- 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
Priority disputes between two transitional security interests
The priority time for all transitional security interests will be immediately before the registration commencement time (anticipated to be sometime in early 2012). For example, all existing company charges registered on the ASIC register will be migrated to the PPS Register and be accorded with a priority time of immediately before the registration commencement time. This does not, however, make them all equal, and will not destroy the priority they may have enjoyed before commencement of the PPSA.
If the priority between two transitional security interests cannot be determined under the PPSA rules (for example, because they rank equally, both having priority times of immediately before the registration commencement time), then they have the priority against each other that they would otherwise have had under the law that applied before commencement of the PPSA1. This means that pre-PPSA general law priority rules and principles (legal versus equitable interests, knowledge, the fact that vitiating conduct by holders of existing interests that permits or facilitates the creation of subsequent interests can postpone, etc), including Chapter 2K of the Corporations Act 2001 (Cth) as it regulated ASIC registrable charges, remain relevant to the pipeline of transitional security interests under the PPSA.
Priority disputes between transitional security interests and new PPSA security interests
Transitional security interests will be automatically temporarily perfected with a priority time of immediately before the registration commencement time. They will have an earlier priority time than any new PPSA security interests, and therefore will defeat “normal” PPSA security interests. This makes sense, because transitional security interests arose first and transition into the new system - they should have priority.
The PPSA was amended prior to its commencement to clarify that transitional security interests will not be defeated by security interests perfected by control.
The PPSA is silent on the position of transitional security interests against creditors receiving payments of debts (section 69), general law and statutory liens and charges (section 73(1)) and negotiable instruments, chattel paper and negotiable documents of title (sections 70, 71 and 72). Presumably these interests would defeat even transitional security interests, provided the terms of sections 69, 70, 71 or 72 (as applicable) were complied with.
Priority disputes between a PPSA security interest and a non-PPSA security interest
The general law will also govern priority disputes between two (security) interests where one is regulated by the PPSA and one is not. For example, priority disputes between rights of set-off (not security interests and so not generally governed by the PPSA) involving funds in an ADI account, and PPSA security interests over that same ADI account, would be governed by the general law. To resolve this priority dispute, it would be fundamental to establish whether the security interest (perhaps a charge or mortgage at general law, depending on the terms of the security agreement) over the ADI account would destroy mutuality for any set-off that might otherwise be available in respect of funds in the account.
Even if the drafting of security agreements once the PPSA has come into force does not include mortgage or charge language, the grant of a "security interest" is almost certainly to be interpreted to grant a proprietary interest in the secured party in circumstances where the security interest falls into a priority dispute that is governed by non-PPSA law.
Priority of pre-PPSA “common law” PMSIs
Importantly, there is a common law PMSI principle which existed before the PPSA2. The PPSA picks up and expands the common law PMSI principle. Accordingly, common law PMSIs will be transitional security interests. Common law PMSIs are in essence the equivalent of PPSA PMSIs – they are security interests granted over property newly acquired, to secure a loan of the purchase price.
The common law PMSI principle provides that where property is acquired on PMSI finance, the acquisition of that property by the buyer and the grant of security over that property are taken to occur simultaneously3. The simultaneous acquisition of property and the grant of security over that property effects an immediate split of title whereby the PMSI passes to the PMSI secured party and the remaining rights in the property only (the equity of redemption in the case of a legal mortgage PMSI, or the already-encumbered full legal title in the case of a charge or equitable mortgage PMSI) pass to the buyer.
Any existing future property security granted by the buyer (for example, fixed and floating charges) can only attach to the rights that the buyer acquires. The buyer only acquires the residual rights in the property after the PMSI has been granted. The courts have constructed the mechanics of PMSI securities such that PMSIs do not relate to the “same” property or bundle of rights as existing future property securities granted by the buyer, therefore there is no priority contest, and the PMSI prevails.
The priority of many pre-PPSA common law PMSIs should be largely preserved following the commencement of the PPSA for the following reasons.
The reasons why transitional security interests that are common law PMSIs should largely retain the super priority they enjoyed under the general law before commencement of the PPSA include:
(a) first, a pre-PPSA transitional PMSI will have a priority time of immediately before the registration commencement time (anticipated to be sometime in early 2012). It will defeat new “normal” (non-PMSI, not perfected by control) PPSA security interests by virtue of an earlier priority time;
(b) second, in competitions between two transitional security interests, the pre-PPSA law determines priority. To the extent that common law PMSIs would under pre-PPSA law defeat prior fixed
and floating charges and other future property security that also attaches to the PMSI collateral, that priority will continue in relation to other transitional security interests following the commencement of the PPSA;
(c) third, transitional PMSIs are very unlikely to come into competition with new PPSA PMSIs in respect of original collateral, because the original collateral has already been acquired by the grantor on common law PMSI finance.
In the rare circumstance that a priority contest develops between a transitional common law PMSI and a PPSA PMSI in relation to proceeds, the priority result is unclear. Presumably the PPSA PMSI would win, given that transitional security interests are not protected from defeat by PPSA PMSIs as they are protected from PPSA security interests perfected by control (see below);
(d) fourth, transitional PMSIs are unlikely to relate to collateral that can be perfected against by control under the PPSA, being financial collateral such as investment instruments (unlisted shares, bonds, units in managed investment schemes, derivatives, etc), intermediated securities (for example, ASX-listed securities), ADI accounts, letters of credit and negotiable instruments not evidenced by certificate.
However, it is conceivable that pre-PPSA common law PMSIs may fall into priority disputes with security interests perfected by control in relation to collateral such as shares, or proceeds. Take the example of a margin loan or similar transaction where money is lent to fund the acquisition of shares. If a common law PMSI over the shares was generated and its super priority was important to defeat existing future property security which would otherwise attach to the shares being acquired, then such common law PMSIs may become subject to a priority dispute following the commencement of the PPSA if another secured party holds a another security interest over the same shares and perfects by control.
Under the PPSA PMSIs cannot exist over investment instruments (which include unlisted shares)4, whereas common law transitional PMSIs theoretically can relate to any collateral.
The PPSA provides in section 322A that transitional security interests defeat PPSA security interests perfected by control. A common law transitional PMSI should accordingly prevail in the priority example above, even if a another secured party perfected against the shares by control.
Notes:
1 PPSA section 323
2 The common law PMSI principle is clearly established under the following line of cases:
Mathieson v Wahlen (1928) SR(NSW) 189 (Harvey CJ in Eq);
Re Bunbury Foods Pty Ltd v Nissho Iwai Australia (1984) 2 ACLC 639;
Composite Buyers Ltd v State Bank of New South Wales (1991) 3 ACSR 196;
Sogelease Australia Pty Ltd v Boston Australia Ltd (1991) 26 NSWLR 1;
Metway Leasing Ltd v Narien Holdings Pty Ltd (SCNSW, Cohen J) (12 April 1991) (BC 9102116);
North Western Shipping & Towage Co Pty Ltd v Commonwealth Bank of Australia (Full FC) (1993) 118 ALR 453;
Helicopter Fleet Management v Ellison (SCNSW, Windeyer J) BC9901504.
3 See the discussion in Composite Buyers Ltd v State Bank of New South Wales (1991) 3 ACSR 196, and Sogelease Australia Pty Ltd v Boston Australia Ltd (1991) 26 NSWLR 1.
4 PPSA section 14 (2)(b)
