The Court of Appeal has reversed the High Court’s decision in Healy Holmberg Trading Partnership v Grant on a PPSA issue it describes as being of “practical significance”.
The Court of Appeal is very clear that, as between competing registered security interests, the Personal Property Securities Act determines priority according to the order of registration, not the order of perfection. For a copy of the case, click here.
The High Court had been concerned that injustice would result if that rule applied. A creditor who registered on the PPSR early, but without completing its security agreement, could get priority over a creditor who was first to complete its security agreement, but who registered second.
The High Court therefore treated section 36 (the requirement for a security agreement to be in writing etc), as a priority rule that prevailed over the default priority rule in section 66 (first to register wins). That analysis has been criticised elsewhere.1
The Court of Appeal has now disagreed with the High Court, in part because of the plain wording of section 36. On its face, section 36 does not deal with priority. Further, the High Court’s approach would compromise “the predictability and simplicity of the PPSA regime”. The Court of Appeal was, rightly in our view, concerned that a “first to perfect” priority rule:
“would mean that a search of the register would not provide an answer in a priority dispute, and there would then need to be the obtaining of evidence from the parties as to the exact time at which the steps necessary to perfect the security interest took place.”
A “first to register” rule is much more workable. As the Court pointed out, it gives clarity to secured creditors by enabling them to search the register, understand immediately their relative priority position and make an informed decision before committing themselves to providing credit.
In our earlier Brief Counsel, we said that any injustice arising from a security agreement being executed shortly before liquidation should be dealt with by the voidable transactions regime, rather than a strained interpretation of the PPSA. In this particular case, however, the voidable transaction issue was not before the Court. For a copy of our earlier Brief Counsel, click here.
Secured creditor must prove its security interest
Ultimately, however, the PPSA issue was not the basis for the Court’s decision. The Court resolved the case on the evidence, but the way in which it did so should be of interest for insolvency practitioners and creditors engaged in priority disputes.
The Court refused to uphold Healy Holmberg’s claim that it held the first-ranking security interest because it had failed to provide proof of the date the security agreement was signed.
Healy Holmberg had been put on notice that the date was an issue in the case. Had the security agreement been signed after the date of liquidation, it would not have been valid, given the directors’ inability to bind the company after appointment of liquidators.
Healy Holmberg could have been expected to have produced such information, but for whatever reason did not do so. It was the party best placed to explain the date of the documents. Accordingly, there was a gap in the evidence meaning that Healy Holmberg failed to prove its case.
A creditor seeking to uphold a security position ought to put before the Court all the evidence that is relevant to the issues in dispute. If not, the creditor runs the risk that it will fail to prove its case, particularly where the evidence is of a nature that the creditor itself could reasonably be expected to have and produce.