Purchase Money Security Interests – Title Based Securities

The following title based securities may qualify for ‘super priority’ under the PPSA as purchase money security interests. 

  • retention of title clauses/romalpa clauses; and
  • conditional sale/hire-purchase agreements.

A purchase money security interest will arise where:

  • the buyer’s obligation to pay the purchase price of the goods is secured by a security interest in those goods; or
  • a party provides value to enable the acquisition by the grantor of an item of collateral.

A security interest may contain both PMSI and non PMSI components. ‘Super priority’ is only conferred to the extent of the PMSI component.

The Act also deems the following arrangements to be purchase money security interests:

  • the interest of a lessor or bailor of goods under a PPS lease;
  • the interests of a consignor who delivers goods to a consignee under a commercial consignment.

Retention of title & Romalpa clauses

It is common in supply arrangements for a seller to deliver goods prior to receiving payment. Title to the goods will generally pass on delivery. To protect its position, a seller may include a clause in its terms of trade that title to goods will remain with the seller until the purchase price has been paid – a retention of title clause (“RoT”).

A  RoT clause may go further and specify that:

  • any proceeds of sale of RoT goods are held on trust for the seller; and
  • if the goods are processed or commingled into other property, that property also vests in the seller.

Commercial consignments

A consignment is an arrangement where goods are delivered to a party (the consignee) who sells or disposes the goods as agent for the seller. The consignee is never the owner of the goods.

PPS leases or bailments

The definition of PPS lease aims to catch ‘financial leases’ where the duration of the lease roughly equates to the economic life of the goods. Generally speaking, a lease will qualify as a PPS lease and therefore be a security interest, if it has potential to run for a term of one year or more. The term for a PPS lease of goods described by serial number is 90 days or more.

However, to qualify as a PPS lease, the lessor or bailor must be ‘regularly engaged in the business of leasing/bailing goods’. A bailment will only be a PPS lease if the bailee provides value for use of the goods.

As a result, a lessor under a PPS lease becomes a secured creditor and its interest should therefore be registered.

Conditional sale & hire-purchase agreements

A hire-purchase arrangement typically involves the delivery of goods to a buyer on the condition that buyer makes periodic repayments. The repayments are generally the purchase price of the goods together with interests and costs. The seller retains ownership of the goods and the buyer has no obligation to continue in possession and therefore ‘purchase’ the goods.

Under a conditional sale agreement, the buyer is contractually bound to make all instalments and receive title to the goods.

If a hire-purchase agreement is for a term over one year, it will qualify as a PPS lease and therefore be deemed a security interest. A conditional sale agreement will only be a security interest if it, in substance, secures payment or the performance of an obligation.

Priority of purchase money security interests – section 62

For priority purposes, the Act distinguishes between collateral that is ‘inventory’ and ‘non inventory’.

A party claiming a purchase money security interest must expressly state in its financing statement that the security interest is a PMSI.

To maximise priority, a secured party claiming a purchase money security interest should register its security interest as a PMSI before delivery of the collateral to the grantor.

A perfected purchase money security interest will have priority over a perfected security interest if:

  • for non-inventory goods: the security is registered within 15 business days of delivery of possession;
  • for non-inventory other than goods: intangible property: the security is registered within 15 business days of the date of attachment;
  • for inventory goods: the security is registered at the time the grantor obtains possession;
  • for all other inventory: the security is registered at the time of attachment.

Priority between purchase money security interests

Priority between two perfected PMSI is determined by the first-in-time rule. However, a PMSI granted to a seller, lessor or consignor of collateral has priority over a secured party that funded the acquisition of the particular collateral.

Limits of priority

Security interests perfected by control take priority over PMSIs as do non-purchase money security interests taken in accounts.

A non-purchase money security interest is a concession to accounts receivable financing otherwise known as factors. A factor who provides new value to purchase the accounts of a debtor will have priority over a PMSI taken over collateral and its proceeds (accounts) provided:

  • the non-purchase money security interest is perfected by registration before the PMSI; or
  • the factor gives notice to the holder of the PMSI at least 15 business days before the non-purchase money security interest is perfected by registration.

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