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PMSIs – Registration and ROT issues

Section 14 of the Personal Properties Securities Act 2009 (Cth) (PPSA) defines a purchase money security interest (PMSI) to include Retention Of Title arrangements – see s 14(1)(a).

The registration that perfects the PMSI must also state that the interest is a PMSI. It is important to note that a registration that incorrectly claims a PMSI to any extent is ineffective – ss 160(1)(b) and 165(c).

The PPSA recognises that is it possible for a ROT security interest to extend to the proceeds of sale of the inventory. The ROT supplier will take the book debts as proceeds of the original goods. Such rights will obviously interact with the interests of a receivables financier – see s 64.

Section 64 is to the effect that provided that appropriate notice is given by the receivables financier, the receivables financier can achieve priority over and above the security interest of a PMSI holder (the ROT supplier). Notice to the PMSI holder must be given at least 15 days before the interest of the factor attaches or is registered, whichever is the earlier.

What s 64 does not affect is the position as between a general financier or banker (who holds security interests over all assets of the client) and a receivables financier. In this circumstance, the general priority rules will prevail.

Why use an ROT clause?

Whilst title is irrelevant in determining whether an interest in personal property is a security interest, it may be advantageous to use an ROT structure rather than (for example) a secured loan to secure finance.

Firstly, A supply of goods on ROT terms will usually give rise to a PMSI. In a competition between two perfected PMSIs that are granted by the same grantor in the same collateral, if one of those PMSIs is held by a seller of the collateral, then that PMSI will take priority (s 63 of the PPSA). This can give an advantage to a seller over a financier that provides PMSI finance by way of a secured loan. This is expanded below.

The PPSA differentiates between seller and lender PMSIs. Section 14 defines PMSIs. An example of its application is helpful. Assume a company agrees to purchase from a vendor a computer to use in its computer programming business. It agrees to pay a 25% deposit on the purchase price and to pay the balance in instalments on ROT terms. It borrows the deposit amount from a financier and gives the financier a security interest in the computer too. Provided both secured parties duly register their financing statements, both would have PMSIs. Which will have priority? The vendor would have a “seller PMSI” and will have priority over the financier. The reason for this policy decision, it is argued is that the financier should suspect that the company (purchaser) is funding the 75% outstanding on the purchase price from another source, whereas the vendor will typically have no reason to suspect that the company needed or obtained finance for the deposit- s63.

The second reason you might want to use an ROT clause is s 561 of the Corporations Act which gives a statutory priority to employee entitlements over obligations that are secured by a “circulating security interest”. A person with a security interest over inventory will be exposed to the risk that its security interest could rank behind unpaid employees of the grantor, even if the security interest is not in the form of a floating charge.

Section 51C of the Corporations Act provides, however, that a security interest over circulating assets is only a circulating security interest if the grantor has title to the asset. This means that a financier of inventory can avoid the s 561 risk by structuring its financing as a retention of title arrangement, rather than in some other manner (such as a secured loan).

Thirdly, although the PPSA generally treats title-based security interests and non title-based security interests equally, the distinction between them will still be relevant where the PPSA does not apply.

Liens

The policy of the PPSA is to govern secured transactions in respect of personal property- that is, consensual transactions.

Where a security interest arises other than by agreement between the secured party and the grantor, it is probably not a transaction giving rise to a security interest under s12. Nevertheless, for the avoidance of doubt, s 8 excludes various interests, some of which may otherwise fall within s12. Thus, s8(1)(b) expressly excludes statutory liens arising under Commonwealth or State legislation, from the ambit of the Act, unless the person who owns the property agrees to the interest being created.

The legislation provides that the Act does not apply to a “lien, charge or any other interest in personal property, that is created, arises or is provided for by operation of the general law” – s8(1)(c).

Liens which are expressly provided for by the parties in their agreement (i.e. contractual liens) fall outside s8 (1) (c) and therefore require registration.