The recent Court of Appeal (CA) decision The Healy Homberg Trading Partnership v Grant  NZCA 451 examined issues of priority of competing security interests under the PPSA. The CA confirmed that priority is determined by order of registration of the interest, not order of perfection.
The Healy Homberg Trading Partnership (HHTP) made a number of advances to two sister companies, Landscape by Design Ltd (Landscape) and LBD Civil Limited (LBD), over a two year period for the purchase of equipment. HHTP took security over the equipment purchased. Landscape's assets were transferred to LBD subject to those securities and the advances were consolidated into two loans to LBD. HHTP then registered financing statements in respect of its security interests.
LBD later entered into a financing agreement with, and granted a general security agreement over all of its present and after-acquired property to, Riga Investments Ltd (Riga). Riga then registered a financing statement. LBD was subsequently put into liquidation and a dispute arose as to whether HHTP's two security agreements covering the equipment were valid, and whether HHTP's interests had priority over those of Riga.
The case was decided on the factual issue – the CA found that there was insufficient evidence to prove that the security agreements HHTP had provided to the liquidators were signed prior to LBD being put into liquidation. It follows that HHTP's security interests were not valid. However, both the High Court (HC) and CA discussed the issue of priority between competing perfected security interests.
Section 66 of the PPSA sets out the residual priority rule – this section applies if the PPSA "provides no other way of determining priority between security interests in the same collateral". Section 66(b)(i) clearly provides that priority between two perfected security interests is determined by the order in which they were registered.
Despite the clarity of section 66, the HC found that priority between security interests was determined by order of perfection, not registration, and therefore that Riga's interest had priority over HHTP's due to being perfected earliest. In doing so, the HC applied section 36, which on its face deals with enforceability of security interests against third parties, as opposed to priority between interests. It would appear that the HC considered that section 36 provided another way of determining priority between security interests, meaning that section 66 need not be applied.
Although it dismissed HHTP's appeal on the factual issue, the CA gave its non-determinative views on this priority issue. The CA stated that section 36 does not deal with priority but the enforceability of security interests against third parties, and that section 66 is clear; priority between perfected security interests is determined by registration, not perfection.