The Personal Property Securities Act 2009 (Cth) establishes a set of rules to determine the priority between competing security interests. These rules generally provide that a purchase money security interest (PMSI) over collateral that is perfected by registration will have priority over a non PMSI security interest that is granted by the same grantor in the same collateral. However, section 64 of the Act reverses this position and allows a non-PMSI to take priority over a PMSI for an interest in an account as proceeds of inventory. This article explores the application of section 64, and what to do if you have received notice pursuant to the section.

Section 64

The section provides, relevantly, that a security interest granted for new value and perfected by registration has priority over a PMSI that is granted by the same grantor in an account if certain conditions are met. These conditions are that either:

  1. the registration of the non-PMSI is before the PMSI is perfected or registered (first condition); or
  2. if the registration of the non-PMSI is after the PMSI, notice is given to the secured party (in the appropriate form) at least 15 business days before the earlier of registration or attachment (second condition).

This article focuses on the application of the second condition.

The use of the section is best illustrated by an example:

Business A is supplied widgets on retention of title terms from Business B. Business B registers a PMSI in the products it supplies to Business A at the time of supply. Business B’s PMSI extends to the proceeds of sale of the products.

Business A then sells the widgets to customers on credit terms before paying Business B for them.

Further, Business A enters into an agreement to sell its accounts receivable relating to the widgets (through, for example, a factoring agreement), which accounts receivable are secured by Business B’s PMSI as proceeds.

Section 64 allows the receivables financier, in certain circumstances, to elevate the priority of its security interest to defeat Business B’s PMSI in the proceeds.

Applying section 64

Section 64 allows a financier’s non-PMSI over an account (such as that arising under a factoring agreement) to take priority against a PMSI. This can be done so long as either of the conditions (above) are met.

The first condition will rarely be relevant as it effectively requires the supplier trade creditor to have forgotten or otherwise failed to have registered its security interest at the time of supply.

The second condition requires a receivables financier to take the following steps in order to take advantage of section 64:

  1. They must conduct a PPSR search in respect of the prospective client.
  2. They must locate each potential PMSI. The section requires notice to be given to all secured parties holding a PMSI – not just those that have perfected their security interest. In practice this means that the financier must give notice to all prior registered security interests (and not just those registered as a PMSI).
  3. Notice must be given to each security interest holder in the appropriate form (via their address for service) 15 business days before the day of registration or the day the security interest attaches to the account. Generally, this will be the date the Accounts Receivable were purchased. The form of notice must be given in accordance with section 64(2) of the Act.
  4. The financier can then perfect its security interest after the notice period (i.e. through registration).

Financiers should be aware that section 64 will not elevate their security interest above an existing non-PMSI security interest covering the same collateral. In these circumstances, the other non-PMSI will prevail by virtue of its earlier registration.

Receiving a section 64 notice

The recipient of a section 64 notice should seek advice as to whether the notice is defective. Section 64 provides a number of timing and form requirements that must be strictly adhered to by the financier. If the notice is not defective, the recipient of the notice may want to negotiate with their customer to ensure that their trading terms adequately protect them from risk. This might involve additional security arrangements, depending on the commercial position of the parties.

A business that provides inventory on retention of title terms should also consider revising its trading terms to protect itself from a section 64 notice. With proper advice, a supplier can lodge a non PMSI security interest in addition to a PMSI security interest. This approach erodes the effect of section 64, as the supplier’s prior registered security interest (non-PMSI) will prevail over a section 64 security interest.

Conclusion

Section 64 of the Act provides a powerful instrument for financiers looking to elevate the priority of their security interests. If you are a business that has received a notice pursuant to section 64 of the Act, or a financier looking to take advantage of the section, we encourage you to seek prompt advice as time frames are critical.