In both business and in your personal life, you may encounter a Deed of Priority. You might be mortgaging your property. You may be raising capital for a business by offering security to a creditor. Alternatively, you might be a creditor offering up capital in exchange for security. In any event, having an understanding of what a Deed of Priority entails is vital to knowing your rights in these situations. Sometimes known as an inter-creditor agreement, a Deed of Priority assigns the rights which each creditor will have pertaining to recovering the debts which the specific debtor in question owes them all should that debtor default.
In essence, it is a contract that ranks the rights of creditors in order. It may also list certain other conditions about the arrangement. However, an inter-creditor agreement may vary in terms of when it is used. It may be used prior to insolvency, whilst a Deed of Priority is usually used upon such time as a debtor becomes insolvent. Winding up a company is an arduous process, but knowing where security interests exist, and what is owed to whom makes the process a much easier exchange. We have outlined some more thoughts for you below.
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What is a security interest?
A security interest is a legal right granted by a debtor to a creditor over the debtor’s property. This enables the creditor to have recourse to the property if the debtor defaults in making payment or otherwise performing the secured obligations. This might be the property or land on a mortgage, or might be some assets to a business. A security interest can be a useful part of any loan arrangement. In company law, secured creditors generally get first priority to recoup debts. Where possible, being a secured creditor is preferable.
Creditor rights
Recouping any security interest can be more of a task with multiple creditors. This is where having a Deed of Priority in place can prevent any confusion or disputes throughout this process. Negotiating this arrangement can be a hard process on its own. The general rule of thumb is that first in best dressed tends to reign supreme. However, every situation is different, and can depend on the unique factors at hand.
It is wise that when drafting a loan agreement with the debtor, you also consider what impacts this might have for any other creditors. It is important that you ensure the debtor is open and honest about any other creditors. Liaising with these other creditors will form the basis for arranging a Deed of Priority. It will hold all parties in good stead. Once aware of all parties, you may be able to commence an originating process to secure debts owed through a letter of demand.
Debtor responsibilities
Even though the Deed of Priority concerns more creditors than it does debtors, it is still wise to be aware of how this might impact on you as a debtor. As a debtor, it is incumbent on you to make creditors aware of any competing interests with respect to security interests which might exist. Fulfilling this obligation is important in terms of how the distribution of debts owed may occur. Being open and transparent about any preexisting arrangements and other creditors is key. Without this transparency, the outcomes could be more troublesome for you down the line. Knowledge of this process and rights owed to creditors will help improve your situation.
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What about tax?
Tax requirements can impact both creditors and debtors. It is best practice to familiarise yourself with the impacts of these requirements in the process of recouping debt owed. For example, the difference between cash and accrual accounting. How you are ranked in a Deed of Priority may dictate what taxable income you or your business has or may have. Therefore, having knowledge of how this works can be useful for your financial and business affairs. The Australian Taxation Office lists more information about this on its website.
Ultimately, wherever the are competing needs, there can be disputes. However, this deed can help to prevent this by prioritising the order in which rights are afforded to creditors. Nevertheless, even with such a contract, conflict can arise, and legal assistance may be required. Each situation can be different. Your needs will depend on your own circumstances. If you are unsure of your rights, you should seek the help of a contract lawyer. For further reading, the ASIC website contains more information for creditors.
