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Making sense of the purchase money security interest (PMSI) priority provisions in the Personal Property Securities Act 2009 (Cth) (PPSA) can be challenging for financiers and insolvency practitioners tasked with assessing the merits of competing security interest claims.
The key provision in the PPSA is section 62. Among other things, section 62 provides that a PMSI in respect of goods that are inventory has priority if the PMSI is perfected by registration when the grantor, or another person at the request of the grantor, obtains “possession” of the inventory.
A recent decision of the South Australian Supreme Court (Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd  SASC 163) has clarified that the reference to a grantor obtaining “possession” of goods that are inventory is a reference to the grantor obtaining possession of the inventory in question as a grantor of the PMSI rather than in some other capacity.
The decision involved a priority dispute between Allied Distribution Finance (ADF) and Samwise Holdings (SH) in relation to 40 motorcycles that had been bailed to a subsidiary of SH (Bill’s Motorcycles).
Bill’s Motorcycles had a floorplan finance arrangement with Commercial Distribution Finance (CDF). CDF registered against Bill’s Motorcycles on the Personal Property Securities Register (PPSR).
Bill’s Motorcycles subsequently granted a general security interest over all of its present and after acquired property in favour of SH.
On 12 April 2016, ADF entered into a new floorplan bailment agreement with Bill’s Motorcycles and on 14 April 2016, ADF registered against Bill’s Motorcycles on the PPSR claiming a PMSI.
On 15 April 2016, ADF purchased the 40 motorcycles from CDF that were in the possession of Bill’s Motorcycles pursuant to its original floorplan finance arrangement with CDF and on 18 April 2016 ADF issued to Bill’s Motorcycles bailed goods notices in respect of these motorcycles pursuant to the bailment agreement between them.
The court had to determine the time when Bill’s Motorcycles obtained possession of the 40 motorcycles for the purposes of section 62(2)(b)(i) of the PPSA and whether ADF was entitled to PMSI priority under that section. SH argued that the date of mere physical possession should be determinative. The South Australian Supreme Court disagreed and found ADF was entitled to PMSI priority.
In reaching this conclusion the court observed that:
Interestingly, the Allied Distribution Finance decision did not specifically refer to any of the Canadian case law on the Canadian provisions equivalent to section 62. This is somewhat surprising given that a number of decisions in the Canadian courts have also held that the time of "possession" for the purposes of the provisions equivalent to section 62 should be measured from when the relevant security agreement is executed and value is given, despite the fact that physical possession was obtained earlier. In effect, these decisions have interpreted the relevant Canadian PPSA provisions so that the time period in which the PMSI is to be perfected in order to obtain super priority runs from when the debtor (which term includes a grantor) has possession of the collateral as a debtor.1
The argument that the date of physical possession should be determinative because it clothes the grantor with ostensible ownership of the property which might be relied upon by other secured parties to their detriment has not persuaded the courts that possession, for the purposes of section 62 (and the overseas equivalent provisions), means mere physical possession.
The underlying rationale for the PMSI priority provisions is that it is equitable and commercially sensible to afford priority to security holders who provide the means to acquire personal property because without their contribution and without their being afforded priority the grantor would not acquire its interest in the property and pre-existing non-PMSI holders would have no security over that property.
Although the decision in Allied Distribution Finance provides some useful insight about section 62 of the PPSA, serious pitfalls remain for financiers considering refinancing existing inventory or other assets. For example:
1 see Guaranty Trust Co of Canada v Canadian Imperial Bank of Commerce  OJ No 1081; 2 PPSAC (2d) 88; 16 ACWS (3d) 349; 1989 CarswellOnt 626, McLeod & Co v Price Waterhouse Ltd  SJ No 104; 101 SaskR 115; 3 PPSAC (2d) 171; 31 ACWS (3d) 1086, Associates Leasing (Canada) Ltd v Humboldt Flour Mills Inc  SJ No 841; 175 SaskR 220; 14 PPSAC (2d) 174; 85 ACWS (3d) 691, Air Products Canada Ltd v Farini Corp  OJ No 1396; OTC 264; 16 CBR (4th) 18; 96 ACWS (3d) 496; 994814 Ontario Inc v RSL Canada Inc and En-Plas Inc  OJ No 1907; 209 OAC 326; 20 CBR (5th) 163; 9 PPSAC (3d) 240.