Contractual priority—varying the basic rules on priorities

The following Banking & Finance practice note provides comprehensive and up to date legal information covering:

  • Contractual priority—varying the basic rules on priorities
  • Common approaches to contractual priority arrangements
  • Terms of the contractual priority agreement

Contractual priority—varying the basic rules on priorities

Competing security interests arise when more than one creditor has taken security over the same asset or group of assets. Determining the order of priority between those security interests decides the order in which each of the secured creditors can claim on the secured property in an enforcement or insolvency scenario.

Where the proceeds of enforcement of the security are not sufficient to pay all of the competing secured creditors in full, questions about priority are particularly critical because one or more of them may not recover all of the amounts they are owed if the company cannot pay from other assets. In such cases, being a higher-ranking creditor has significant advantages.

The rules concerning priorities are complex and, in the absence of contractual agreement between competing creditors, there can be considerable uncertainty about where competing security interests rank in the order of priorities. For more information, see Practice Notes: Priority between security interests. Setting out the priorities between competing creditors contractually is an effective means to avoid the uncertainty of priorities caused by the complex rules created at common law and statute.

Secured creditors are free to vary the priority of their interests as they wish. They do not need the consent of the debtor, who has no right to insist on the order in which successive debts are satisfied.

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