What is a Purchase Money Security Interest for the purposes of the Personal Property Securities Act?

On 30 January 2012, the Personal Property Securities Act 2009 (Cth) (PPSA) came into effect. It affects all security interests in ‘personal property’ where either:

• (i) the personal property over which the security interest is being granted; or
• (ii) the grantor of the security interest is located in Australia.

One of the many changes brought about by the PPSA was the introduction of purchase money security interests (more commonly known as a PMSI).

What is a PMSI?

A purchase money security interest is a particular type of security interest. It is distinguished from other security interests in two ways:

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

It should be noted that a PMSI will not arise in property that the grantor intends to use for personal domestic or household purposes unless the property is serial numbered property (i.e. a motor vehicle, an aircraft, a 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 as follows:

• Where money is lent to the grantor in order to enable the grantor to purchase personal property. This would cover the purchase of a motor vehicle where finance is provided at the time of sale.
• Where the secured party has given the grantor personal property but all or part of the purchase price remains outstanding. The most common transactions in which this occurs are retention of title arrangements. This type of arrangement usually involves the transfer of possession of the collateral with title only passing once the purchase price of the collateral has been received in full.
• PPS lease transactions (i.e. leases or bailments of goods for a term exceeding one year or for an indefinite period).
• Consignment transactions (i.e. where the title holder, consignor, delivers possession of personal property to the consignee. The consignee is on the business of selling personal property of that type and attempts to sell the consignor’s property).

Priority

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

Registration

When registering a PMSI on the Personal Property Securities Register, you must note that it is a PMSI. Also the PMSI must be registered within specific timeframes (which vary according to the type of personal property and its intended use by the grantor).

Conclusion

Not only did the PPSA extend the concept of security interest, but it also brought about the new concept of a PMSI. In order to ensure your PMSI has the super priority it is allowed, you must ensure you can identify PMSIs and register them correctly and within the requisite timeframe. If you require advice about whether or not you have granted or been provided with a PMSI (and how to register such to maximise your security), please do not hesitate to contact LegalVision. One of our PPSA lawyers would be delighted to assist you.

Questions? Call us on 1300 544 755.