Acquisition Financing of Inventory: Explaining the Diversity

The United States, Canada, New Zealand and Australia have all modernized their secured transactions law with the adoption of a single, comprehensive statute. These statutes all embrace the same objective – to create an efficient, predictable and commercially sensible framework that facilitates secured financing. Yet when the statutory priority rules are compared, it becomes obvious that there are vast differences in approach. This paper will focus upon the typical priority disputes that can arise between a supplier of inventory and a lender who supplies working capital to the debtor. It will identify six key questions that must be resolved when designing the priority rules and it will review the differing approaches taken in the various jurisdictions. It will then examine three different explanations for these variations – the public choice explanation, the innovation explanation, and the primary collateral explanation – and test them to determine what explanatory power they hold.