- 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
The priority of common law security interests (non-PPSA, not ASIC registrable charges) depends on the nature of the security interest (legal or equitable) in question, the time of its creation, whether there is any knowledge of prior interests and many other factors. The PPSA carries its own complexities about priority.
The priority of security interests under the PPSA depends on a number of factors. To summarise the key factors that will determine priority (this is by no means an exhaustive list):
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- Priority time
- The type of security interest
- The class of collateral
(a) Priority time: the time of perfection creates what is called the priority time for a security interest. The general rule is that security interests rank for priority against each other by priority time1, subject to super-priority exceptions such as PMSIs and security interests perfected by control;
(b) The type of security interest: not all security interests are created equal under the PPSA, regardless of priority time. There is a more comprehensive list of the relative priorities of the various types of security interests under the PPSA in the priority waterfall discussion and diagram that are both set out later in this chapter. To give just a few key examples for the moment to introduce the flavour of priority under the PPSA:
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- PMSIs have a limited “super priority”. PMSIs defeat many other security interests in the same collateral except, for example, security interests perfected by control (see below under "classes of collateral") and other interests noted above PMSIs in the priority waterfall below; and
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among PMSIs there are “strong PMSIs” and “normal PMSIs”. Strong PMSIs are the title-based PMSIs, namely those of sellers, lessors and commercial consignors. Strong PMSIs defeat “regular” PMSIs granted by the same grantor in the same collateral.
PMSIs must comply with the PMSI Rules to qualify for super priority.
See paragraph 17.9.2 of Chapter 17 (Perfection) and paragraph 18.3.7 below for how to perfect PMSIs, and the PMSI Rules;
(c) The class of collateral: the class of collateral in question is relevant to priority for several reasons:
(i) first, control: there are six (6) classes of collateral against which security interests can be perfected by control. This matters because security interests perfected by control defeat other PPSA security interests in the same collateral, regardless of priority time or knowledge, except perfected transitional security interests2.
Security interests perfected by control are, however, subject to certain interests (not PPSA security interests) in the same collateral, which are those in the first three priority buckets of the priority waterfall. Briefly, these are
- creditors receiving payment of debts from ADI accounts or negotiable instrument under section 69,
- general law liens or statutory liens or charges arising to secure amounts owing from the provision of goods or services in the ordinary course of business under section 73(1), and
- takers of interests in negotiable instruments, negotiable documents of title or chattel paper under sections 70, 71 and 72.
The six (6) classes of collateral which permit perfection of security interests by control are3:
- investment instruments (for example, unlisted shares and bonds);
- intermediated securities (for example, ASX-listed securities);
- ADI accounts (bank accounts);
- letters of credit;
- negotiable instruments not evidenced by a certificate; and
- interestingly, space objects and satellites;
(ii) second, serial-numbered property: registrations over serial numbered property must correctly list the serial number, otherwise:
- for consumer serial numbered property and commercial aircraft only, the registration will be defective. Further, subsequent changes to serial numbers (for example, by manufacturers or IP Australia) post-registration will also render the registration defective4. Certain defects (changes to serial numbers mentioned above, but not registrations against incorrect serial numbers) are not void automatically, but become void after five (5) business days from the time the secured party has actual or constructive knowledge of the defect and does not remedy it. See the discussion in paragraphs 22.19.1 to 22.21.3 of Chapter 22 (Registration and the PPS Register) on defective registrations; and
- for all serial numbered property, the secured party will be on risk that its security interest will be extinguished if the grantor sells or leases the property to another5
(iii) third, inventory: if collateral is inventory in the hands of the grantor, then any PMSI security interests over the inventory must be registered (perfection for PMSIs is by registration only) either before supply of the goods to the grantor (for inventory that is goods) or before the PMSI attaches (for inventory other than goods). See the PMSI Rules discussed at paragraph 17.9.2 of Chapter 17 (Perfection) and paragraph 18.3.7 below for how PMSIs must be registered. This essentially means that PMSIs over inventory must be pre- registered, that is, registered before the inventory is supplied. Pre-registration is possible under the PPSA, provided the secured party has reasonable grounds to believe that a security interest will be taken in the future;
(iv) fourth, circulating assets: if collateral is a circulating asset, for instance inventory and many accounts, then whether the secured party has control (not control in the sense of perfection by control, but similar) over the collateral will determine whether the security interest is treated as a circulating security interest (floating charge equivalent) or not. Circulating security interests under the PPSA are subordinated to employee entitlements and the liens of administrators, just as floating charges were so subordinated before commencement of the PPSA; and
(v) fifth, goods: the commingling and accession rules under the PPSA apply only to goods. These rules apply to determine priority where goods subject to security interests are attached to, mixed with or processed into other goods.
Accordingly, the PPSA has its own complex set of priority rules which are based around not only priority time, but also the nature of the security interests subject to a priority dispute, and the class of collateral.
Notes:
1 PPSA section 55
2 PPSA sections 57(1) and 322A
3 PPSA sections 25 - 29
4 A registration will be defective for being seriously misleading if it does not display the serial number for serial numbered property which is required by the PPS Regulations to be registered by serial number (PPSA section 165(a)). The PPS Regulations require that only consumer (used by individuals for household or domestic purposes) serial numbered property and commercial aircraft must be registered by serial number. Other serial numbered property may be registered by serial number.
5 PPSA sections 44 and 45
