In a decision concerning the expiry of a subordination agreement, the High Court has indicated that the priority of competing security interests is to be determined at the time the competing interests come in to conflict.

This case concerned priority of competing security interests over the collateral of Anthem Holdings Limited (in receivership).  One of the secured creditors had agreed to subordinate its security interest to the interest of another secured creditor.  The key issue before the Court was whether the subordination agreement expired on 31 March 2010 (as indicated on the face of the registration), or continued until the competing security interest was satisfied or otherwise released. 

Section 70 of the Personal Property Securities Act 1999 ("PPSA") allows a secured party to subordinate its security interest to any other interest.  The section does not require the subordination agreement to be registered under the PPSA.  However, a subordination agreement may be disclosed by a financing change statement being registered under section 159. 

There had been no discussion between the parties about expiry dates of the subordination agreement.  The Court held, however, that it was inherent in the subordination agreement that the creditor that was given priority under the agreement would have that priority until its advance was repaid or its security interest otherwise satisfied.  While the advance was only for a term of one year, the commercial reality was that it might not be repaid on its due date or that it might be rolled over.  The Court held that had the creditor wanted the subordination to be limited in duration it would have said so.  While the registration mentioned an expiry date of 31 March 2010, no third parties had been affected.  Section 70 gives primacy to the terms of the subordination agreement reached between the parties. 

The Court noted that had it been necessary, it would have reached the same conclusion on the basis that, on the particular facts of the case, the competing priorities fell to be determined when the receivers were appointed.  Whilst the PPSA does not specify the time at which a dispute as to priorities is to be determined, the Court held that it would be logical and in accord with principle to resolve the priority issue at the time the competing interests came into conflict.  As the agreement to subordinate was still in force when the receivers were appointed, the party that had priority under that subordination agreement would have always prevailed.  This aspect of the decision is strictly obiter dicta andnot binding authority.  However, the decision in this regard applies the Canadian approach (from the decision of the Ontario Court of Appeal Sperry Inc v Canadian Imperial Bank of Commerce).

Gibbston Downs Wines Limited v Perpetual Trust Limited [2012] NZHC 1022