Priorities

Click on the following link to read the Working Group B Draft Summary Paper.

Priorities

Parties which lend or supply goods or services on credit often take a security interest over property owned by the debtor in order to provide themselves with protection against the risk that the debtor will become insolvent before the debt is repaid. The efficiency of that security interest against other secured creditors, or against third party buyers of the secured property, is determined by rules governing priority.

In 2004, the Law Commission considered the rules governing the priority of security and quasi-security interests. It concluded that the law is deficient for a number of reasons, and highlighted in particular that it lacks transparency and is unsuited to modern business practice. In response, the Law Commission proposed an extensive set of reforms designed to improve and clarify the law on priority of security and quasi-security interests. The reforms were published in Consultation Paper No 176.

The remit of Working Group B is to consider what reforms might be useful to the law governing the priority of security and quasi-security interests. The Group takes as its starting point the reforms proposed by the Law Commission.

Perfection and Filing

Working Group B is considering the appropriate relationship between filing and priority. This includes consideration of the circumstances in which filing should be possible in advance of any security interest being created, and whether priority should be determined by the date of filing where two interests are perfected by filing. The Group is also considering whether filing should be required in respect of all advances made by the creditor to the debtor and whether a party having notice of a subsequent advance has an effect on its priority.

The Group is also considering the appropriate priority rules where an interest is perfected other than by filing.

Sales of Receivables

The sale of receivables is a common form of finance used by parties who wish to convert receivables into cash. Where the seller of the receivables is required to guarantee the buyer against default by the debtor, this sale is difficult to distinguish from the granting of a security interest in the receivables by the seller: in each case the seller receives cash and must later account to the buyer for the value of the receivables assigned. One issue for consideration by Working Group B, in conjunction with Working Group A, is whether the outright sale of receivables should be brought within the registration system and whether the priority rules applicable to security and quasi-security interests should also apply to such sales.

Purchase Money Security Interests

A purchase-money security interest (PMSI) arises where a seller takes an interest to the extent that it secures payment of the purchase price of goods, and also where a lender takes an interest to the extent that it secures an advance which enables the debtor to acquire rights in goods. Working Group B is developing a definition of the PMSI and considering what priority rules that should apply to PMSIs.

The Current Law

What is wrong with the current law of priorities between interests in assets?

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