- 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
Security interests continue upon transfers of collateral unless extinguished
Where collateral is transferred (the PPSA uses the vague term “transfer”, which is probably wide enough to cover sales, leases and other dispositions of property, but assume for present purposes and simplicity that it includes sales only) by a grantor to another person (a buyer), security interests granted by the seller may be extinguished under the ten (10) extinguishment rules in sections 43 to 52. The extinguishment rules are discussed in Chapter 21 (The Extinguishment Rules).
If not extinguished upon a transfer of collateral, security interests continue to be attached to collateral in the hands of a buyer, and must be re-perfected against the new owner (buyer) of the collateral. Pending re-perfection, security interests granted by a seller and which survive (are not extinguished by) the transfer, are temporarily perfected against the buyer for certain periods, up to a maximum of 24 months from the date of transfer1.
Priority contests upon transfers of collateral
Priority contests can develop between security interests granted by the seller and which continue un-extinguished in the collateral into the hands of the buyer, and security interests granted by the buyer (either existing all-assets security interests that attach to after-acquired property, or security interests granted by the buyer after acquisition of the collateral) that attach to the collateral acquired. The PPSA has rules to resolve these priority disputes in sections 34 and 66-68. The situation is complex.
The general rule is that perfected security interests granted by the seller and which are not extinguished by a transfer continue in the collateral in the hands of a buyer, and provided they are re-perfected against the buyer within the applicable temporary perfection windows (see below), they defeat other security interests granted by the buyer and which attach to the collateral once acquired by the buyer2.
The reason for this general rule is presumably that secured parties of the seller have everything to lose, while secured parties of the buyer may stand to receive a windfall benefit to their security net. It might be argued that secured parties of the buyer may never have relied on the collateral transferred to the buyer, and that it is a windfall to them. There may, however, be no windfall in actual fact, because secured parties of the buyer suffer a (theoretically) equal loss of value by the buyer paying the purchase price for the collateral acquired. The PPSA favours secured parties of the seller, particularly in the temporary perfection and re-perfection windows it permits to secured parties of the seller, as explained below. The policy justification for this position is not obvious.
Temporary perfection windows for secured parties of a seller to re-perfect against a buyer
Where security interests granted by either the seller or the buyer of collateral are perfected by control, they will win, consistent with the priority rule that security interests duly perfected by control defeat other PPSA security interests regardless of priority time, or notice3. The discussion below assumes there is no perfection by control.
Secured parties taking security interests granted by a seller (original secured party) and whose security interests are not extinguished by a transfer are temporarily perfected against the buyer for up to 24 months, assuming the buyer has not granted, and does not grant, any security interests that also attach to the collateral acquired4.
If the buyer of collateral has granted existing security interests (such as all-assets security interests that attach to after-acquired property), or grants new security interests following acquisition of the collateral, which attach to the transferred collateral, then a perfected original secured party (of the seller) has the benefit of temporary perfection against the buyer as follows5:
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- if the original secured party expressly or impliedly consented to the transfer, for five (5) business days from the transfer time6; or
- otherwise, for five (5) business days from the original secured party having actual or constructive knowledge of the transfer and the buyer’s details to enable re-perfection against the buyer, up to a maximum period of 24 months from the date of transfer7.
Considerable time could elapse before an original secured party (of the seller) realises that a transfer of collateral has occurred, hence the 24 month (maximum) temporary perfection period.
It will, of course, be a difficult exercise to determine exactly when an original secured party acquires constructive knowledge of a transfer to determine the time from when the five (5) business day temporary perfection window starts running. The PPSA includes a definition of constructive notice, which is discussed in Chapter 27 (Knowledge).
Original secured parties (of the seller) must re-perfect against the buyer within the five (5) business day temporary perfection windows outlined above to maintain continuous perfection and to continue to enjoy the same priority time against the buyer that they enjoyed against the seller. Otherwise, original secured parties taking security interests granted by sellers will become unperfected.
Notice to re-perfect unperfected security interests granted by sellers
Even if an original secured party (of a seller) fails to re- perfect against a buyer of collateral within the temporary perfection windows outlined above (paragraph 18.16.7) and becomes unperfected, and the buyer of collateral grants or has granted other security interests that attach to the collateral acquired and are perfected, even then all is not lost for an original secured party.
The PPSA allows an original secured party yet another chance to re-perfect against the buyer, provided the collateral is not registered against by serial number. If an original secured party (of the seller) becomes unperfected because they fail to re-perfect against a buyer within the applicable temporary perfection windows (see paragraph 18.16.7 above), they can in any event give a prescribed form notice to all other secured parties with a registered security interest granted by the buyer and which attaches to the transferred collateral (not registered against by serial number), re-perfect against the buyer, and gain priority over all other security interests granted by the buyer that attach to the collateral8.
However, the above priority rule does not apply as against secured parties of the buyer who have made new advances to the buyer before the original secured party gives notice of re-perfection to other parties and re-perfects against the buyer.
Secured parties taking perfected security interests from the buyer that attach to and are perfected against transferred collateral (for instance an all-assets security interest that attaches to after-acquired property) and who make new advances to the buyer before the original secured party (of the seller) re-perfects against the buyer and gives notice of that re-perfection, have priority to the extent of those new advances. This is provided the buyer purchased the collateral without actual or constructive knowledge that the acquisition may have breached the terms of a security agreement held by an original secured party9.
