PPSA section 95 creates dilemma for receivers, unless...

Making a payment to a creditor (in this case, the IRD) will in and of itself give that creditor priority over competing creditors. A recent Court of Appeal judgment to that effect, under section 95 of the Personal Property Securities Act (PPSA), carries serious implications for receivers.1

The ruling suggests that the receiver has to choose between two risks – the risk of incurring penalty payments or the risk of conceding PPSA priority status unnecessarily. We suggest ways to escape this dilemma...

What does section 95 say?

Section 95 is designed to facilitate trade, in particular the payment of debts. It provides that, where a debtor "initiates" a payment of a debt owed by the debtor, the creditor receiving the payment will have priority over any security interest in the funds.

It does not matter whether the payee is a secured or unsecured creditor. It does not matter whether the security interest concerned is perfected or unperfected. Knowledge of the security interest, or lack of knowledge, is irrelevant.

The court ruling

IRD successfully invoked section 95 to prevent the money (a not insubstantial $123 million) from being recovered by the receivers. IRD succeeded although:

the sum was paid to the IRD on the same day that the receivers' appointor advised the IRD that they disputed the IRD's entitlement to the funds, and the Court agreed that the receivers could properly have paid the funds to their appointing creditors, ahead of the IRD. (The receivers chose not to because the position at that stage was unclear, and the risk of penalties and interest on $123 million was too great.) The Court accepted that the receivers were not liable to make the payment. But because they had caused the debtor to initiate the payment, section 95 applied to give the IRD the funds free of any security interest.

The Court's ruling makes section 95 a very powerful provision.

The Court of Appeal agreed with the High Court that section 95 deals only with priority, and does not prevent in personam claims. That is, claims other than to some property interest in the funds themselves, such as a claim for money paid under a mistake, or under duress etc. Similarly, section 95 would not be a barrier to a liquidator's voidable transaction claim.

However, although the payment in this case was made due to a mistaken belief on the part of receivers that the IRD had, or potentially had, better entitlement to the funds than their appointing creditors, that mistake could...