The PPSA provides that security interests have the same priority in relation to all advances1. The effect of this is that the PPSA permits tacking of further advances. In most cases the only relevant enquiry is the priority of the security interest, not in addition the priority of each advance secured by the security interest.
What was tacking anyway?
Under pre-PPSA law, for both registrable charges under Chapter 2K of the Corporations Act 2001 (Cth) and other general law personal property security interests such as mortgages and charges, there was a need to ascertain the priority of the security interest on the one hand, and each advance secured by the security interest on the other hand.
To take our standard priority example again and add a tacking twist to it, Bank A makes two advances to D, one on 1 January 2010 (marked 1 on the diagram) when Bank A also takes its security from D, and a further advance to D on 1 August 2012 (marked 2 on the diagram).
In-between Bank A making its first and second advances, Bank B makes an advance to D and takes security on 1 July 2012.
Bank A would hope to “tack” its second advance made on 1 August 2012 back to the original priority of its security granted on 1 January 2010, ahead of Bank B’s advances and security made/granted on 1 July 2012.
Tacking at general law
Under the general law (not registrable charges under Chapter 2K of the Corporations Act) each advance of money to be secured by a security interest has to be tacked back to the priority of the security interest. Returning to the example, where secured parties such as Bank A have actual knowledge that other security interests have been created in favour of other secured parties (Bank B in the diagram), Bank A would be prevented from tacking any further advances that Bank A may make back to its original security interest to defeat secured parties such as Bank B.
Tacking is prohibited where the first secured party (Bank A) has actual knowledge of the intervening secured party (Bank B)2. The prohibition on tacking further advances keys off actual knowledge only (not constructive knowledge). In the example, the result (under the general law) would have been that Bank A would have priority under its security interest for its first advance, but if Bank A has actual knowledge of Bank B’s advance and security, Bank A would not have priority for the second advance.
There are various exceptions to the general prohibition on a first secured party tacking further advances back to their first-created security interest where they have actual knowledge of subsequent intervening security interests and advances. These are broadly (A) construction mortgages (where further advances fund further construction which builds the value of the secured property, therefore permitting tacking causes little collateral value loss to other secured parties) and, (B) mortgages that require (as opposed to permit) further advances to be made3. In these cases further advances can be tacked back to a first-ranking security interest despite actual knowledge of subsequent intervening security interests and advances.
Tacking and prospective liabilities for company charges under Chapter 2K of the Corporations Act 2001 (Cth)
To give secured creditors more certainty and avoid them being prevented from tacking further advances back to the priority of their original security, a “prospective liability” system was set up for registrable company charges under Chapter 2K of the Corporations Act 2001 (Cth) (and its predecessors). Again returning to the example, given that Bank A’s company charges are registered first on 1 January 2010, if Bank A provides in these securities that they have priority up to a prospective liability of say $100 million, then Bank A can make as many further advances as it likes, and rely on its security to secure those further advances up to that $100 million prospective liability limit, in priority to intervening security interests and advances. This is so even if Bank A makes the further advances with actual knowledge of intervening security interests and advances.
However, if Bank A’s advances exceed its $100 million prospective liability limit, then Bank A would again become subject to the principles relating to tacking further advances, as provided for under Chapter 2K of the Corporations Act 2001 (Cth)4.
The PPSA abolishes the tacking doctrine for personal property security, and does not include a prospective liability system
The PPSA provides that all advances secured by a security interest have the same priority as the security interest5. There is no need to consider the priority of each advance made, and tack each advance back to the security interest, whether through a prospective liability “cap” system or otherwise.
There are always exceptions, and one very minor exception where it is necessary to determine the priority of advances as well as security interests under the PPSA relates to collateral subject to a security interest that is transferred without extinguishing the security interest. In these circumstances, if the buyer has granted or grants further security interests that attach to the transferred collateral, a priority contest can develop between the security interests granted by the seller and the buyer. If the buyer makes new advances before the secured party of the seller re-perfects against the buyer then the buyer will have priority for those new advances. This is discussed in more detail at paragraphs 18.16.1 to 18.16.26.
The principles that restrict tacking further advances remain in Australia for real property mortgages under the Torrens system and non-PPSA security
The principles that restrict tacking further advances remain in Australian secured transactions law in relation to real property mortgages, and security over property not regulated by the PPSA. The Torrens registration systems have been held to incorporate equitable principles, including the doctrine of tacking in relation to future advances secured by security over Torrens land6.
Notes:
1 PPSA section 58
2 Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293.
3 Matzner v Clyde Securities Ltd [1975] 2 NSWLR 293, at page 300E-F.
4 Corporations Act 2001 (Cth), section 282.
5 PPSA section 58.
6 Central Mortgage Registry of Australia Ltd v Donemore Pty Ltd [1984] 2 NSWLR 128.