Security Interests Under The PPSA – A Warning For Artists

Artists often leave their works with retailers for them to sell the works on their behalf of the artists. However, if a retailer has given security over all of its assets to a bank or other lender, the artist runs the risk that he may not be able to retrieve his works or get paid for them, if the retailer goes into receivership or liquidation.

This is because a bank almost always registers a financing statement on the Personal Property Securities Register (the PPSR) under the Personal Property Securities Act 1999 (“the PPS Act”) to protect a “general security agreement” given by the retailer in favour of the bank. Registration of the financing statement gives the bank priority over the retailer’s other creditors.

This can have dire consequences for artists and designers who leave their works with retailers and galleries to generate sales. Even some of New Zealand’s most successful designers were caught out by the Eon receivership and current market conditions are likely to give rise to more similar situations.

An artist may think that he doesn’t have to do anything when leaving his works with a retailer because he still “owns” his own works. However, the Act disregards ownership and treats the artist’s work as goods delivered as a “commercial consignment”.

The PPS Act does allow an artist to register a financing statement to protect what is called a “purchase money security interest” in respect of his “commercial consignment”.

If the artist registers a financing statement before delivering his artwork to the retailer, he will take priority over a bank or other lender who has registered a general security over the retailer’s business. He will also have priority over anyone else who subsequently registers a financing statement on the PPSR.

So what can an artist do?

The first thing the artist needs to do is search the PPSR, to see if any financing statements have been registered over the retailer with whom he intends to deal.

The artist would then be well advised to register a financing statement of his own immediately. He can do this for $3. Although there is no time limit for registering the financing statement, registration will be ineffective as against the bank or other lender with a registered general security (usually described on the PPSR as a security that applies to “all present and after acquired property”) if registered after the date the artist gives possession of his artwork to the retailer.

The artist would therefore be strongly advised to register a financing statement before he delivers his works to the retailer.

If the artist has, without registering a finance statement, given possession to a retailer whose bank has already registered a financing statement, then the only point in filing a financing statement would be so that the artist can gain priority over any lender who subsequently registers a financing statement to protect a general security interest.

The effect of registering a financing statement before giving possession of the artwork to the retailer is that:

• if someone buys the works from the retailer, the artist will have an interest in the cash proceeds from the sale and will be entitled to be paid by the retailer;
• if the retailer goes into receivership or liquidation, the artist will be entitled to get paid before: (1) anyone with a prior registered general security; (2) anyone who has subsequently registered a financing statement and (3) any unsecured creditors.

Where the artist has registered a financing statement after giving possession of his works to the retailer, a bank or other lender with a prior security over the artist will be entitled sell the artist’s works without having to account to the artist.

So, what are the alternatives where a bank already has a general security registered and the artist has already given possession?

1. If it’s not too late, the artist should go back to his retailer and retake possession of his artwork. He should then register a financing statement on the PPSR. After that he can safely return the artwork to the retailer.
2. The artist could sell his works outright to the retailer. The retailer needs to have the cash to be able to pay for the works but it does mean that the artist gets paid up front and doesn’t have to worry about security issues at all.

Artists are not the only people affected by the problem with the “commercial consignment” provisions of the PPS Act. If another gallery goes into liquidation or receivership leaving artists unpaid for their works, the entire creative sector will have little confidence and will be reluctant to support galleries and other outlets who have given general security over their business assets.

If retailers wish to maintain the confidence and goodwill of artists, they should consider:

1. asking their banks to remove “commercial consignments” from the scope of the banks’ general security agreements;
2. making artists aware of their rights, when they bring their artwork in for sale or display and encourage the artists to use the PPSR to protect their “commercial consignments”;
3. asking their bank for a written waiver of any rights it might otherwise acquire in the artist’s work.

If banks prove reluctant to cooperate in mitigating the potential plight of the artistic and creative community, many of whom are not commercially minded enough to cope with the difficulties of negotiating with banks and retailers and understanding the PPSR, perhaps the PPSA Act should be changed to remove “commercial consignments” from its scope.