Subordination Agreements and the Personal Property Securities Act (PPSA) in New Zealand

By Meryl Duval, Associate, Morrison Kent Lawyers, NZ

Should you register subordination agreements on the New Zealand Personal Property Securities Register (PPSR)? A subordination agreement is an arrangement between secured creditors where a creditor having higher priority enters into an arrangement (subordination agreement) which allows a lower priority creditor to leapfrog the higher priority creditor.

Primarily, New Zealand law affords priority to security interests perfected (by way of registration on the PPSR) first in time.  The PPSR does however allow creditors to agree alternative priority arrangements whereby higher priority creditors give way to lower priority creditors.  In its simplest form, consider a debtor who has granted general security interests to two independent creditors at different points in time.  A priority arrangement between the debtor and these creditors could record the first ranking creditor (in time) ceding priority to the lower ranked creditor.  

For the most part, subordination arrangements under NZ law are effective according to their terms and enforceable only as between the contracting parties and any third party identified in those agreements.

Generally, subordinations are purely contractual and not dependent on the PPSA for validity. While registration of a financing change statement to indicate subordination is permitted, it is not required.  

The NZ High Court confirmed in a recent case that registration of a subordination agreement simply achieves disclosure of its existence but does not otherwise confer any particular benefit on a registering party nor does failure to register endanger either party’s security interest in any way.

When searching the PPSR, be aware that the absence of a registered subordination agreement does not guarantee there is no subordination agreement in existence between secured creditors.

Secured creditors who choose to register a subordination agreement should be aware of the PPSR registration requirements and the effect (or lack of it) of registration.  

Practically, when registering subordination agreements the PPSR requires entry of an expiry date for the subordination arrangements. The PPSR restricts the expiry date which can be entered; the expiry date cannot be later in time than the date the first financing statement is due to expire.   

The expiry date of a subordination registered on the PPSR does not reflect the term of the subordination agreed between the parties even where no such expiry date is specified in the agreement.  

In Gibbston Downs Wines one of the critical issues considered by the NZ High Court was the duration of a subordination agreement.  In that case, the parties agreed to a subordination arrangement without specifying any period of subordination. The subordinated creditor registered a financing change statement to indicate its subordination which expired on 31 March 2010. The subordinated creditor subsequently assigned its interests to a third party. When the debtor went into receivership, the assignee accepted that there had been an effective subordination but asserted that by specifying an expiry date of 31 March 2010 (on the PPSR), this created a term of the subordination which came to an end on the date the registration lapsed.  

The NZ High Court rejected this position and confirmed that a decision to register the subordination “was not a term of the agreement” and “was not intended to, and did not, undo or alter the agreement that had already been reached” between the parties. On appeal the Judge agreed with the High Court decision and confirmed that where a subordination agreement is noted on the Register, the agreement will continue according to its terms (agreed between the parties) notwithstanding the fact that the notation on the Register may have expired.

Renewing either of the relevant financing statements does not automatically renew the registration of subordination arrangements relating to those financing statements on the PPSR.

Creditors that wish for the registration of subordination arrangements to continue past the expiry of a financing statement will need to file a new financing change statement at the time either financing statement is renewed. Though failing to do so, in most situations, will not affect the contractual position in the arrangements under NZ law.

It is important to note that the NZ Registrar does not provide any notification that financing statements or registered subordination arrangements are due to expire on the PPSR.  

If creditors wish to register subordination arrangements on the PPSR, the financing statement expiry dates should be closely monitored (either by way of an internal notification system or a third party registration agent) to ensure the subordination registration subsists for the lifespan of the relevant financing statements or otherwise as agreed between the parties.  

Meryl Duval, Associate
Morrison Kent, Auckland, Wellington, New Zealand
T: (09) 9155436
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published: June 2015

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