The linking of a financing statement to an earlier registration may support a guarantor’s right of subrogation but when should this linking be done? Linking can only be undertaken prior to the discharge of the earlier registration. In circumstances of refinancing, a guarantor has two options: (1) to link their security to the existing lender’s security prior to settlement or (2) to wait until after settlement and then to link their security.
The risk with option (1) is that the guarantor’s registration may delay settlement, assuming the incoming lender intends to register its security. The risk with option (2) is that the outgoing lender may discharge its security before the guarantor registers its security and links it to the outgoing lender’s security. The timing of registration will depend on the circumstances in which a guarantor is repaying or procuring the repayment of a borrower’s debt.
Take out lesson:
Linking can only be undertaken prior to the discharge of a security. If discharge occurs, a guarantor’s right of subrogation would remain and their security interest could be registered but they would not have the benefit of linking their security and the priority of the (existing) lender’s registration start date. In practice, there is often delay on the part of a bank between providing an undertaking to effect discharge on the PPSR, and the bank in fact effecting the discharge – but this window of opportunity to register and link a security cannot be guaranteed.
For further information, please contact: Nicola Young, Senior Associate, B2B Lawyers, +61 3 8602 4000, firstname.lastname@example.org
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