What is a Purchase Money Security Interest (PMSI)?
Are you in the business of lending, leasing or loaning to other businesses? Purchase money security interests (also known as PMSIs) will protect your security in collateral in case things go wrong.
So you invested in a business that you thought was going well. Let’s say you loaned them some vehicles for a few years to help them grow. Turns out the business wasn’t doing as well as you thought. Now they’ve become insolvent and they’re selling up all their assets to pay their debts. What happens to those vehicles you loaned? Well, that all depends on whether you registered a purchase money security interest (PMSI) over them.
Not registering a PMSI might mean that another creditor will get priority over your assets and they might go towards paying them off instead of you. The Personal Property Securities Register (PPSA) allows for the registration of PMSIs in Australia. However, only certain things can be classified as PMSIs. They are usually commercial goods, so they don’t include land or buildings. First, it helps to more clearly define a PMSI.
Personal Money Security Interest: Defined
When a business becomes insolvent, it will have to sell and divide its assets to pay back all of its creditors. A personal money security interest ensures that you get priority when creditors are repaid. It’s defined in complicated legal language under the Personal Property Securities Act 2009 (Cth). A PMSI is a security interest in the collateral of the grantor. It exists where that security interest secures the payment of money to the secured party that was advanced to the grantor. It must also be for the purposes of obtaining the collateral. This all might sound a little complex. Here’s an example to clear things up a little.
Ingrid’s Investments Co. (secured party) lends Diane’s Deliverers (grantor) $300,000 for the purpose of buying trucks (collateral). This agreement is dependent on Diane giving Ingrid a security interest in the collateral (the trucks). In this case, the security interest secures the repayment of the loan. This loan was made for the express purpose of acquiring the collateral. Therefore, the security interest held by the secured party is a PMSI.
This is a common example of when a security interest is a PMSI. However, the PMSI only gets priority once registered with the PPSA. A security interest can be a PMSI in a few other cases.
Possession Transferred Without Full Payment
A purchase money security interest can also be registered where possession of the personal property is transferred, but the purchase price is not paid in full. For example, if it is under a ‘retention of title’ clause. This type of situation can arise in similar circumstances to the example earlier. The key difference is the role of the collateral. Let’s have a look at another example:
Tomas’ Trucking Co. (secured party) provides Diane’s Deliverers (grantor) with a special truck (collateral) on loan. The agreement says that ownership still belongs to the secured party, but will transfer to the grantor once the loan for the collateral is paid off. Once registered, this can also become a PMSI.
Personal Property Securities Act Leases
Some leases are considered security interests and can be registered on the PPSR. A PPS lease is a lease of goods that creates a security interest in those goods if the agreement is for a term of two years or more. Registration of a security interest arising under a lease gives notice of the owner’s legal interest in the goods while it is in the possession of the lessee. This is important so that the lessee can maintain the outward appearance of ownership while still providing security to the owner. For example:
Tomas’ Trucking Co. (secured party) enters into a lease of trucks (collateral) with Diane’s Deliverers (grantor) for a term of three years. So long as Tomas’ Trucking Co. registers the lease under the PPSR, his company will maintain security interest. Tomas will also have the first priority in the event that Diane’s Deliverers becomes insolvent.
What If I Don’t Register My Purchase Money Security Interest?
Let’s use the same example of the lease above. Diane’s Delivers is now insolvent and needs to sell her assets to pay off creditors. What happens when you don’t register a PMSI? The worst-case scenario is if Diane granted a security interest over all of her assets (including the trucks) to another lender. If this lender registered their interest on the PPSR, then the lender has priority. Even though the trucks belong to Tomas, the lender will get priority over him because the lender registered their interest. This is thanks to a legal term called ‘super priority’. Registering a PMSI gives the registering party ‘super priority’ over all others. The rules get a little more complicated if nobody registers their security interest.
A purchase money security interest is an important tool of any lender. They have super priority when it comes to disputes over debts in the case that grantors become insolvent. If you’re in the business of lending, leasing or loaning, it’s important to make sure that you register your security interests with the Personal Property Securities Register. If you’re not sure about whether commercial goods can be registered as a PMSI, speak to a commercial lawyer to make sure you’re making all the right choices for your business.
Michael is a legal intern at Lawpath working with the content team. With an interest in contracts, intellectual property, and constitutional law, Michael is currently completing a Bachelor of Laws with a Bachelor of Commerce at Macquarie University.