The Full Court of the South Australian Supreme Court has provided helpful clarification on the operation of Purchase Money Security Interests ('PMSI') under the Personal Property Securities Act 2009 (Cth) ('PPSA') in the context of inventory.
In a decision that will be welcomed by inventory financiers in particular, the Full Court held that, for the purposes of determining perfection and priority of a PMSI, the question of possession of the relevant inventory is determined by reference to when a grantor takes possession as a grantor, and not simply when it takes physical possession, even if that occurs at an earlier time.
Bill's Motorcycles sold Kawasaki motorcycles to the public. Those motorcycles found their way to Bill's showroom floor by way of a 2012 financing arrangement, commonly used in the industry and known as floorplan finance, which can be briefly summarised as follows:
- Kawasaki sold the motorcycles to a financier, CDF.
- CDF supplied the motorcycles to Bill's Motorcycles as a bailor of goods under a PPS Lease, which is a PMSI under the PPSA.
- Bill's Motorcycles incurred certain financial obligations to CDF under the terms of that bailment arising from the purchase by CDF of the Motorcycles from Kawasaki.
- CDF registered a PMSI on the PPSR in relation to the motor cycles bailed to Bill's Motorcycles.
Importantly, for CDF's interest to be properly protected, it needed to have already registered (and did register) its PMSI on the PPSR before Bill's Motorcycles obtained possession of the inventory.
Subsequent to establishing the floorplan finance described above, in 2014, Bill's Motorcycles granted a general security interest in favour of Samwise over all present and after acquired personal property (Samwise GSA).
In 2016, inventory finance was arranged between Bill's Motorcycles and Allied Distribution. This arrangement replaced the existing arrangement that Bill's Motorcycles had in place with CDF as described above.
In order to give effect to the Allied Distribution financing arrangement, Kawasaki repurchased the motorcycles from CDF and then sold them on to Allied Distribution who then, like CDF before them, bailed the motorcycles to Bill's Motorcycles under a PPS Lease. In addition, Allied Distribution registered a PMSI on the PPSR in relation to the motorcycles to be bailed to Bill's Motorcycles.
The only difference between the CDF arrangement and the new Allied Distribution arrangement was that Bill's Motorcycles was already in possession of the motorcycle inventory when it entered in to the arrangements with Allied Distribution and, critically, when Allied Distribution's PMSI was registered on the PPSR.
In June 2016, Administrators were appointed to Bill's Motorcycles.
The issue in this case arises out of the fact that the motorcycles covered by Allied Distribution's PMSI had, in fact, already been physically supplied at an earlier time.
Accordingly, the question was, had Allied Distribution's PMSI been perfected in such a way as prescribed by section 62 of the PPSA so as to afford them the usual priority that a PMSI holder enjoys.
Relevantly, section 62(2)(b)(i) of the PPSA requires that, in order to enjoy priority in the case of collateral that is inventory, the secured party (in this case, Allied Distribution) needs to have registered its PMSI at the time the grantor obtains possession of the goods.
The trial judge held possession for the purposes of section 62(2)(b)(i) of the PPSA should be construed as possession as a grantor rather than simply physical possession.
In other words, the trial judge was of the view that Bill's Motorcycles took possession of the motorcycles for the purposes of perfecting a PMSI on the date that Allied Distribution's security interest attached to those motorcycles. This is the point at which it was considered Bill's Motorcycles become a grantor for the purposes of the PMSI. Attachment occurred at the point when Allied Distribution advanced funds under the arrangement which was after it had registered its PMSI.
The Full Court agreed with the trial judge finding that, even though Bill's Motorcycles had physical possession of the motorcycles for a considerable period of time before entering in to the arrangements with Allied Distribution, for the purposes of section 62(2)(b)(i) of the PPSA, Bill's Motorcycles only took possession of the motorcycles as the grantor under the new arrangements in April 2016, which is the point in time that Allied Distribution's security interest attached.
Accordingly Allied Distributions met the requirements for perfecting its PMSI before Bill's Motorcycles took possession as required by section 62(2)(b)(i) of the PPSA.
In so holding, the Full Court gave careful consideration to a number of Canadian authorities that grappled with a similar issue. Although there appeared to be a divergence of views in Canada, the Full Court found the weight of authorities in Canada (as well the US) supported the trial judge's interpretation.
Inventory financiers and PMSI financiers in general should take comfort from the decision as it provides certainty around when a customer is considered to take possession of goods for the purposes of perfecting a PMSI.
As always, inventory financiers should continue to take care to ensure they perfect any PMSI over inventory before providing funds under any arrangements.
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