A recent Court of Appeal case (Gibbston Downs Wines Limited v Perpetual Trust Limited [2013] NZCA 506) has upheld the High Court's decision on the effectiveness of a subordination agreement, but has noted that the task of determining the issue of the appropriate time to determine priorities as between holders of competing security interests under the PPSA must continue to wait.

The facts of the case were as follows:

  • Two creditors held separate general security agreements (GSAs) over the assets of a borrower, with both security interests registered on the PPSR
  • The holder of the first-registered GSA (PFS) agreed with the holder of the second-registered GSA (C+M) to subordinate its security interest.  No termination date for the subordination was mentioned in the discussions between the creditors
  • PFS registered a financing change statement on the PPSR recording the agreed subordination of its security interest.  The registration included an expiry date for the subordination of March 2010 (being the date of expiry of the financing statement)
  • Various assignments by the two creditors occurred, and the holder (by assignment) of PFS's security interest appointed receivers in respect of the borrower's assets in 2008
  • In January 2010 the financing statement for the PFS security interest was renewed, but the March 2010 expiry date for the subordination remained on the renewed financing statement
  • Gibbston Downs (as assignee of the PFS security interest) later sought a declaration that its security interest had priority, on the basis that the subordination arrangement had expired on 31 March 2010 (being the date specified in the financing statement).

The Court of Appeal held that:

  • The PPSA cannot be said to govern subordination agreements, which do not rely upon the Act for validity
  • The recording of the expiry date in the PFS financing statement said nothing about the term of the underlying subordination agreement.  In situations where a subordination agreement is noted on the Register, the agreement will continue in accordance with its terms notwithstanding the fact that notation on the Register may have expired
  • It was appropriate in the circumstances to imply a term that the duration of the subordination agreement would continue until the (assigned) C+M loan was repaid, or its security interest was otherwise satisfied
  • The subordination arrangement continued to bind the assignees of both security interests pursuant to the PPSA
  • It was not necessary to determine the issue of an appropriate date for determining the competing priorities, given the court's finding that the subordination agreement did not expire in March 2010.

In relation to this final point, the High Court decision had included a non-binding observation that while the PPSA does not specify the time at which a dispute as to priorities is to be determined, it seemed "logical and in accord with principle to resolve the priority issue in this case at the time that the competing interests came into conflict", which the judge went on to note may be the date of appointment of receivers.

The Court of Appeal noted that this conclusion by the lower court had received some academic criticism.  This had generally been along the lines that the court was reading into the legislation a time limit on registration on the PPSR where none was provided for.  'Freezing' a creditor's priority position in this way would have the effect that nothing (including an otherwise valid PPSR registration) which occurred after the relevant time would have any bearing on the creditor's priority position.  Other concerns were raised with the court's suggestion that whether the appointment of receivers was the relevant time for determination might depend upon the provisions of the relevant GSA, which the competing creditor would not be party to or necessarily have seen.

The Court of Appeal, while leaving this key issue to another day, did note that the High Court's view that the appropriate time to determine priorities was the date of receivership had "much to commend it in the particular circumstances", and that the date on which a receiver or liquidator is appointed is generally adopted as the relevant date in other legislation.  So the uncertainty continues for now, with the possibility of a 'freezing point' for action by creditors to perfect their security interests not yet ruled out.