Purchase Money Security Interests (PMSIs) and super priority

The general rule for resolving competing security interests is, in a general sense, first in best dressed.  In other words, a perfected security interest will take priority over all other security interests perfected after it.  There are of course certain exemptions to this principle, with one major exemption being the “super priority” enjoyed by purchase money security interests (PMSIs).

What is a PMSI?

Pursuant to section 14(1) of the Personal Property Securities Act 2009 (Cth) (PPSA), a PMSI is any of the following:

• a security interest taken in collateral, to the extent that it secures all or part of its purchase price;
• a security interest taken in collateral by a person who gives value for the purpose of enabling the grantor to acquire rights in the collateral, to the extent that:
  • the value is applied to acquire those rights;
  • the interest of a lessor or bailor of goods under a PPS lease; or
  • the interest of a consigner who delivers goods to a consignee under a commercial consignment.

From the above, it can be said that a PMSI is a security interest in collateral of the grantor, where that security interest secures the payment of money to the secured party that was advanced to the grantor for the purposes of obtaining the collateral.

A simple example being where Company A (Secured Party) lends Company B (Grantor) $100,000.00 (Loan) for the express purpose of purchasing machinery (Collateral), subject to the Grantor granting the Secured Party a security interest in the Collateral.  In this instance, as the security interest secures the repayment of the Loan, which itself was made for the express purpose of acquiring the Collateral, the security interest held by the Secured Party is a PMSI.

Another common transaction giving rise to a PMSI is the supply of goods subject to a retention of title clause.  That is, where one party (Supplier) supplies goods to another party (Purchaser) subject to the condition that the Supplier retains title to those goods until the Purchaser has made all payments owing to the Supplier.

What a PMSI isn’t?

There are certain transactions that are, pursuant to section 14(2) of the PPSA, expressly excluded from giving rise to a PMSI, these include (but are not limited to):

• an interest acquired under a transaction of sale and lease back to the seller; or
• a security interest in collateral that (at the attachment time), the grantor intends to use predominantly for personal, domestic or household purposes.

Priority rules for PMSIs

Pursuant to section 62 of the PPSA, a perfected PMSI that is registered at a later time than a regular perfected security interest (Earlier Security Interests) over the same collateral will be granted priority over the Earlier Security Interests.  This is referred to as super-priority (Super Priority).

For example, Company A has a perfected security interest over all present and future assets of Company B, which was registered on 1 January 2016.  Company C has a perfected PMSI over specific machinery held by Company B, which was registered on 1 February 2016.  In this instance, Company C’s PMSI in the machinery will be given priority (in relation to that machinery) over Company’s A’s security interest.

Why give PMSIs super priority?

The rationale behind the super priority rules is that an earlier secured party should not be able to satisfy the grantors obligations to themselves from assets of the grantor that would not have been acquired but for the PMSI secured party advancing the grantor the funds necessary to acquire those assets.

Obtaining super priority

In order to enjoy the benefits of super priority, a Secured Party must registered their PMSI within strict time frames.  These time frames vary depending on the nature of the Collateral over which they are granted, in particular, they are affected by the following factors:

• whether the Collateral is inventory or personal property other than inventory; and
• whether the Collateral is tangible or intangible property.

The Australian Financial Security Authority (AFSA) has produced the following helpful summary, based on section 62 of the PPSA, for determining when a Secured Party must register their PMSI to obtain Super Priority:

	Where the Collateral is tangible property:	Where the Collateral is intangible property:
Where the Collateral is inventory:	The PMSI must be registered before the time the grantor obtains possession of the Collateral.	The security interest must be registered before the time the PMSI attaches, or is created, over the Collateral.
Where the Collateral is personal property other than inventory:	The security interest must be registered within 15 business days of the grantor obtaining possession of the Collateral.	The security interest must be registered within 15 business days of the time of attachment, or creation, of the PMSI.

A failure to register a PMSI within these time frames will not render the PMSI void, but will prevent it from enjoying the benefits of Super Priority.   In these circumstances, the general priority rules will apply.

Links and further references

Legislation

Personal Property Securities Act 2009 (Cth)

Further information about purchase money security interests

If you need advice on granting or registering security interests or the PPSR generally, contact us for a confidential and obligation-free discussion:

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

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