Section 41 – Ranking clauses
125.The ranking of securities may be the subject of agreement among the secured creditors. Section 41(1) allows for secured creditors to enter into ranking agreements regulating the order in which floating charges are to rank in the event of insolvency.
126.Subsections (2) and (3) clarify that the rule contained in sections 40(1) and (2), that floating charges rank by date of creation, can be displaced by a ranking agreement. These subsections also clarify that the capping provisions contained in sections 40(5) and (6) can be altered by a ranking agreement. Subsection (2)(b) makes it clear that a ranking agreement cannot displace the rule contained in section 40(4) that a fixed security arising by operation of law (such as a lien or landlord’s hypothec) has priority over a floating charge.
127.Subsection (4) makes provision for requiring the consent of a floating charge (or fixed security) holder, where the holder’s position would be adversely affected by the provisions of a ranking agreement. It does not require such a holder to subscribe the document granting the floating charge. In practice, it may often be impractical to require the lender to grant consent by becoming a party to the floating charge document itself. Subsection (5) therefore provides that the lender may give consent in a separate document which may be (but need not be) registered in the Register of Floating Charges. As the registration of consent will be in the interests of the borrower (it makes clear to third parties that consent was duly obtained), there is no need to impose a requirement to register.