Priority is key to any exercise of a power of sale

Priority will determine whether a receiver or other controller (which could include the secured party as “mortgagee in possession”) appointed under a security interest can sell the collateral and give good title to a purchaser by “overreaching” (selling through) other junior- ranking security interests attached to the same collateral.

A power of sale exercised under a second ranking security interest cannot overreach a first-ranking security interest to deliver unencumbered title to a purchaser. The best title that a second-ranking secured party, or a receiver or other controller appointed by them under a second-ranking security interest, can give to a purchaser is title subject to the first-ranking security interest¹. The first ranking secured party would have to consent to the sale and agree to release its security interest, no doubt in return for first bite of the sale proceeds.

Section 133 of the PPSA, in Chapter 4, provides that a first-ranking security interest carries a power of sale over collateral which can “overreach”, meaning sell free and clear of, junior-ranking security interests such as second and third-ranking security interests in the same collateral. However, section 133 sits within Chapter 4. Chapter 4 does not apply to receiverships of companies. Section 133 will not apply where it is needed most, that is, to asset sales by receivers of companies.

Section 133 may be helpful in certain enforcements of security by the appointment of (non-receiver) controllers to the assets of companies, and security granted by individuals. Chapter 4 may (in certain circumstances) apply to these enforcements. Enforcements of leases that secure obligations or retention of title sales by the lessor or seller repossessing collateral are examples.

How would a receiver appointed under a first-ranking security interest granted by a company, or buyers from them, sell (or buy) free and clear of junior-ranking security interests? There does not appear to be a provision in the PPSA that permits this. It should follow from first- principles, otherwise what is the point of first-priority.

A receiver appointed under a security interest that is also (as a matter of general law) a mortgage or charge is likely to be able to rely on the provisions of the property law legislation in each relevant State of Australia. Take section 104 of the Victorian Property Law Act 1958 (Vic) as an example. It confirms that a power of sale exercised under a mortgage or charge can sell free and clear of junior-ranking mortgages or charges, but sells subject to senior-ranking mortgages or charges. The general law continues to apply in conjunction with the PPSA to the extent not inconsistent². Receivers exercising a power of sale, and purchasers from them, under mortgages and charges ("charge" includes a PPSA security interest in NSW, Qld and WA) only, could rely on section 104 or equivalent provisions in other States³ to sell free and clear of junior-ranking security interests.

Query whether the provisions in the property law legislation of each Australian State (in particular VIC, SA, TAS, NT and ACT) should be amended to expand their application to all security interests under the PPSA, not merely mortgages and charges to which they currently apply.

Security agreements often include contractual confirmations that the secured party can exercise a power of sale in relation to the collateral and sell free and clear of other encumbrances. However, such contractual provisions are of questionable binding effect on other secured parties.

Sales by receivers can degenerate into unnecessary dogfights with a nervous purchaser and their solicitors in the absence of a clear statutory provision which confirms the ability of a first-ranking security interest to overreach. This is because sales by receivers or controllers typically give no representations or warranties as to title.

When contemplating the appointment of receivers/ controllers or administrators, secured parties should do a “priority audit” and ascertain whether their security interest has first ranking priority over the collateral they wish to realise. If a secured party is second ranking over collateral they wish to realise to repay themselves, then they need to ascertain (A) which secured party is first ranking, and (B) whether any residual value or equity remains for them after the first-ranking secured party is repaid. If there is likely to be residual value in the collateral for second-ranking secured parties, discussions should be entered into with the first-ranking secured party as to realisation strategy.

The fact that a first-ranking secured party has control of the situation might seem obvious, but it takes on particular significance under the PPSA because there are various classes of security interests that have super-priority to all- assets security interests. The main super-priority security interests are PMSIs and security interests perfected by control. Holders of an all-assets security interest who are contemplating enforcement need to ascertain and make a list of PMSIs and security interests perfected by control, to ascertain which security interests may have priority to them and over which assets.

As discussed next, trade sales of the (entire) business of a grantor will often include the sale of collateral which is subject to PMSIs, and possibly security interests perfected by control. These “super priority” secured parties will normally need to consent to a trade sale that includes their collateral, and receive the sale proceeds apportioned to the collateral sold over which they hold super-priority security.

PMSIs and security interests perfected by control as “blockages” to sales upon enforcement by all-assets security interests

It will be usual for there to be at least several PMSIs granted by any grantor when it comes to enforcement.

PMSIs must be perfected by registration, and must be registered within strict timeframes to comply with the PMSI Rules (see paragraphs 17.076 to 17.077 of Chapter 17 (Perfection) for the PMSI Rules). Further, PMSIs cannot be taken over investment instruments (shares, bonds and other instruments), intermediated securities, negotiable instruments, and “monetary obligations” which is not defined but should include accounts and all forms of guarantee, indemnity and other payment obligations.

If valid, PMSIs have super priority, and rank ahead of most other security interests, particularly security interests over all present and after-acquired property such as “general security interests” under which secured parties will often seek to appoint receivers. PMSIs are not, however, infallible as the priority waterfall (see paragraph 18.4.2 of Chapter 18 (Priority)) bears out.

Under pre-PPSA law, valid leases, conditional sales by retention of title, consignments and sales of receivables, all being transactions where title to the collateral sits outside the grantor’s insolvent estate, generally had priority to all-assets security interests. It should be no surprise that various collateral will not be available to all-assets secured parties. The trick is to spot all PMSIs and security interests perfected by control, ascertain which collateral they cover, and identify which property of a grantor requires the consent of another secured party (the holder of the PMSI, the security interest perfected by control or other security interest with higher priority) to sell.

If there are valid PMSIs, or security interests perfected by control, those secured parties will (usually) need to consent to asset sales or other restructuring options or plans in respect of the collateral subject to their security.

Secured parties such as banks holding all-assets security interests should make a list of PMSIs, and security interests perfected by control, or collateral owned by the grantor that could be perfected against by control by other secured parties. This exercise will ensure that banks and other secured parties know what collateral and which secured parties in relation to which they or their receivers or controllers are first-ranking, or subordinated, upon an enforcement, asset sale or restructuring.

From above, this will be particularly important when structuring trade sales of entire undertakings or large parts of an undertaking, which may include PMSI collateral or collateral perfected against by control by other secured parties.