What is a PMSI?

What is a Purchase Money Security Interest?

A Purchase Money Security Interest (PMSI) is defined by the PPSA as occurring where ‘collateral secures its own purchase price’.

This happens when a supplier sells their goods subject to a Retention of Title right – it also happens when goods are sold out of a Consignment Stock arrangement or Leased.

The PMSI designation is important because it allows the supplier to enjoy a ‘super priority’ over the goods they are selling that will rank higher than any bank’s general security interest even when the bank’s interest was lodged earlier.

However, the security interest is ONLY over the supplier’s unpaid stock as long as it is in their customer’s possession.  

A PMSI security right MUST be identified on the supplier’s PPSR registration if it is to achieve its maximum potential effectiveness.

PMSI registrations over goods that will form part of the buyer's inventory (eg, for on-sale, or inclusion in a product for eventual on-sale) must be lodged before the goods are delivered to the buyer although the PPSA allows an additional 14 days' grace for any other goods.

Note: Suppliers should only 'tick the PMSI box' if they have been granted PMSI rights (eg, they have a Retention of Title over their goods) - ticking the box when a PMSI right has not been granted may invalidate an otherwise effective registration.

PPSA & Consignment Stock

Under a Consignment Stock arrangement Company A supplies goods to Company B without passing ownership until such time as those goods are used or sold by Company B – at that point in time a payment obligation between Company A and Company B is created.  Any unused/unsold goods will usually be returned to Company A.

The Personal Property Securities Act treats the structure of Consignment Stock arrangements as providing a security interest for Company A in the goods supplied (PPSA Sections 12(2)(h) and 12(3)(b) refer).

The PPSA goes on to allow for such a security interest to be designated a Purchase Money Security Interest (PMSI) thus allowing Company A a greater priority claim over the goods they  supplied than, say, the holder of a general security agreement over all the assets of Company B (PPSA Section 14(1)(d) refers).

So, as with Leasing arrangements and Retention of Title clauses, it is not necessary for the terms of a Consignment Stock arrangement to specifically describe the agreement as a form of security for it to nevertheless be considered as such in the event of an administrator being attached to Company B.

Unfortunately, this can be something of a double-edged sword. 

Whenever the PPSA provides for an arrangement/agreement to be treated as a security interest it also allows for an administrator to vest the goods/collateral in question along with the rest of the assets of the debtor company UNLESS that security interest has been correctly registered on the PPSR.

Bringing this home quite strikingly was the entry into liquidation last month of Jacksons Rare Guitars Pty Ltd in Annandale, in Sydney’s inner west.  At the time a voluntary administrator was first appointed, Jacksons had over 100 clients who were using Jacksons to sell their instruments on a consignment basis representing almost $850,000 of the total stock.

In a pre-PPSA world the individual consignors could have relied upon consignment notes to prove ownership and claim back their instruments but, since PPSA, if they failed to register their consignment on the PPSR (and I’m not aware of any who did) their precious guitars would be vested by the liquidator with the rest of Jacksons’ stock and sold off for the benefit of, primarily, other creditors.  Unfortunately, it is the post-PPSA scenario that is currently playing itself out in Annandale.

While we continue to bemoan the poor promotion the Federal Government has engaged in regarding letting small and medium sized businesses know about the implications and requirements of the PPSR let us spare a thought for the lack of promotion towards the general public who may first become aware of the Register at the same time as they’re being told that they can’t have their guitar back!