When refinancing inventory, gaining 'super priority' for a purchase money security interest (PMSI) over existing general security interests is paramount to protecting the investment made by the financier.

Relying on an earlier PMSI to claim ‘super priority’ for the refinancing PMSI can be risky.

The best way to avoid this risk is to put in place appropriate priority agreements with any other secured parties who have perfected their security interests under the Personal Property Securities Act 2009 (Cth) (PPSA) in respect of the relevant collateral.

Hypothetical scenario

A motorcycle retailer grants a general security interest to Financier A over all of its current and future property. Financier A properly and continuously perfects its general security interest.

The retailer then enters into a floorplan bailment finance arrangement with Financier B in order to access funds which are used to stock more motorcycles. The retailer takes possession of the motorcycles, but Financier B fails to register its PMSI on the Personal Property Securities Register (PPSR).

A few years later, the retailer enters into a new floorplan bailment finance arrangement with Financier C which replaces the earlier arrangement with Financier B. Financier C acquires ownership of the motorcycles from Financier B. The motorcycles remain in the possession of the retailer. Financier C perfects its PMSI by registering on the PPSR before the motorcycles become subject to its bailment arrangement.

Which financier has priority?

With respect to the motorcycles held by the retailer, is PMSI super-priority available to Financier C, over Financier A, given the security interest of Financier B was not perfected as a PMSI?

The Full Court of the South Australian Supreme Court has suggested the answer is yes. In our view, this suggestion is problematic and may not be followed by other courts.

Our primary concern is that the 'refinancing' of an earlier PMSI must surely depend on the earlier PMSI having been properly and continuously perfected in the first place. A financier or person seeking to refinance an existing PMSI should carry our sufficient due diligence to determine whether the existing security was properly and continuously perfected as a PMSI otherwise there is a risk that the 'super priority' will not apply.

The decision in Samwise - Full Court of the Supreme Court of South Australia

The recent decision in Samwise Holdings Pty Ltd v Allied Distribution Finance Pty Ltd & Ors [2018] SASCFC 95 (Samwise) outlined that PMSI super-priority would be attributed to Financier C if it registered its PMSI on the PPSR before the motorcycles were subject to its bailment arrangement.

Interestingly, the Samwise case did not involve the refinancing of an existing PMSI that was not properly and continuously perfected, so the comments regarding this scenario were made unnecessarily. For a discussion on the trial judge's reasoning which was followed by the Full Court see our earlier article: Do you possess what it takes to perfect your PMSI?

The relevant commentary in Samwise is (at [101] and [102]):

“…let it be assumed, for example, the Motorcycles were acquired by [the grantor] in circumstances where there was a PMSI in favour of [Financier B] but it was later in time than, and had not achieved super-priority over, general security holders such as [Financier A]. To confer super-priority upon a later or second PMSI holder (here, [Financier C]) would in those circumstances result in prejudice to the earlier general security holder ([Financier A]).

However, it is difficult to reconcile the suggestion that the [PPSA] was not intended to permit the conferral of PMSI super-priority in such a situation – and was intended to confine it to situations involving new assets – with the [PPSA’s] apparent intention to facilitate and encourage the refinancing of PMSI’s under s 14(5).” [emphasis added]

The basis for the Full Court’s comments in Samwise appears to be their analysis of the interaction between sections 14(5) and 62 of the PPSA.

Section 14 of the PPSA contains the definition of PMSI. The Full Court’s reasoning emphasised the importance of subsection 14(5) as evidencing a plain intention for the PPSA to facilitate refinancing by permitting the conferral of PMSI status upon refinanciers whose security interest otherwise meets the definition of a PMSI.

Our concerns with this approach

While we agree that subsection 14(5) does evidence this intention, the wording of subsection 14(5) strongly suggests the conferral of PMSI status is only appropriate in the context of a refinancing where the original security interest meets the definition of a PMSI (including perfection) and itself had PMSI super priority.

If, however, the Full Court’s comments are correct, a refinancing PMSI could be entitled to super priority under section 62 of the PPSA even though the original PMSI was not. This could seriously undermine the PPSA priority regime. For example, PMSI holders who become aware of priority defects with their PMSI could simply arrange for another financier (including a related party) to “refinance” their position and, in the process, take an effective PMSI.

The issues outlined above can be equally applicable to the refinancing of non-inventory PMSIs.

What should a PMSI refinancer do?

  • Ensure the original PMSI has been properly and continuously perfected as a PMSI in respect of the relevant property and either:
    • take an assignment of the original PMSI and transfer the PPSR registration to the refinancer; or
    • ensure the refinancing PMSI is perfected in accordance with the timing requirement in s 62 of the PPSA.
  • If these things cannot be assured, enter into priority agreements with any other secured parties who have perfected their security interest before the refinancer in respect of the relevant collateral.