In our Winter 2005 edition of Financial Services Quarterly, we advised of a High Court decision that cast doubt on the rights of a second ranking security holder where a receiver sold personal property under a first ranking security.
The rights of the second ranking security holder in that case were found to be automatically extinguished by the sale.
The Court of Appeal has now overturned the High Court decision and confirmed the rights of subsequent security holders in this situation.
High Court decision
The High Court case decided, in considering section 30A of the Receiverships Act 1993, that a sale of personal property by a receiver meant that all other subordinate security holders lost priority in the surplus proceeds of sale and were relegated to the position of unsecured creditors.
Court of Appeal decision
This decision has been comprehensively overturned by the Court of Appeal which confirmed the traditional position that a subordinate security holder ranks ahead of unsecured creditors in relation to those proceeds. The Court of Appeal favoured a narrower interpretation of the "proceeds" in which subordinate security holders' rights are extinguished following a sale by a receiver. It confirmed they are limited to the future proceeds from the asset sold and do not include the sale proceeds.
Following the High Court's decision last year, Parliament passed amendments to the Receiverships Act 1993, to ensure that subordinate security holders' rights were preserved. These came into effect on 14 December 2005.
Consequences of new decision
The Court of Appeal's decision means that the legislative changes were unnecessary, since they have the same effect as the Court of Appeal's decision. However, the new decision does mean that with any proceeds distributed prior to the enactment of the Receiverships Amendment Act 2005, subordinate security holders were entitled to payment in priority to unsecured creditors. This may upset any distributions made based on the High Court decision.
In our view, the Court of Appeal decision is correct. The decision of the High Court created significant uncertainty in relation to priority and the new determination is a welcome development.
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This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.