Otherwise described as "super priority" security interests, a valid "purchase money security interest" (also known as a "PMSI") can be an effective tool to protect the interests of a secured party in a priority dispute or upon the grantor's insolvency.
In Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd [2017] SASC 163, both priority and insolvency issues arose. The critical issue before the Court was what was meant by the grantor "obtains possession" of the personal property in the context of the rules relating to the registration of PMSIs.
PMSIs include leases and bailments that are "PPS leases".
Priority rule
Under the Personal Property Securities Act 2009 (Cth) (PPSA), a PMSI over personal property has priority over any other security interest in the same property if it is registered as a PMSI on the PPS register within the timeframes set out in section 62 of the PPSA.
Those timeframes depend on whether or not the personal property will be inventory of the grantor. If it:
- is or will be inventory, the PMSI must be registered before the grantor obtains possession of the property; and
- is not and will not be inventory, the PMSI must be registered within 15 business days of the grantor obtaining possession of the property.
While the words "obtains possession" appear straightforward, what is the position if the grantor just happens to have had the property in its possession before it granted the security interest? Put differently, does "obtains possession" refer to possession simpliciter, or possession in its capacity as grantor? In Allied Distribution, the Court confirmed that, in this context, "possession" means possession of the property by the grantor in its capacity as grantor of the PMSI. It is irrelevant that the grantor may have held those goods in some other capacity before that time.
Facts in Allied Distribution
- Samwise Pty Ltd (trading as Bill's Motorcycles) was a motorcycle dealer that sold and serviced Kawasaki motorcycles.
- In 2012, Commercial Distribution Finance Pty Ltd (CDF) bailed floor stock to Bill's Motorcycles. It registered that bailment against Bill's Motorcycles on the PPS register.
- In 2012, Bill's Motorcycles granted its parent company, Samwise Holdings Pty Ltd (Holdco), a security interest over all of its assets. In June 2014 Holdco registered its security interest against Bill's Motorcycles on the PPS register.
- On 12 April 2016 Bill's Motorcycles signed a bailment agreement with Allied Distribution Finance Pty Ltd (Allied). On 14 April 2016 Allied made PMSI registrations against Bill's Motorcycles in respect of all vehicles bailed to Bill's Motorcycles from time to time.
- On 15 April 2016, Allied bought 40 motorbikes from CDF. The bikes were already in Bill's Motorcycles possession. On 18 April 2016, Allied bailed the bikes to Bill's Motorcycles. The bailment began when Allied issued bailment notices to Bill's Motorcycles in respect of the bikes or when the bailment terms (commencement and end dates and fees) for the bikes were identified.
- On 16 June 2016 administrators were appointed to Bill's Motorcycles.
Allied sought a declaration that its PMSI had priority over all other registered security interests in the bikes, including Holdco's. Holdco challenged the application. Holdco argued that Allied's PMSI did not have priority as Allied had not made its PMSI registration before Bill's Motorcycles had "possession" of the bikes and therefore had not met the timing requirements in section 62 of the PPSA.
The court used a conventional statutory interpretation approach and focused on the text, context and purpose of section 62. It found that:
- (text): section 62 could be read to mean that the registration must be made before the grantor has actual possession of the property or possession of that property in its capacity as grantor of the PMSI; and
- (context and purpose): section 62 gives priority to secured parties who give the grantor money to acquire (or allow the grantor to use their) personal property. Without that secured party's contribution or involvement, the grantor may not have been able to acquire or use the property. If a secured party could not obtain priority of its PMSI because the grantor already had possession of the property in another capacity, the other secured creditors of the grantor may obtain a windfall benefit of the property (at the expense of the PMSI holder). The court held that it is unlikely that Parliament intended that.
On that basis it held that the proper construction of section 62 is that it refers to the grantor obtaining possession as grantor of the PMSI. That meant that Allied's PMSI had priority over Holdco's security interest even though Allied had made its registration at a time when Bill's Motorcycles was already in physical possession of the Bikes. Allied had made its registration before its bailment commenced and therefore before Bill's Motorcycles obtained possession of the Bikes as bailee under that bailment.
Interestingly, the judgment touched upon the alternative ways in which CDF, Allied and Bill's Motorcycles could have structured their transaction. For example, it could have taken an assignment of CDF's rights under its security interest, or refinanced CDF's debt (the inference being that either structure could have been an alternative way for Allied to preserve CDF's security ranking and obtain priority). The Court said that the mere fact that the transaction could have been structured in a different manner in which Allied would have received priority did not preclude Allied from receiving priority as a result of the manner in which the transaction was in fact structured.
Why is this decision relevant?
As with a large number of PPSA decisions at this juncture in the history of the legislation, this decision is relevant and helpful to practitioners in that it clears up potential ambiguity which can arise where a grantor happens to already have property in its possession which subsequently becomes subject to a PMSI.
The decision clarifies what is intended by the phrase "obtains possession". Possession is pivotal in the context of the stringent timing requirements for valid PMSIs. The decision also supports a conventional statutory interpretation of the PPSA. That approach may assist those endeavouring to interpret PPSA provisions which have not yet been subject to any judicial interpretation.
UPDATE: This decision was appealed; that appeal was dismissed by the Full Court of the Supreme Court of South Australia, which affirmed the trial judge's interpretation of section 62 of the PPSA: Samwise Holdings Pty Ltd v Allied Distribution Finance Pty Ltd & Ors [2018] SASCFC 95.
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