Last week, our alert focussed on the importance of ensuring that
when registering interests in respect of serial numbered goods on
the PPS Register, the correct details are entered. This week, we
discuss a scenario which examines the consequences of wrongly
"ticking the PMSI Box" at the time of registration of a
Denny Danuto specialises in the provision of top quality legal
advice. Over several months, he assists Bodgy Bob Pty Ltd (Bodgy)
to structure the sale of some expensive new rugby gear (jerseys,
shorts, boots and balls) to some South African interests. Over this
time, he bills Bodgy quite a large amount. Due to some cash flow
issues Bodgy is having, Denny's bills remain unpaid.
Given Bodgy needs Denny's advice to get things done,
Bodgy's director offers Denny a security interest for the
moneys he is owed over a pool of high quality footballs. Denny
thinks this is great. He draws up a Specific Security Interest
(SSI) over the footballs, has it signed by Bodgy, and tells his
clerk to register the interest on the PPS Register.
In connection with the registration, the clerk does a search of
the PPS Register and notices that Fatbank has registered an
interest against Bodgy over all its present and after acquired
property. The clerk tells Denny that there is a prior ranking
interest, and asks whether Denny can potentially register a PMSI to
get priority over Fatbank. Denny figures that the money that should
have been used to pay his fees was used to acquire the footballs
over which he has been offered security, and consequently, he has a
de-facto PMSI. He tells the clerk to "just get it done",
so she registers the SSI and checks the PMSI box.
Unbeknownst to Denny, Bodgy's cash flow issues have also
prevented them from paying their accountants, Suburban Advisory.
Bodgy fixes this by granting them an SSI over the same footballs to
secure moneys owing to them; after all, Bodgy's director has
Denny's SSI as a precedent and can just change the names. He
doesn't mention the arrangement with Denny, as the transaction
will soon complete and everyone will get paid.
Suburban Advisory trust Bodgy's director, so they don't
do a search. They register their interest on the PPS Register, but
not knowing what a PMSI is, Suburban Advisory assumes that they do
not have one. They therefore do not check the PMSI box on the
A short time later, given a shake-up following South
Africa's all too recent world cup failure, the South African
interests go cold on the transaction with Bodgy and the cash flow
issues become worse. On hearing the transaction has fallen over,
Denny seeks to enforce his SSI by taking possession of the
footballs. He reaches Bodgy's warehouse just as FatBank's
Receivers have changed the locks.
Who has the better claim to the footballs?
When Denny tells the Receivers the basis of his PMSI interest in
the footballs and grandly claims that this gives him a
"super" priority, they can hardly contain their laughter.
In truth, all Denny had was security for a pre-existing debt and
not a PMSI as defined in the PPSA. They point out that as Denny
checked the PMSI box at the time of registration when he was not
entitled to, his security interest is defective and therefore
This is not good news for Denny as, unlike him, both Fatbank and
Suburban Advisory have perfected interests. The Receivers confirm
that whilst Fatbank has a first ranking claim to the footballs,
there will be a small surplus which they will pass on to Suburban
Advisory as the perfected second security interest holder. Denny
laments that but for his clerk checking the PMSI box, that surplus
would have flowed to him as he contemplates debt recovery options
as an unsecured creditor.
The lesson: Ticking the PMSI Box at the time of registration of
a security interest when you do not have a PMSI leads to you
holding an unperfected security interest.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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