Introduction
In March 2020, the Federal Government introduced measures to reduce financial pressure on businesses and individuals caused by COVID-19, including Job Keeper and extensions of time to comply with statutory demands and bankruptcy notices. As these measures are set to expire in September 2020, an increase in individuals and businesses defaulting is expected and consequently, an increase in the enforcement of security interests against defaulting debtors.
Accordingly, it is important that secured parties take action now to ensure that their interests are protected under the Personal Property Securities Act 2009 (Cth) (PPSA) and enjoy the highest available level of priority. One form of priority available under the PPSA is ‘PMSI super priority’.
What is PMSI super-priority?
For a secured party to protect its security interest in personal property (property other than land), it must first ‘perfect’ the interest. This is usually achieved by registration on the Personal Property Securities Register (PPS Register) digital register.
Commonly, two or more secured parties will have a security interest in the same secured property. The PPSA introduced a priority system to determine competing claims to the same property. Generally, a secured party which registers its interest first will take priority over later-registered interests. An exception to this general rule applies to Purchase Money Security Interests (PMSI).
A PMSI will arise:
- when a seller sells goods on retention of title terms;
- when a lender loans money to a third party to purchase goods and the lender takes a security interest in the purchased goods; and
- under a PPS Lease, being a lease or bailment of goods for 2 or more years.
Example:
Bank lends money to Construction Company, secured by all of Construction Company’s present and future assets. Bank prefects its interest by registration on the PPS Register.
Later, Seller sells a truck to Construction Company, but retains title to the truck until Construction Company has paid in full. Seller perfects its interest by registration.
Later still, Construction Company defaults and Bank and Seller both try to take possession of the truck.
Ordinarily, because Bank perfected its security interest before Seller, Bank’s interest will take priority and Bank can claim the truck. However, if Seller has satisfied certain requirements, it may claim a PMSI super-priority and will be entitled to take possession of the truck.
How to qualify for PMSI super-priority
To qualify for PMSI super-priority, the secured party (in the above example, the Seller) must register its security interest on the PPS Register:
- for goods that are inventory (e.g. stock), prior to the goods being supplied; and
- for goods that are not inventory, within 15 business days of supply.
The registration must also specify that the security interest is a PMSI. If any of the requirements is not satisfied, there will be no entitlement to PMSI super-priority.
Is it too late to register?
Registration of a security interest may occur at any time. There are advantages to perfecting a security interest promptly, and serious consequences for failing to do so. Consequences include losing PMSI super-priority status and losing the security interest altogether. Even so, it is advantageous to register at a late stage versus not registering at all.
Applications to extend PMSI super-priority status
In the above example, as the truck is not inventory, Seller was required to register its interest within 15 days of supplying the truck to Construction Company. If Seller registered its interest after this time, Seller’s interest would not have PMSI super-priority status and Bank could claim the truck. However, Seller may apply to the court to retrieve its PMSI super-priority status.
The court may grant an extension of the registration period, thus affording PMSI super-priority status, if it is just and equitable to do so. The court will consider:
- whether the extension is required as a result of accident, inadvertence or some other sufficient reason;
- prejudice to any other secured parties or creditors; and
- whether a third party has acted, or not acted, in reliance on the secured party not having PMSI super-priority.
Conclusion
Security interests should be perfected as soon as possible, ideally in advance of the supply of goods.
Even if a lengthy period has elapsed since the security interest arose, it is advantageous to perfect the interest by registration.
PMSI super-priority status can be obtained by court order if there are compelling reasons to do so.
Contact our team for advice about perfecting your security interest to obtain the highest level of priority.
Marcus Fogarty
Lawyer
Melbourne
