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Car collateral confusion

Cars NZ, a car sales business, entered into a facility agreement to borrow up to $350,000 from a finance company to enable it to purchase vehicles for its car yard.  The facility agreement was secured by initial security over all 51 vehicles in the yard.

Previously Cars NZ had borrowed smaller amounts from the finance company, secured against specific vehicles.  Once Cars NZ had paid off the money it owed to the finance company for the specific vehicle, it was able to sell that vehicle.

Just over a year after entering into the facility agreement, Cars NZ experienced financial difficulties.  It asked the finance company to release its security over some vehicles so that Cars NZ could sell them to provide cashflow.  Cars NZ considered that it had paid off the debt owed on the vehicles it wished to sell.  The finance company told Cars NZ that the vehicles concerned secured all Cars NZ’s borrowings.  However, it agreed to release its security over the vehicles Cars NZ wished to sell if Cars NZ paid $20,000 towards what it owed to the finance company.

Cars NZ complained to FSCL. 


Cars NZ’s view

Cars NZ believed it was oppressive and unreasonable that it had to pay an upfront amount to release security on vehicles that had been paid off in full.  It was under the impression that the facility easily allowed vehicles to be added and removed.  It noted that, previously, the finance company had let Cars NZ sell specific vehicles once those vehicles had been paid off in full.


The finance company’s view

The finance company said that the vehicles were collateral for all the lending from the finance company to Cars NZ.  It said that its security interest in individual vehicles should not be considered individual lending against that particular vehicle.



We reviewed the facility agreement and the security agreement.  We noted that they explicitly recorded that the security interests granted to the finance company were for all amounts owed from time to time by Cars NZ to the finance company.  They were not limited to lending under any particular loan or credit contract.  We considered that it was reasonable for the finance company to hold on to its security interests until Cars NZ had paid all amounts owed to the finance company.

We noted that the most important factor is the actual wording of the agreements, not an impression held by Cars NZ.

We noted that typical lending practice is that a security would not be released until the loan was completely repaid.  We also noted that the finance company’s total equity position would decrease by almost 20% if it released the security interest without the payment of $20,000 it had requested from Cars NZ.  For those reasons, we were satisfied that the finance company was not acting in an oppressive manner.



We issued our preliminary view that Cars NZ had offered to the finance company all 51 vehicles as security for all money owed to the finance company by Cars NZ.  This was not limited to lending under any particular loan or credit contract.  We therefore concluded our investigation.


Our insight

It is not unfair for a finance company to require a loan to be repaid in full before releasing its security, as long as that is what the loan agreement and security agreement says it can do.