What is a Purchase Money Security Interest?

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Table of Contents

• What is a PMSI?
• When is a PMSI Likely to Arise?
• How Do I Register a PMSI?
• Key Takeaways
• Frequently Asked Questions

The Personal Property Securities Act 2009 (Cth) (PPSA) came into effect in 2012, and with it came the Personal Property Securities Register (PPSR). The PPSR acts as a national database where creditors can publicly inform others that they have taken a security interest over a piece of personal property. Likewise, those seeking security can check the PPSR to see whether any other security interests have been granted over a piece of personal property. With the PPSA and PPSR came the introduction of purchase money security interests (PMSIs). This article will discuss what a purchase money security interest is and how to claim one on the PPSR.

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What is a PMSI?

A purchase money security interest (PMSI) is a particular type of security interest. It differs from other security interests in two ways:

• the manner in which it is created; and
• the priority it is given compared to other security interests over the same collateral.

A perfected PMSI provides the secured party with super priority over the collateral. A perfected PMSI will take priority over all other security interests in the collateral (other than those perfected by control), including those created and registered before the PMSI. 

Notably, a PMSI will not arise in property that the grantor intends to use for personal domestic or household purposes. An exception is if the property is serial-numbered property, like a motor vehicle, aircraft, boat or intellectual property. Accordingly, PMSIs usually relate to commercial property rather than consumer property.

When is a PMSI Likely to Arise?

A PMSI is likely to arise in four situations.

Secured Property Loans

This occurs when a lender has lent money to a borrower to purchase specific property, and the loan agreement is accompanied by a specific security agreement. In this case, the lender would have a PMSI over that specific piece of property, even if another security interest had been registered first in time. It is important to note that this super priority will only be in relation to that specific piece of personal property and not any other security interests that the borrower may have granted.

An example is where a borrower borrows money from a lender to finance the purchase of a motor vehicle. The lender would have a PMSI over the motor vehicle. 

Retention of Title

A retention of title arrangement arises where the secured party has given the grantor personal property, but some or all of the purchase price remains outstanding. This arrangement usually involves the transfer of possession of the collateral with the title only passing once the purchase price of the collateral has been received in full. In this case, the secured party (the supplier) would have a PMSI over the property until the purchase price has been fully paid. 

An example is when a supplier supplies building materials to a building company, which has to pay the invoice within 90 days. The supplier would have a PMSI over the supplied building materials even if there is no separate security agreement. 

PPS Leases and Bailments

PPS leases/bailments have a very specific meaning under the PPSA. If an arrangement meets the definition under the PPSA, a PMSI will arise automatically. Generally, these arrangements occur when:

• the lessor or bailor is regularly engaged in the business of leasing or bailing;
• the agreement is for a term of over two years, whether directly or indirectly; and
• in the case of a bailment, the bailee provides some form of payment.

A common example of these transactions is an equipment hire arrangement, such as an equipment hire business leasing a crane to a construction company for over two years. In this case, the equipment hire business would have a PMSI over the crane.

Commercial Consignments

Like a PPS lease/bailment, a commercial consignment has a very specific definition under the PPSR. A PMSI will arise automatically if a contract between two parties gives rise to a commercial consignment. Generally, this occurs where:

• the consignor retains ownership in the goods they deliver to the consignee;
• the consignee is tasked with selling, leasing or otherwise disposing of the goods in some way; and
• the consignor and the consignee both deal in these types of goods as part of their normal business.

An example of this is where goods are delivered to an auctioneer who is tasked to sell them. In this arrangement, the person who delivered the goods will have a PMSI over them. 

How Do I Register a PMSI?

When registering a PMSI on the PPSR, you must note that it is a PMSI. Also, you must complete registration within specific timeframes. The timeframes will vary according to the type of personal property and its intended use by the grantor. Generally, these time frames are:

• before the grantor takes possession of the property, if the property is part of the grantor’s inventory; or
• within 15 days of the grantor taking possession of the property if the property is not part of the grantor’s inventory.

Key Takeaways

The Personal Property Securities Register (PPSR) provides a national database where people can check what security interests have been registered over a piece of personal property, including purchase money security interests (PMSIs). A PMSI is essentially a super priority. When it arises, it allows a secured party to jump to the front of the line regarding security over that property, even if other parties have registered first in time. There are certain circumstances where PMSIs arise, which include: 

• secured property loans; 
• retention of title arrangements; 
• PPS leases/bailments; and 
• commercial consignments. 

When registering a PMSI, you must do so within the stipulated time frame or risk losing your super priority.

For more information about personal money security interests, our experienced business lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.

Frequently Asked Questions