Minimising Risk: What is a PMSI?
The Personal Property Securities Act 2009 (Cth) (Act) affects the way a number of supply and loan arrangements are secured. One of them is a purchase money security interest (PMSI).
All businesses should understand what a PMSI is. If you are part of a trading or loan arrangement and don’t property register your security interest, you could lose your goods if the counterparty to the arrangement goes bust.
Meaning of some common terms
Some of the relevant terms of the Act are as follows:
• “security interest” means basically the granting by a person (the grantor) of an interest in personal property to another person which secures payment or performance of an obligation. A security interest can be created by way of a charge over a company, a hire purchase agreement, a consignment, a retention of title clause and many others.
• “collateral” means the personal property over which the security interest is given or attaches.
• “personal property” is just about anything other than land.
• “PPSR” means the Personal Property Securities Register. This is a publicly searchable register (for a fee) which contains details of all registrations of security interests.
PMSI is a special type of security interest because it secures the purchase of the personal property. It can arise when goods are supplied under a retention of title clause, arises on leases of such things as motor vehicles or boats or in a consignment transaction.
Typical situations where a PMSI will arise
To understand when a PMSI arises, some examples would be:
• You provide stock to someone on a monthly account and your trading terms include a retention of title clause. That means that although risk and possession of the stock passes to the buyer, the title to the stock does not pass until full payment is made. This creates a PMSI which can be registered to protect your interest as unpaid seller of the goods.
• You give someone goods to sell for you on consignment. You can register a PMSI to protect your interest.
• You buy a new car. You get finance for the car from a bank. The bank will register a PMSI. So if you are buying the car privately, you will be able to search the PPSR to see if there is any existing security.
Generally unless the collateral is a motor vehicle, a PMSI will not arise in property that the grantor intends to use for personal, domestic or household purposes. There are some other exceptions such as an interest that arises in a sale and lease back arrangement, but for present purposes, we will concentrate on the more common examples.
Why register a PMSI?
A PMSI is given “super priority”. That means that it can defeat other security interests in the collateral. This includes security interests created before the PMSI arises. That is unusual because normally with security priority it is the first in time that prevails or when there is registration then the first to be registered gets the priority. Of course there are situations where priority can be given to another party by way of a deed, but normally the first in time is the one who gets priority so the “lion’s share” of the money available.
However with a PMSI, so long as the registration requirements are complied with (which are strict), the “super priority” arises. A practical example would be where company A signs an General Security Agreement with its bank, Big Bank. Company C then sells some stock to company A and the trading terms include a retention of title clause. Company C registers a PMSI in regard to the stock. Company A then becomes insolvent. The effect of the registration of the PMSI and the “super priority” is that Company C is entitled to the stock.
The rationale is that in our example, Big Bank should not benefit from assets that company C would not have supplied to company A if it had not been for the retention of title clause. Company A needed the stock for their business and company C provided that stock and therefore should be able to get it back if company A becomes insolvent.
If the stock is sold by company A, company C may not get the “super priority” over the sale proceeds if the retention of title clause was one that allowed the sale of the stock. Usually those clauses do allow the sale, because otherwise, how would company A get the money to pay company C except by the sale of the stock.
So there are limits to the benefits of a PMSI. But if you are company C providing stock worth a substantial amount that may take some time to sell, then a PMSI would give some peace of mind.
There have been many cases in recent years where the failure to register a PMSI, or registering a defective PMSI, has meant businesses have lost millions of dollars when a counterparty enters into liquidation.
If your business is a supplier who provides stock to your customers on account, then you need to check your trading terms to make sure that you have a retention of title clause. In that case, you can get the benefit of registration of a PMSI to secure your interest in the stock. You would probably not bother for stock worth only a few hundred dollars but in some cases, the value of stock provided can be considerable. In that case, you should be looking to protect yourself – just in case the unforeseen happens.
By Luke McKavanagh
Luke is part of Salerno Law’s commercial law team. His days involve providing advice on a wide variety of commercial issues that arise in operating small to medium businesses, where he assists clients who are growing their business or wanting to protect what they’ve established.
DISCLAIMER: This article is only meant to give you general information and should not be relied on as legal advice. Speak to one of our lawyers for more information.