How well do you know the PMSI priority rule?
Under the Personal Property Securities Act 2009 (Cth)(PPSA), a purchase money security interest (PMSI) has the benefit of a super-priority if the PMSI is perfected in accordance with the PPSA. This means the PMSI will have priority over the collateral to which it relates even if a prior perfected security interest attaches to the same collateral.
PMSI is defined in s 14 to include four types of interests:
- the security interest retained by a seller of collateral to secure the purchase price;
- the security interest taken by a lender who provides a loan that enables the grantor to acquire the collateral;
- the interest of a lessor or bailor of goods under a PPS lease; and
- the interest of a consignor under a commercial consignment.
Section 62 sets out when a perfected purchase money security interest has priority over another security interest. Often over looked, however, is the fact that s 62 applies only if the competing security interests were granted by the same grantor.
Assume that Lender A has a perfected security interest over all of the present and after-acquired property of a company, but the security interest is not a PMSI. Without the consent of Lender A, the company sells a large piece of equipment to a third party.
Lender B agrees to finance the purchase of that equipment for the third party grantor, which will give Lender B a PMSI. Lender B searches the register and sees Lender A’s perfected security interest, but notes that Lender A has not ticked the PMSI box when registering.
Lender B believes its PMSI will have priority over Lender A’s perfected security interest which is not a PMSI. This is not correct. Section 62 does not apply because the grantor of the security interest to Lender B was not the same grantor who granted the security interest to Lender A. Therefore, section 67 applies to give Lender A priority.