First: payments to creditors – section 69

Creditors who receive payment of debts by transfers from ADI accounts or by negotiable instrument, where the funds or instrument are subject to a security interest in favour of others, take the money/instrument in priority to the security interest if¹:

Most common here will be transfers from ADI accounts where the ADI account is subject to an all-assets security interest. The idea of the priority rule in section 69 is to ensure certainty of payments and minimised interruption to the payment systems in Australia. Even an account bank (the ADI at which an ADI account is held) which holds a security interest over the ADI account and which is perfected by control over the ADI account, is defeated if they allow payments out of the ADI account to pay a creditor of the grantor and that creditor has no actual knowledge that the payment may breach the terms of a relevant security agreement.

Diagram 1 helps to illustrate this priority rule.

Diagram 1 is the standard PPS priority diagram:

Bank A has lent money to the debtor/grantor D, and has taken a security interest over all of D's present and after-acquired property, which includes D’s ADI account (No 3 in the diagram). Assume that Bank A is the account bank where D holds the ADI account. The security interest held by Bank A over D’s ADI account would be perfected by control over the ADI account because Bank A is the bank at which the ADI account is held. This is one of the strongest priority positions available under the PPSA, especially because an account bank (ADI) can be protected from a current ADI account being a circulating asset (a current ADI account is taken not to be a circulating asset if an ADI has a registered security interest over it that nominates control over the account)².

Further, assume that D, who owns a car, puts the car in for servicing with his mechanic. D pays his mechanic’s bill by EFT transfer from the ADI account held with Bank A to the mechanic’s bank account. Bank A later complains that D has transferred $3,000 from the ADI account over which Bank A claims a first-ranking security interest perfected by control. Bank A writes to the mechanic asking him to refund the $3,000.

The mechanic, who went to school with a friend who just happened to become a lawyer, consults his lawyer friend, smiles, then calls Bank A. The mechanic says he was paid an invoice (a debt) owing by EFT transfer from the ADI account, and he had no actual knowledge of any breach of Bank A’s security agreement, so under section 69 of the PPSA, he wins. Bank A can only agree, and retracts the letter.

This priority rule is designed to maintain the certainty of payments though payment and clearing systems, and ensure a debtor can continue to trade. If a secured party wishes to lock up an ADI account over which it has security, it should do so by requiring the debtor to restrict the operation of or signatories on the account.

The priority rule in section 69 relating to creditors receiving payment of debts sits first in the waterfall, ahead of general law liens and statutory liens or charges arising after commencement of the PPSA to secure amounts owing from the provision of goods and services in the ordinary course of business (second priority, below). The PPSA provides in section 69 that payments from ADI accounts or by negotiable instrument made on the conditions outlined in section 69 have priority to PPSA security interests. General law liens, and statutory liens or charges, are not PPSA security interests.

General law liens arise at both common law (legal, possessory liens) and in equity (equitable liens, which do not rely upon possession of the collateral for their existence).

Exceptions aside, the priority position between creditors receiving payment of a debt from an ADI account, and statutory liens or charges over the funds used to make the payment, would seem likely to follow this general pattern:

1. 1. a creditor receiving payment of a debt should normally acquire the legal interest in the funds paid

   2. any common law liens over the funds should have extinguished because the lienee would have lost possession of the funds

   3. equitable liens may or may not continue to attach to the funds in the hands of the creditor receiving the payment (that is a difficult point), but should be defeated provided the creditor receives legal title to the funds without knowledge of the equitable lien; and

   4. the legal nature and priority of statutory liens or charges should be checked under the legislation under which they arise, and then the analysis in paragraphs (a) to (c) above applied to determine their priority

Negotiable instruments, including bills of exchange, cheques and promissory notes, have their own particular priority rules, including under the Bills of Exchange Act 1909 (Cth) and the Cheques Act 1986 (Cth) - PPSA section 256.

Another example is a trustee’s lien over trust funds (including a trust bank account) to secure the trustee’s right of indemnification from trust assets (including the trust bank account) for the trustee’s remuneration (services rendered in the ordinary course of business). The trustee’s lien over the bank account is likely to be extinguished or defeated by payments duly made from the trust bank account because the creditor is likely to acquire the legal title to the funds without knowledge of the trustee’s equitable lien.

Creditors receiving payments of debts by transfers from ADI accounts or by negotiable instrument should prevail over liens or statutory charges over the funds used to make the payment in most circumstances, and that is why this priority rule appears at the top of the priority waterfall.