  Perfected securities have priority over unperfected securities. A perfected interest will take priority over any other interest save for an earlier perfected interest. This is a simplistic explanation, and specific rules of priority attach to different types of security interests.

The mechanics of registering an interest will be that a creditor will provide a ‘financing statement’ to the PPS Register. The financing statement will include the names of the parties to the transaction, the collateral, and the security interest. For the example of a broodmare in foal, the parties could be the mare owner and the stallion owner, the collateral will be the mare and foal, and the security interest will be the stallion service fee. Once the financing statement is registered, the PPS Registrar will issue a ‘verification statement’ to the stallion owner. The stallion owner must then give a copy of the verification to the mare owner. It will be possible to search the PPS register. If you are buying a mare you will be able to find out if any debts are attached to her as collateral, before you buy her.

Bloodstock Leasing

An area where special rules will apply will be bloodstock leasing. Where a bloodstock company agrees to finance the purchase of bloodstock, a Purchase Money Security Interest (PMSI) will be created. This is a special class of security interest that not only secures the bloodstock company’s interest in the purchased horses, but also requires the other party to the lease to assist the bloodstock company to assert a legal right to the purchased bloodstock.

So what happens if the bloodstock buyer defaults on paying the bloodstock company. If the bloodstock company has registered its interest in the bloodstock, it can seize the bloodstock, and either sell it, or retain it. The person with a higher priority security interest that is registered is entitled to seize the stock from a person with a lower priority security interest. The bloodstock company must then give notice of the sale or disposition to the defaulting person, and anyone else who has a higher priority interest in the bloodstock. There is a duty to obtain market value for the bloodstock, which would probably mean sale by public auction at a recognised thoroughbred horse sale. Proceeds of the sale are divided amongst the secured parties, with the balance of any left over money going back to the defaulting party.

What if I Buy a Mare Who is Registered on the PPSR?

Now, what happens if you buy a mare that has a security interest registered, with her as collateral. Firstly, you should do a search of the PPS Register to see if there is any security interest registered against her. If there is, then you are buying her subject to the interest of the person who has the registered security. If you buy the mare and bona fide have no knowledge of a registered security interest, then your purchase extinguishes the registered security interest, and you have good title to the mare, without any encumbrances.

Getting the Priorities Right

How we do business in the thoroughbred industry is going to change once the Personal Property Security Act comes into effect later this year. It will be vital for anyone who gives credit on horses, or agistment, or stallion services to be aware of how this law will affect them. It will be vital for anyone who already is a creditor to industry participants to have their interest registered with the PPS Register. If you do not register your interest, then someone who gets in and registers first, will have priority over you when the time comes to sell the horses.

George Fraser is a practising solicitor with EQUILAW at Muswellbrook, and a co-owner of Ilala Stud at Scone. See www.equilaw.com.au and www.ilalastud.com



Email brbrian@tpg.com.au