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Why is priority important?

Competing security interests arise when more than one creditor has taken security over the same asset(s). Determining the order of priority between those security interests decides the order in which each of the secured creditors can claim on the secured property in an enforcement or insolvency scenario.

Where the proceeds of enforcement of the security are not sufficient to pay all of the competing secured creditors in full, questions about priority are particularly critical because one or more of them may not recover all of the amounts they are owed if the company cannot pay from other assets. In such cases, being a higher-ranking creditor has significant advantages.

The 'first in time' general rule

The basic starting point for the rules governing priority of security is that a creditor with a security interest in an asset takes priority over all subsequent security interests in that same asset. There are a number of exceptions to this rule including:

1. •

   a legal security