- 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 keeping with the examples used above, below is a variation of the standard PPS priority diagram, diagram 8, showing Bank A as a bank lending to and taking security from the grantor/debtor D. Assume that D’s ADI account is held with Bank A. Bank A has lent money to D, and holds a fixed and floating charge from (security interest overall present and after-acquired property of) D, which covers D's ADI account held with Bank A. D has also leased a car for an initial term of five (5) months from a car lessor.
Diagram 8
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 and floating charge), granted 1 January 2010
4. Lease of car, 5 month term
5. Security interest (lease) over car
Recall that we assumed (see paragraphs 18.9.24 to 18.142 above) that the debtor/grantor D first bought a truck from a truck dealer, financed by a truck mortgage granted to the truck dealer, and then sold the truck and deposited the truck sale proceeds into the ADI account held with Bank A. D then used part of those proceeds in its ADI account to pay the deposit owing to the car lessor under a car lease to acquire a car on lease from the car lessor.
If Bank A has the benefit of an event of default under its security agreement then Bank A can step in at that point, before D pays the deposit to the car lessor under the car lease, and claim priority to the truck sale proceeds deposited into the ADI account. Bank A is the account bank and therefore is automatically perfected by control over the ADI account. Bank A’s security interest, as the account bank, will defeat other security interests over the ADI account, and security interests which attach to funds deposited into the ADI account such as the truck dealer’s truck mortgage (provided the truck mortgage is not a transitional security interest).
However, if Bank A allows D to make withdrawals from the ADI account to pay debts, for example, the car lease deposit owing to the car lessor from whom D leases the car, the priority game starts again. The car lessor can take the money in priority to Bank A’s and anyone else’s security interest under section 69 if the money is transferred by EFT or transfer/debit order from the ADI account to pay a debt owing (the car lease deposit), provided that the car lessor has no actual knowledge that receipt of the car lease deposit would breach the terms of the security agreements of either Bank A or the truck dealer.
The priority game then shifts to the car, which may be (at least partially) the proceeds of the truck dealer’s truck acquired on mortgage terms by D. The car lessor has a lease over the car that is a strong PMSI, which should defeat other PMSIs over the car, including the truck dealer’s truck mortgage to the extent it attaches to the car as (partial) proceeds of the truck unless the truck mortgage is a strong PMSI itself (section 63 suggests that it applies to sellers).
Assume next that D sells the car and deposits the car sale proceeds into D’s ADI account with Bank A. Bank A then gets a second chance. The car lessor’s strong PMSI car lease will attach to, and be automatically perfected over, the car sale proceeds in D’s ADI account held with Bank A (perfection is automatic against proceeds that are money in ADI accounts, currency, cheques and insurance indemnity payments for damage to collateral, provided the security interest over the original collateral was duly registered). Bank A’s security interest is perfected by control over the ADI account because Bank A is the account bank. Bank A’s security interest over the ADI account, perfected by control, should defeat the car lessor’s strong PMSI which attaches to the car sale proceeds in the ADI account.
Perfection by control is, however, subject to transitional security interests. If the car lessor’s car lease is a transitional security interest (entered into before commencement of the PPSA), and the car is sold and the sale proceeds deposited into D’s ADI account held with Bank A and over which Bank A holds a security interest, then the car lessor should defeat Bank A with respect to car sale proceeds in the ADI account, even though Bank A is perfected by control.
Some key themes of the PPS “priority game” in relation to ADI accounts include:
(a) banks holding security over an ADI account held with them, should carefully consider whether to permit withdrawals from the account where there are live events of default: account banks that have security interests over ADI accounts held with them, and have live events of default and so enforceable security interests, should be careful before permitting withdrawals. Banks with security over ADI accounts held with them will in most cases have first-priority over the funds in ADI accounts, so long as the funds stay in the account. Transitional security interests that attach to funds in an ADI account as proceeds appear to be an exception – they should defeat an account bank holding a security interest over the ADI account even though the account bank is perfected by control1.
An account bank’s position with respect to an ADI account is very strong. Current ADI accounts would otherwise be circulating assets, creating subordination to employee entitlements and other claims upon insolvency – see paragraph 18.17.20 below – but not for account banks. ADI accounts are taken not to be circulating assets where the secured party is the account bank and has registered against the account claiming control over the account2;
(b) ADI account banks holding security will usually defeat PMSIs that attach to the funds in the account as proceeds: secured parties in general, especially PMSI holders, should be very careful of sales of collateral (i) extinguishing their security interests, and (B) generating proceeds that are then deposited into ADI accounts of the grantor held with banks to which the grantor/debtor owes money. If the ADI account bank holds or takes a security interest over the ADI account, they are likely to have first priority over the funds by virtue of being perfected by control, and any PMSIs (strong or normal) or normal security interests may be defeated; and
(c) payments from ADI accounts to pay debts will usually defeat all security interests over the funds: everybody should be careful about debts or invoices being paid by transfers from ADI accounts, because creditors receiving payments of debts owed by transfers from ADI accounts without actual knowledge that the transfer breaches the terms of security agreements held by other secured parties, will defeat security interests over the ADI account or security interests attached to funds in the ADI account as proceeds.
In the example above, both (i) the PMSI holders who attach to the sale proceeds of trucks and cars that are deposited into D’s ADI account, and (ii) the ADI account bank Bank A, are defeated by the car lessor in respect of the funds paid from the ADI account to pay a debt owing to the car lessor (the car lease deposit), provided that the car lessor has no actual knowledge that the transfer may breach the security agreements of Bank A or the truck dealer.
ADI accounts and security interests over circulating assets (floating charges)
As noted above, account banks have a very strong position over ADI accounts held with them. Not only will they be perfected over ADI accounts held with them by control, but in addition the ADI accounts (even current accounts) will not be circulating assets provided the account bank has registered against the ADI account and the registration claims control over the ADI account3.
Notes:
1 PPSA section 322A. The better interpretation of section 322A is that it applies to both original collateral and proceeds.
2 PPSA section 341A
3 PPSA section 341A(1)(a)(i)
