1. First, creditors receiving payment of a debt – section 69. Creditors who receive the payment
of a debt with funds subject to a PPSA security interest have priority over a security interest in the funds, if the payment is made by electronic funds transfer (EFT), debit or transfer order from an ADI account, or payment is made by negotiable instrument1.
The recipient (payee) must have no actual knowledge that the payment was made in breach of the terms of a security agreement that governs a PPSA security interest over the funds or instrument used to make the payment2.
Only debts paid will benefit from this priority rule, as opposed to the wider concept of “liability”. However, this should not be too significant a distinction. Although liabilities include contingent and unascertained amounts, once an amount is paid on account of a liability, the liability will usually have been ascertained or quantified, in which case the amount owing is likely to be characterised as a debt at law.
This category is first in the priority waterfall, ahead of general law liens and statutory liens and charges arising to secure amounts owing from the provision of goods and services in the ordinary course of business (second priority, below). This is because, while the PPSA appears to be silent on the point, as a matter of general law, in many (but not all) cases the payment of a debt would likely extinguish or defeat a general law lien or statutory lien or charge over the funds used to pay the debt. Take for example 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, which is payment for services rendered in the ordinary course of business of the trustee. The trustee’s lien over the bank account is very likely to be extinguished or defeated by payments duly made from the trust bank account.
It is extremely difficult to make a general statement of priority because so much will depend on the nature of the lien or charge over the funds in question (legal or equitable), the nature of the interest that the creditor recipient of the funds acquires (legal or equitable – usually legal) and any knowledge that the creditor recipient has of the prior lien or charge over the funds.
General law liens arise at both common law (legal liens) and in equity (equitable liens). Common law liens are possessory liens because they rely on the continued possession of the property the subject of the lien for their existence. Equitable liens are recognised in favour of a person who incurs expenses or indebtedness to buy, build, repair or otherwise in relation to property, where it would be unfair to leave that person with a mere unsecured claim3. Equitable liens do not rely on the continued possession of the property subject to the lien for validity.
Exceptions aside, the priority position of creditors who receive payment of a debt from an ADI account with funds subject to general law liens or statutory liens or charges is likely to follow this general pattern:
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a creditor receiving payment of a debt should in most cases acquire the legal interest in the funds paid;
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any common law liens over the funds should have extinguished because the lienee would have lost possession of the funds;
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equitable liens may or may not continue to attach to the funds in the hands of the creditor recipient (that is a difficult point), but should be defeated provided the creditor receives the legal interest in the funds without knowledge of the equitable lien; and
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the legal nature and priority of statutory liens or charges should be checked under the legislation under which they arise, and then (if applicable) the steps at (i) to (iii) above applied to determine priority.
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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.
Accordingly, creditors receiving the payment of debts by transfers from ADI accounts or by negotiable instrument should prevail in many circumstances over general law liens over the funds used to make payment, and that is why this priority rule appears at the top of the priority waterfall. The priority of statutory liens and charges must be checked under the relevant legislation under which they arise, in case priority is accorded over “any interest” (which may include the interest of a creditor receiving payment4) in the property subject to the lien or charge
2. Second, general law liens, and statutory liens and charges – section 73(1). Both general law liens, and statutory liens or charges, arising after commencement of the PPSA and which secure amounts owing from the provision of goods or services in the ordinary course of business, defeat PPSA security interests unless the lien or charge holder has actual knowledge that the lien/ charge arising breaches the terms of a security agreement that governs a prior perfected security interest over the collateral5. This will be the case if, for example, a security agreement contains a restrictive covenant that prohibits liens or charges arising over the collateral and the lien or charge holder has actual knowledge of that covenant.
General law liens are introduced above in the waterfall (paragraph (a)). There are two types of general law lien – common law possessory liens and equitable (non-possessory) liens.
Common law possessory liens can be general liens (which secure all moneys owing) or particular liens (which secure only amounts owing in relation to a particular item of property). Solicitors, bankers and stock brokers have general common law possessory liens over items in their possession to secure all amounts owing from their clients or customers. Particular liens most commonly arise where a person has repaired or improved property by performing services in relation to it. A common example is a mechanic's lien over a car for unpaid repair costs.
Turning to equitable liens, the most common equitable liens are those that arise for the benefit of buyers and sellers of real estate, to secure payment of the balance of the purchase price (seller's lien), or for repayment of the purchase price if the sale is rescinded (buyer's lien). Equivalent equitable liens also apply to buyers and sellers of personal property6, and possibly goods to the extent not inconsistent with the Sale of Goods legislation in each Australian State7. Another example is that a trustee has an equitable lien over trust assets for amounts owing associated with the provision of trustee services, or liabilities incurred on behalf of the trust.
There are also many examples of liens and charges that arise under State and Commonwealth legislation to secure amounts owing from the provision of services in the ordinary course of business.
State and Commonwealth legislation can and does exclude certain statutory liens and charges which arise under State and Commonwealth legislation from the “super priority” accorded by the PPSA under section 73(1). Section 73(2) of the PPSA permits State and Commonwealth legislation to make this declaration in respect of any statutory lien or charge. In these cases, the statutory lien or charge will have the priority provided for under the legislation under which the lien or charge arises. Some legislation applies the general law to determine priority. Other legislation provides for a specific priority regime for liens or charges arising under the legislation itself. Similarly, general law liens can be excluded from the “super priority” accorded by section 73(1), by legislative instrument8.
The statutory liens and charges that have been excluded from section 73(1) “super priority” under the PPSA are listed and discussed at paragraph 18.5.8 of Chapter 18 (Priority). There do not yet appear to be any legislative instruments that exclude general law liens from the priority accorded by section 73(1)
Notes:
1 PPSA section 69. The PPSA treats the matter of payments from an ADI account, and payments by negotiable instrument, as a priority contest with other security interests that may be attached to the funds or instrument used to make payment. Thus, creditors receiving payments are subjected to a priority dispute, although such creditors will be well-positioned in most cases so disputes should seldom develop. The matter is different to the extent that an extinguishment rule applies, for instance, section 48 in respect of currency.
2 PPSA section 69(2)
3 See Deane J in Hewitt v Court (1983) CLR 639
4 PPSA section 73(2) permits Commonwealth and State legislation to determine the priority of statutory liens and charges in relation to PPSA security interests.
5 PPSA section 73(1)
6 In relation to equitable liens in favour of sellers and buyers under contracts of sale, it is unclear whether the contract in question must be specifically enforceable for the equitable lien to arise. The author's view is that there is no need for specific enforceability - this view is supported by Deane J in Hewitt v Court, and in JNJ Investment Australia Pty Ltd v Sunnyville Pty Ltd [2006] QSC 249. However, several first instance decisions hold that specific enforceability is required – see for example Electrical Enterprises Retail Pty Ltd v Rodgers (1988) 15 NSWLR 473; Re Mas Good Industries (Australia) Pty Ltd [2000] WASC 155.
7 Electrical Enterprises Retail Pty Ltd v Rodgers (NSWSC, Kearney J) (1988) 15 NSWLR 473
8 PPSA section 73(7)
