- 18.1 What is priority?
- 18.2 Priority rules under the PPSA
- 18.3 Priority waterfall - summary
- 18.4 First: payments to creditors - section 69
- 18.5 Second: general law liens and statutory liens and charges arising in the ordinary course of business - section 73
- 18.6 Third, takers of interests in negotiable instruments, chattel paper and negotiable documents of title – sections 70, 71 and 72
- 18.7 Fourth: control - section 57
- 18.8 Fifth – accounts – security interests over (future) accounts generated from sales of inventory, as original collateral and granted for new value – section 64
- 18.9 Sixth: “strong PMSIs” – section 63
- 18.10 Seventh: “normal” PMSIs – section 62
- 18.11 Eighth: perfected v’s perfected – earliest priority time wins – section 55(4)
- 18.12 Ninth: execution creditors may defeat unperfected security interests – section 74
- 18.13 Tenth: perfected v’s unperfected – perfected wins – section 55(3)
- 18.14 Eleventh: unperfected v’s unperfected – the first to attach wins outside of the grantor’s bankruptcy, administration or liquidation – section 55(2)
- 18.15 Priority waterfall diagram
- 18.16 Transfers of collateral
- 18.17 Security interests over ADI accounts
- 18.18 Tacking of further advances is permitted
- 18.19 Transitional security intersts – priority disputes
- 18.20 Knowledge and its diminished relevance to priority disputes
- 18.21 Accession, processing and commingling priority rules
- 18.22 Prioirity of security interests in agricultural interests
In a competition between a perfected and an unperfected security interest, the perfected security interest will win1.
This will be the case even if the secured party who perfects has knowledge of an existing unperfected security interest, and registers with the intention of defeating the unperfected security interest. This creates a “race
to perfect”. Perfection is golden and is not affected by knowledge of prior unperfected security interests. The first to perfect will generally defeat other security interests that exist first but are not perfected, with very limited exceptions.
Diagram 6
1. $50 milion loan, 1 January 2010
2. $50 milion loan, 1 August 2012
3. Security interest over all present and after-acquired property (fixed an floating charge), granted 1 January 2010
4. $10 milion loan, 1 July 2012
5. Security interest over all present and after-acquired property, granted 1 July 2012
6. Lease of car, 5 month term
7. Security interest (lease) over car,
To build on the priority diagram, where Bank A and Bank B have lent money to and taken security from the debtor/grantor D, now, in the diagram above, a new financier, the car lessor, finances the acquisition of a car by D to use as equipment in D’s business by entering into a car lease with D. However, assume that the car lessor forgets to register its equipment PMSI (a PPS Lease) within 15 business days of supplying the car to D. In that case, Bank A and Bank B, who both hold perfected security interests that are all-assets security interests and so would attach to the car, would defeat the car lessor, despite the car lessor's potential PMSI status. The car lessor failed to register in time and did not comply with the PMSI Rules.
Unperfected PMSI collateral will fall back and be swept up by perfected all-assets security interests such as those of Bank A and Bank B in the diagram, which will enjoy a windfall at the expense of holders of unperfected (or incorrectly perfected) PMSIs. This will be very important for receivers and administrators, and the secured parties appointing them. It presents a chance for them to increase their recoveries with a windfall.
Perfection means continuous perfection
Perfection must be continuous. Continuous perfection means that there have been no gaps in the perfection, and any windows of temporary perfection have been complied with and the security interest was duly perfected before the expiration of any temporary perfection windows.
For example, assume there is a security interest over an obsolete ship as original collateral, and the ship is sold on credit, which generates an account payable for the purchase price of the ship. Assume that the secured party’s registration is registered against the serial number of the ship, but omits proceeds altogether. However, the secured party is organised, and lodges a financing change statement to register against accounts as proceeds within three (3) business days of the ship being sold (within the five (5) business day temporary perfection window to perfect against proceeds). The secured party would remain continuously perfected, and retains the same priority time against the account payable owing to the grantor generated from the sale of the ship, that it had against the ship. If the ship sale proceeds were funds deposited into an ADI account instead of an account (receivable), perfection would have been automatic without any additional registration, by virtue of section 33(1)(c) because a registration covered the original collateral.
Notes:
1 PPSA section 55(3)
