Making sense of the purchase money security interest (PMSI) priority provisions in the Personal Property Securities Act 2009 (Cth) (PPSA) can be challenging for financiers and insolvency practitioners tasked with assessing the merits of competing security interest claims.
The key provision in the PPSA is section 62. Among other things, section 62 provides that a PMSI in respect of goods that are inventory has priority if the PMSI is perfected by registration when the grantor, or another person at the request of the grantor, obtains “possession” of the inventory.
A recent decision of the South Australian Supreme Court (Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd  SASC 163) has clarified that the reference to a grantor obtaining “possession” of goods that are inventory is a reference to the grantor obtaining possession of the inventory in question as a grantor of the PMSI rather than in some other capacity.
The decision involved a priority dispute between Allied Distribution Finance (ADF) and Samwise Holdings (SH) in relation to 40 motorcycles that had been bailed to a subsidiary of SH (Bill’s Motorcycles).
Bill’s Motorcycles had a floorplan finance arrangement with Commercial Distribution Finance (CDF). CDF registered against Bill’s Motorcycles on the Personal Property Securities Register (PPSR).
Bill’s Motorcycles subsequently granted a general security interest over all of its present and after acquired property in favour of SH.
On 12 April 2016, ADF entered into a new floorplan bailment agreement with Bill’s Motorcycles and on 14 April 2016, ADF registered against Bill’s Motorcycles on the PPSR claiming a PMSI.
On 15 April 2016, ADF purchased the 40 motorcycles from CDF that were in the possession of Bill’s Motorcycles pursuant to its original floorplan finance arrangement with CDF and on 18 April 2016 ADF issued to Bill’s Motorcycles bailed goods notices in respect of these motorcycles pursuant to the bailment agreement between them.
The court had to determine the time when Bill’s Motorcycles obtained possession of the 40 motorcycles for the purposes of section 62(2)(b)(i) of the PPSA and whether ADF was entitled to PMSI priority under that section. SH argued that the date of mere physical possession should be determinative. The South Australian Supreme Court disagreed and found ADF was entitled to PMSI priority.
The court’s reasoning
In reaching this conclusion the court observed that:
- the text of section 62(2)(b)(i), considered in isolation, can be read as the grantor obtaining possession of the goods as grantor of the PMSI or as the grantor obtaining mere physical possession. However, the meaning of the section must be determined having regard to the language and purpose of all the provisions of the Act;
- the fact that the person who becomes the grantor of the PMSI might have had possession of the relevant goods in some other capacity before being the grantor of the PMSI is irrelevant;
- if this were not the case, non-PMSI holders would obtain a windfall benefit at the expense of PMSI holders because the person who subsequently became the grantor of the PMSI happened to have possession of the relevant property in a different capacity at an earlier time;
- the mere fact that the transaction might have been structured in a different manner so that ADF would have received priority (for example: CDF could have assigned its rights under its security interest to ADF or ADF could have agreed to refinance Bill's Motorcycles’ floor plan arrangements with CDF) did not mean that ADF would not receive PMSI priority as a result of the manner in which the transaction was actually structured;
- when sections 62(2) and (3) refer to the grantor obtaining possession of the relevant goods these are references to the grantor obtaining possession as a grantor of the PMSI not when that person happens to become the grantor of some other security interest (in this case, the security interest granted by Bill’s Motorcycles to SH);
- it was not until the bailed goods notices were issued by ADF pursuant to its bailment agreement with Bill’s Motorcycles on 18 April 2016 that ADF obtained a security interest in the specific motorcycles and Bill’s Motorcycles became the grantor of the PMSI to ADF. This was very significant because the bailment agreement between Bill’s Motorcycles and ADF was signed on 12 April 2016 but ADF did not register its PMSI on the PPSR until 14 April 2016. If Bill’s Motorcycles had become the grantor of the PMSI on 12 April rather than 18 April ADF’s registration would have occurred after Bill’s Motorcycles had possession as grantor of the PMSI and section 62(2)(b)(i) would not have been satisfied.
Interestingly, the Allied Distribution Finance decision did not specifically refer to any of the Canadian case law on the Canadian provisions equivalent to section 62. This is somewhat surprising given that a number of decisions in the Canadian courts have also held that the time of "possession" for the purposes of the provisions equivalent to section 62 should be measured from when the relevant security agreement is executed and value is given, despite the fact that physical possession was obtained earlier. In effect, these decisions have interpreted the relevant Canadian PPSA provisions so that the time period in which the PMSI is to be perfected in order to obtain super priority runs from when the debtor (which term includes a grantor) has possession of the collateral as a debtor.1
The argument that the date of physical possession should be determinative because it clothes the grantor with ostensible ownership of the property which might be relied upon by other secured parties to their detriment has not persuaded the courts that possession, for the purposes of section 62 (and the overseas equivalent provisions), means mere physical possession.
The underlying rationale for the PMSI priority provisions is that it is equitable and commercially sensible to afford priority to security holders who provide the means to acquire personal property because without their contribution and without their being afforded priority the grantor would not acquire its interest in the property and pre-existing non-PMSI holders would have no security over that property.
Although the decision in Allied Distribution Finance provides some useful insight about section 62 of the PPSA, serious pitfalls remain for financiers considering refinancing existing inventory or other assets. For example:
- the decision in Allied Distribution Finance does not fully analyse the interaction between sections 62 and 14(5) of the PPSA - section 14(5) contemplates the renewal, refinancing, consolidation or restructuring of a PMSI, but its scope and limits are yet to be clarified;
- the decision does not comment upon whether the outcome would have been different if CDF had not registered its security interest prior to SH registering its security interest.