PMSI v AllPAAP

MPH was recently engaged by a client to advise on conflicting security interests over the assets of a company that went into liquidation.  This was a timely reminder of the importance of companies and businesses doing their commercial and legal due diligence when contracting with clients, customers and suppliers, including considerations relating to security interests registered against the companies and their assets on the Personal Property Securities Register (PPSR).

The PPSR was established under the Personal Property Securities Act 2009 (Cth) (PPSA).  It is a design feature of the PPSA that:

• assets can be subject to separate security interests; and
• a later (in time) registered secured party could outrank an earlier (in time) registered secured party if the former made a specific contribution to the asset in question.

Despite this, it isn’t always the case that the later in time secured party knows how to navigate the registration, timing and documentation requirements successfully.

With our recent matter, the company in question had 2 security interests registered against it and its assets on the PPSR.  The first security interest (i.e. the first in time), in favour of Creditor X, was registered against all the present and after-acquired property of the company (AllPAAP).  The second security interest (i.e. the second in time), in favour of Creditor Y, was registered against specific assets of the company as a purchase money security interest (PMSI).

Creditor Y was entitled to register the PMSI on the PPSR as the funds advanced by Creditor Y to the company was used to acquire specific assets the subject of the PMSI (Secured Assets).

In normal circumstances and, in this case, in a liquidation scenario, the first secured creditor (i.e. Creditor X) would have priority over the second secured creditor (i.e. Creditor Y) and so on.  This is still the case for all the company’s present and future assets, except for the Secured Assets.  In this scenario, Creditor Y, by virtue of the PMSI, enjoyed a “super priority” over the Secured Assets ahead of the interests of Creditor X.  In other words, the PMSI trumped the AllPAAP.

This means that Creditor Y (even though it was second in time to Creditor X on the PPSR) was entitled to recovery the Secured Assets and to deal with those assets in order to reduce the debts due and payable by the company to Creditor Y.  This had a financial impact on Creditor X as the Secured Assets accumulated to 90% of the asset value of the company.

If you have any questions in relation to security interests, the PPSR or any other related commercial or legal issues, feel free to contact MPH Lawyers on (08) 9221 0033 or at legal@mphlawyers.com.au.