It’s now official. Priority between competing security interests under the Personal Property Securities Act (PPSA) is assessed at the time those interests come into conflict. This will usually, but not always, be when receivers are appointed.
The PPSA is silent on the issue but the general view, now confirmed by the High Court, has been that the rule established in the Canadian Sperry1 case is the correct approach.
The point at which the conflict arises will be a question of fact in each case, with the central focus being on the security agreement between creditor and debtor.
High Court confirms Sperry
The Canadian Sperry case concerned a contest between two unperfected security interests whose registrations had both expired. The main issue in the case arose when one creditor sought to register its interest after receivers had been appointed over the debtor.
The Court held this registration to be ineffectual. Priority was determined with reference to the status of the security interests at the time the receivers were appointed. Because at that time both security interests were unperfected, the first in time to attach had priority.
- the general rule is that the time for assessing the priority between competing security interests under the PPSA is when those interests come into conflict, and
- the point at which this is deemed to occur will turn on the circumstances, and particularly the provisions of the relevant security agreement. It will often be when a receiver is appointed (as was the case in Gibbston Downs), but not always.
In Gibbston Downs, both Gibbston and Perpetual Trust held perfected general security interests over the debtor company. Perpetual Trust appointed receivers. It was undisputed that, at the time the receivers were appointed, Perpetual Trust’s security interest had priority. Perpetual Trust had registered second in time, but Gibbston had agreed to subordinate its interest.
The commencement of the receivership put the debtor in default of its security agreement with Gibbston. This default gave Gibbston the immediate right to call up the balance secured under the security agreement. Because there was insufficient collateral to satisfy both creditors’ claims, the conflict between the security interests of the two parties arose at this point.
It should be noted that, as the case was ultimately decided on other grounds, this aspect of the decision is not strictly binding on the courts in future decisions. However, we expect that the Court’s reasoning with regard to the application of the Sperry rule will be very persuasive.
Subordination agreement trumps registration on PPSR
The case was decided primarily on whether the subordination agreement between the parties had expired. The subordination agreement had been registered on the PPSR by amending Gibbston’s financing statement, which was first in time and thus being subordinated under the agreement. The register requires that such a registration show an expiry date, which cannot be later than the expiry date of the financing statement itself.
In Gibbston Downs, the expiry date on the register had passed. Gibbston argued that the subordination agreement had therefore expired, with the result that its security interest took priority, as it was registered first in time.
The Court held that the governing instrument was the subordination agreement itself, accepting the submission that:3
“The Act simply provides a notice system which does not alter what has already been agreed between the parties”.
As the agreement in this case had no end date, it remained in effect notwithstanding the expiry date shown on the register.
Best practice is thus to ensure that the written deed of subordination avoids any doubt as to its terms and expiry date.
Gibbston has indicated that it will appeal the decision.