It is not uncommon for a receiver, liquidator or competing creditor to be presented with a security agreement, the ink on which appears scarcely to be dry.
If that secured creditor registered on the Personal Property Securities Register (PPSR) months or years earlier, does that registration date determine priority between competing security interests? Or is that unfair to other creditors?
In a recent case, the High Court dealt with the dilemma by ignoring established Personal Property Securities Act (PPSA) rules and instead giving priority to the interest which was perfected first.
This decision turns the PPSA on its head and was in our view unnecessary. Any injustice could have been addressed by applying the insolvent transactions regime.
The Healy Holmberg Trading Partnership v Grant1
Healy Holmberg, a secured creditor, had registered on the PPSR two years before liquidation. But, according to the evidence, its security agreements had been executed just months before liquidation (and possibly even after the liquidation had started).
A security agreement is invalid if it was executed by the directors after either receivership or liquidation. The directors of the debtor company would have had no authority to enter into such a commitment at that time.
Three main questions to consider in this situation
- Was the security agreement executed after receivership or liquidation?
- If not, what priority does it have under the PPSA?
- Does the security agreement fall under the insolvent transactions regime?
Was the security agreement executed after receivership or liquidation?
On receiving a suspiciously fresh security agreement, a receiver or liquidator should look to obtain as much evidence as possible about when the agreement was executed. This includes:
- originals of the agreement
- emails referring to the date of execution, and
- electronic copies of the agreement and its drafts, in order to check whether the electronic files’ metadata is consistent with the stated execution date.
The liquidators in Healy Holmberg suspected that the agreements may have been executed after liquidation and backdated, and made a smart move in getting the police to forensically test the documents.
Although the police were unable to confirm that the agreements had been executed post-liquidation, they did conclude they had been backdated. In the absence of the secured party being able to explain the dating inconsistencies, the Court found that the security agreements had probably been executed after the date of liquidation, although that appears not to have been a conclusive finding, given that the witnesses had not given oral evidence.
Ranking an agreement signed before receivership or liquidation
The liquidators successfully argued that, had Healy Holmberg’s security agreements been signed before liquidation, priority should be determined by the order in which the creditors perfected their security interests. Healy Holmberg’s earlier registration was ineffective until the agreement was in fact signed, and credit given. The Court found that the competing creditor (RIGA) had priority over Healy Holmberg because RIGA’s security agreement had been executed first, and was therefore perfected first.
That argument, if accepted more widely, would turn the PPSA on its head. It would mean that no secured creditor could rely on the register. In every case there would need to be a detailed examination of when perfection occurred, which is not a date that is ascertainable from the register itself.
The Court ought to have applied the ordinary PPSA priority rules. As at the date of liquidation, both Healy Holmberg’s and RIGA’s security interests were perfected. Priority between two perfected security interests is determined by which party registered on the PPSR first - not by which security interest was perfected first.
Healy Holmberg ought to have had priority. It did not matter that its interest was perfected after the other creditor perfected. Registration is what matters.
The Court in Healy Holmberg clearly perceived an injustice in giving priority to a recent security agreement over one executed much earlier.
Chapman Tripp commentary
We believe that the Court’s analysis was incorrect.
There is no injustice in a lender registering early and documenting security agreements days, months or even years down the line.
Before lending, a financier should search the PPSR for security interests registered against the collateral of the debtor company.
If the search shows that another security interest is registered, the financier knows that it will always be at risk that later lending by the prior-registered creditor will take priority unless: (1) the other registration is removed, (2) it is limited to collateral in which the new financier seeks no interest, or (3) a priority agreement is entered into.
The system enables a financier to register on one day, and finalise the lending transaction the following, day, week or month, confident that the priority position has been set by registration.
If priority between perfected security interests was determined by who perfected first, that certainty would disappear. Priority would be determined by identifying which party was the first to have its agreement executed, provide value, have the debtor obtain rights in the collateral and register. Complex investigations would be required. Even ascertaining the date of an agreement can be very difficult (as illustrated by this case). Lenders would become far more cautious as a result.2
We understand that the decision is on its way to the Court of Appeal.
Enter the insolvent transactions regime
The perceived injustice in the Healy Holmberg case is best addressed through the insolvent transactions regime, and not by misconstruing the PPSA priority rules.
In Healy Holmberg, the police evidence showed that the security agreements in question were executed no earlier than nine months before liquidation. The agreements could probably therefore have been set aside because they took place in the “specified” period of two years before liquidation started. Had the liquidators adopted this approach, they would have needed to show only that:
- immediately after the security agreement was entered into, the company was unable to pay its due debts (the actual date of execution is key here – the PPSR registration date is irrelevant), and
- the security agreements were not given to secure new credit.
An early PPSR registration would not have saved Healy Holmberg’s position had the liquidators taken that approach. Registration sets priority. It does not save a later agreement from being voidable.