chapter  6
27 Pages

Priority of security interests

A clear and predictable priority structure is said to lower the cost of credit by ‘giving effect to an effi cient public registration mechanism [which] can increase the accuracy of the legal risk assessment’.1 Generally speaking, the ability to have priority distinguishes a secured lender from an unsecured lender, and grants certain rights during post-default liquidation. There has been, mostly confi ned to academic circles, a debate whether the secured creditor should be given full priority.2 However, it is clear that anything less than a full priority position will clearly lead fi nanciers to increase the cost of credit. International instruments take the view that priority should be given in full to secured creditors and no carve-out should be allowed. If a legal system offers clear and predictable priority rules facilitating low-cost credit, lenders are given the opportunity ‘to assess the loan’s potential risk and return based on its size, the value of collateral, and the order of priority of other creditors’.3 Priority allows a secured creditor to assess whether recovery of the value of collateral is possible by ascertaining who has a prior right over the same asset. Further benefi ts of a predictable priority regime that aims to facilitate credit may be summarised as maximisation of value of the collateral and facilitation of effi cient commercial practice where priority rules are ascertainable prior to entering into a commercial relationship.4