A lot has been said since the inception of the Personal Property Securities Act (PPSA) about the planning opportunities created for small and medium sized businesses and suppliers to gain a super priority, in repayment of their debts. Particularly the opportunities to create a security interest known as a PMSI (purchase money security interest), which can allow tracing into debtors or proceeds.
The priority is created by section 62 of the PPSA. The trick to this is to ensure that the client’s security is registered as a PMSI, which allows for tracing into proceeds.
On the surface the ability to trace into debtors and proceeds is extremely powerful, and may be of significant assistance in ensuring your clients get paid. It is, however completely at odds with the position prior to the inception of the PPSA, where it was difficult (in most cases impossible) to trace down the line to into finished goods, or the subsequent debtors, or sale proceeds recovered by the creditor company.
A simple example of this – pre PPSA – a supplier with a retention over title (ROT), with a financier factoring the debts of the company as a secured creditor, the debt was then being supported by a debenture charge (doesn’t exist now). On liquidation, if the suppliers’ goods had been sold they could not trace into the debtors of the company, nor any cash at bank. Ultimately, if the goods of the supplier had been sold, the proceeds would be available to the financier, to satisfy its outstanding indebtedness.
What is the position post PPSA? The client registers a PMSI and gives it a super priority right?
Section 64 of the PPSA effectively waters down that super priority. It provides:
“Non-purchase money security interest in account as original collateral has priority over purchase money security interest in account as proceeds of inventory”.
Hence if the financiers security provides for a security interest in accounts (i.e. debtors) the financier may obtain priority over a PMSI holder to those proceeds – i.e. the debtors. Therefore the financier may obtain a super duper priority! However, there are some steps that a financier needs to go through first to obtain that priority. They include:
- The registration time for the security interest created for the financier must be before the registration time or perfection of the security interest for the PMSI; or
- The financier must give a written notice to the PMSI creditor in the approved form and the notice must be given at least 15 business days prior to the registration or attachment of the financiers’ interest in the debt.
As a result it is possible for a client with a PMSI to have its priority subrogated to the priority of a financier in the above circumstances. It is imperative to recognise that the creditor with the PMSI will still have the super priority whilst the company to whom they are supplying has the goods in their possession. The diminution in the priority will occur when the goods are sold, and the invoices of the clients are factored.
So it appears to us, that there are circumstances where a PMSI will not have the super priority that was once thought they may have. It is important to consider what alternatives your clients can put in place to alleviate this situation, these circumstances are limited, but include converting the client to a COD basis or insisting on payment at the time the customer sells the goods. Ultimately clients must appreciate that super priority will not always be enough!