In February 2008, BB2 Holdings Limited (“BB2”) sold computer software and hardware to Doyle by Design Limited (“Doyle”). BB2 had a standard credit sale agreement whereby it retained title to the equipment until its debt was repaid in full. Additionally, BB2 had the rights to and registered its security interest under the Personal Property Securities Act 1999 (“PPSA”).

Under the credit sale agreement, Doyle was required to make an initial payment of $2,730.46 and a second payment a month later of $8,231.78 after which monthly payments of $1,365.23 over 56 months. Whilst Doyle was late from time to time, it generally kept up with the required payment arrangement but defaulted in January 2010 whereupon BB2 made enquiries and found that Doyle’s director, Mr Doyle, had gone to Queensland without any intention of returning and had effectively abandoned the business.

BB2 repossessed the equipment on 10 February 2010.

Instead of selling the seized equipment, BB2 agreed to return possession of the equipment to Mr Doyle in return for Mr Doyle giving a mortgage over an apartment that he owned and a promise to keep up with the instalments under the credit agreement.

Doyle was subsequently put into liquidation on 4 June 2010.

The issue: Did BB2 receive a preference?

The liquidators did not dispute the validity of BB2’s security. However, it was submitted that while BB2 holds a perfected purchase money security interest, its rights are defined under the PPSA and is limited to the rights contained in that Act which only entitles BB2 to the actual equipment and to the proceeds of the equipment under section 45 of the PPSA. Proceeds being defined as identifiable or traceable personal property derived from the realisation of the collateral.

Because BB2 took possession of the equipment from Doyle and then returned the equipment to Mr Doyle, it was submitted that BB2 did not have any right to the equipment and has not received any ‘proceeds’ of any disposition of the equipment. It therefore follows that the funds that it received must have gone to BB2 as an unsecured creditor which brings those payments within the ambit of the voidable transaction regime.

To the contrary, BB2 submitted that a secured creditor stood outside of the liquidation provisions of the Companies Act. Accordingly, the assets available for distribution are not to include assets subject to a charge. More importantly, BB2 relied on the following passage from Heath & Whale’s Insolvency Law in New Zealand:

The statutory order of priority will generally be disturbed if an unsecured creditor receives full payment of its debt during the specified period when the company is insolvent. However a payment made to a secured creditor will generally not be impugnable by the liquidator as such payment does not affect the position vis-à-vis the other creditors in the liquidation. Accordingly a payment made to a secured creditor, or to an unsecured creditor that enjoys priority over the general body of unsecured creditors, will rarely be able to be impugned as the effect of the transaction does not result in the creditor receiving more than it is entitled to in the liquidation. A preference may result, however, if the order of payment is deferred.

The Court’s findings

Associate Judge Bell decided that the value of the asset in relation to the debt payable is important to the analysis. Prudent secured creditors ensure that the asset over which they take security has sufficient value if they need to take enforcement steps so that they may be paid from the proceeds of sale. In such a case, they are fully secured creditors. In the event that the value of the asset is insufficient to meet the entire debt, the creditor is partly secured.

In citing Professor Goode’s text, His Honour adopted the following passage:

In general, payment to a secured creditor in reduction or discharge of the debt is not a preference, for the effect of the payment is to reduce or extinguish the security interest and thus pro tanto to increase the company’s equity in the previously charged assets and make them available to other creditors. Accordingly, the payment produces no change in the value of the assets available for the general body of creditors. Moreover, if the company were to refrain from making the payment, that would not help the other creditors, for the secured creditor would still be entitled to enforce his security, assuming the giving of it had not itself been by way of preference.

Having stated the general position, His Honour noted that there are exceptions. One of which:

… where the amount of the payment exceeds the value of the security; in that event, the payment is vulnerable to the extent of the excess.

His Honour continued and held that so long as the value of the asset taken as security is worth more than the debt payable by the company, there can be no element of preference as payments to a secured creditor will either reduce the debt or prevent the debt increasing on account of additional interest arising upon default. On payment made to a fully secured creditor, any equity left is available for unsecured creditors.

However, where a creditor is partly secured, payments it receives are first applied to the unsecured portion before being applied to reduce the secured debt. In this case, such payments could be attacked as a voidable transaction.


On this basis, his Honour decided that payments between 19 January 2010 and 19 May 2010 totalling $6,876.15 were voidable as there was correspondence evidencing that BB2 was to some extent partly secured by early 2010. However, in relation to the rest of the payments between 21 April 2008 and 17 December 2009 totalling $35,844.63, his Honour held that there was insufficient evidence to show that BB2 was partly secured at that stage. Accordingly, His Honour refused to void that sum.