Secured parties of the buyer who provide new advances to the buyer in these circumstances would not defeat security interests perfected by control10.
Diagram 7
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. Sale of car - payment of purchase price
5. Transfer of car
6. Loan to Buyer
7. Security interest over car purchased by Buyer
Diagram of priority contests upon transfers of collateral
Diagram 7 illustrates how a priority contest can arise when collateral is transferred. Bank A holds a fixed and floating charge (an all-assets security interest) from the debtor/ grantor D to secure lending to D, which security covers all D's assets, including D's car. Assume also that Bank A’s security interest is registered against the serial number of the car. Bank A is the original secured party.
Later, D sells the car to a buyer B without Bank A’s consent. B does not come within the applicable extinguishment rule (private sales of motor vehicles – sections 45(1) and 45(2)) because Bank A's security interest is registered against the serial number of the car, so B cannot obtain a clear search of the PPS Register against that serial number before buying the car. Accordingly, Bank A's security interest in the car sold by D to B continues in the car in B's hands.
However, B has borrowed money from Bank C, and granted a security interest to Bank C that attaches to the car. D owns the car and can sell and pass good title to the car to B, despite any restrictions or prohibitions on transfers of collateral in Bank A’s security agreement11.
A priority dispute potentially develops between the security interests of Bank A and Bank C, which both attach to the car.
If Bank A consented to the transfer of the car (but not the release of its security) by D to the buyer B, then Bank A must re-perfect its security interest over the car against B within five (5) business days of the transfer, and is temporarily perfected until then.
If Bank A did not consent to the transfer, then Bank A must re-perfect against B within five (5) business days of the time Bank A has actual or constructive knowledge of the transfer and of B’s details to enable Bank A to re-perfect against B, and is temporarily perfected until then, subject to a long-stop date of 24 months. Clearly, considerable time could elapse before Bank A learns of the transfer of the car.
Some difficulty will obviously arise in establishing precisely when Bank A may have acquired constructive knowledge of the transfer of the car and of the buyer B’s details because it is from this time that the five (5) business day temporary perfection window for Bank A may start running.
If Bank A fails to re-perfect against the buyer B within the applicable five (5) business day temporary perfection windows or in any case within 24 months from the time of the transfer of the car by D to B, then Bank A’s security interest will become unperfected against the car. Even so, Bank A can later give a prescribed form notice to Bank C of his/her (Bank A’s) security interest over the car and his/her intention to re-perfect that security interest over the car against the buyer B and thereby defeat Bank C, provided that Bank C has not made new advances before Bank A gives the notice to Bank C and re-perfects against B12. Bank C will have priority over the car to the extent of new advances made to B before Bank A gives the notice to Bank C and re-perfects against B.
The priority of security interests upon transfers of collateral is one of the few areas under the PPSA where (A) priority is accorded to advances instead of security interests, and (B) knowledge of prior security interests is relevant to determining priority, although it is the knowledge of the buyer (not the secured party of the buyer) that is relevant.
Rescission or termination of sales or leases which extinguished security interests - re-attachment of security interest to returned goods, and priority
In some cases where collateral is sold or leased, security interests over the collateral can be extinguished by the sale or lease under the extinguishment rules. However, if the sale or lease transaction is rescinded or terminated, then security interests can re-attach upon the return of collateral to the grantor if the collateral is goods13. Security interests must also be perfected against the grantor upon the return of goods to the grantor. If the extinguished secured party who held a security interest over transferred goods remains validly registered against the grantor and the goods when the grantor regains possession of the goods, the perfection re-enlivens and the secured party maintains their original priority time against the goods14. See generally paragraphs 21.15.1 to 21.15.8 of Chapter 21 (The Extinguishment Rules) for discussion.
The priority of re-attached security interests in returned goods then falls to be determined, against other security interests attached to the same collateral, by the usual priority rules including priority time, and time of attachment.
New security interests granted by the buyer win if perfected
If:
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a security interest over goods is extinguished upon a transfer of the goods; and
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a buyer/lessee of the goods grants a security interest which attaches to the goods acquired (Buyer Security Interest); and then
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the goods are regained by the seller/lessor upon rescission or termination of the sale or lease contract and a security interest previously granted by the seller/lessor re-attaches to the same goods,
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then the Buyer Security Interest wins provided it is perfected before the grantor regains possession of the goods15.
Notes:
1 PPSA section 34(1)(a) read with section 34(1)(c).
2 PPSA section 67
3 PPSA section 66(1)(d).
4 PPSA section 34(1)(a)
5 PPSA section 34(1)
6 PPSA section 34(1)(c)(i)
7 PPSA section 34(1)(a) read with section 34(1)(c)(ii).
8 PPSA section 68(1)
9 PPSA section 68(2)
10 The PPSA is slightly unclear whether security interests held by secured parties of buyers of collateral
have priority for new advances to the buyer in these circumstances even over PMSIs granted over the transferred collateral by the seller. Section 68 is made subject to security interests perfected by control (see section 66(1)(d)), however there is no mention of PMSIs.
11 PPSA section 79(1)
