Section 64 of the PPSA

OUR CLIENT has a properly registered security interest lodged on the PPSR in respect of a Retention of Title clause included in their terms & conditions with THEIR BUYER.

Because OUR CLIENT’S security interest is in the form of a Retention of Title clause it entitles OUR CLIENT to have designated their security interest as a Purchase Money Security Interest (PMSI) thus giving OUR CLIENT a higher level of priority for their security than might otherwise be the case.

OUR CLIENT’S security interest also extends to any proceeds that might arise from THEIR BUYER on-selling or otherwise using/disposing of the goods subject to the retention of title.

However, as far as those proceeds are concerned (just the proceeds, not the actual goods OUR CLIENT has supplied) THE BUYER’S BANKERS are advising OUR CLIENT that they have a competing claim to the proceeds by virtue of a debtor financing facility they have put in place with THEIR BUYER.  THE BUYER’S BANKERS are suggesting that, in the event of THEIR BUYER entering into receivership or liquidation, their claim on the proceeds will rank higher than OUR CLIENT’S claim.  While this position may be subject to challenge, Section 64 of the PPSA certainly gives them grounds for this view.  In return for being pushed down the priority pecking order for proceeds, OUR CLIENT will automatically have their PMSI rights expanded to include a share in the money being advanced by THE BUYER’S BANKERS in so much as it relates to the sale of product originating from OUR CLIENT.

While I’ve yet to see any examples of this being challenged/upheld in practice, OUR CLIENT should proceed on the basis that, while they have the highest priority security interest over the goods they are specifically supplying, they probably now only have a second level priority over any proceeds that may arise from the subsequent sale of those goods by THEIR BUYER.

No action is required on OUR CLIENT’S part. 

On the one hand, the presence of THE BUYER’S BANKERS’ debtor financing may give OUR CLIENT some additional comfort that finance is being made available to THEIR BUYER to make payments to its suppliers but on the other, if THEIR BUYER does fail, the extent to which their security interest can be stretched to include income from goods OUR CLIENT supplied but which have subsequently been sold by THEIR BUYER has been weakened.

We have seen banks and other financiers try to ‘encourage’ suppliers who have registered PMSI interests to discharge their registrations or otherwise grant releases where the bank is looking to securitise its book debt financing facilities but issuing such notices under Section 64 of the PPSA is the correct way for banks to go about this and better achieve their ends.

As per usual, I have reproduced below the actual text from Section 64 of the Act:

64  Non‑purchase money security interests in accounts

Non‑purchase money security interest in account as original collateral has priority over purchase money security interest in account as proceeds of inventory

             (1)  Despite subsection 62(2), a non‑purchase money security interest (the priority interest) granted for new value in an account as original collateral and perfected by registration has priority over a perfected purchase money security interest that is granted by the same grantor in the account as proceeds of inventory, if:

                     (a)  the registration time in respect of the priority interest occurs before the earlier of the following times:

                              (i)  the time at which the purchase money security interest is perfected;

                             (ii)  the registration time in respect of the purchase money security interest; or

                     (b)  both of the following conditions are met:

                              (i)  the secured party holding the priority interest gives a notice in accordance with subsection (2) to the secured party holding the purchase money security interest;

                             (ii)  the notice is given at least 15 business days before the earlier of the day on which the registration time for the account occurs and the day the priority interest attaches to the account.

Note 1:       This section is subject to sections 57 (perfection by control) and 71 (chattel paper).

Note 2:       The period mentioned in paragraph (b) may be extended by a court under section 293.

             (2)  A notice is given in accordance with this subsection if:

                     (a)  the notice is in the approved form; or

                     (b)  the notice:

                              (i)  contains a description of the inventory to which the notice relates; and

                             (ii)  sets out the effect of subsection (1).

Perfected purchase money security interest in both proceeds and new value

             (3)  If a person has a purchase money security interest in an account as proceeds of inventory that is subordinate to a non‑purchase money security interest under subsection (1):

                     (a)  the person is taken to have a purchase money security interest in both the proceeds of the inventory and in the new value mentioned in subsection (1); and

                     (b)  the purchase money security interest in the new value is taken to be perfected by the registration that perfected the purchase money security interest in the proceeds; and

                     (c)  the new value is taken to be an account for the purposes of this Act (except for the purposes of this section or paragraph 12(3)(a) (account transferee’s interest taken to be security interest)).

             (4)  However, if the new value mentioned in paragraph (3)(c) would be an account for the purposes of this Act in the absence of that paragraph, the paragraph does not prevent the new value from being an account for the purposes of this section or paragraph 12(3)(a).