The recent decision of the Full Court of the Supreme Court of South Australia in Samwise Holdings Pty Ltd v Allied Distribution Finance Pty Ltd & Ors  SASCFC 95 provides some welcome clarity around the timing by which a registration of a purchase money security interest (PMSI) must be made in order for it to benefit from what is colloquially referred to (including by the Court in this case) as PMSI super-priority: that is, priority over non-PMSIs perfected before it.
Section 62 of the Personal Property Securities Act 2009 (Cth) (PPSA) sets out the two requirements for such priority to apply:
- The registration which perfects the PMSI must state that the security interest is a PMSI; and
- The registration must be made within the applicable time period.
The applicable time period depends on whether or not the collateral is tangible, and whether or not it is inventory of the grantor. For inventory that is tangible (arguably the most common situation), the PMSI must be perfected by registration “at the time … the grantor … obtains possession of the inventory”. In other words, registration must have been made before the grantor obtains possession of the goods.
Prior to this decision, a potential difficulty (or impossibility) with satisfying the requirements in s62 for PMSI super-priority had been identified as arising in situations where the grantor of the PMSI has had possession of the goods for some time prior to the PMSI arising.1 Examples include:
- If a supplier provides a person with a machine on a “trial” basis prior to the person purchasing it on credit terms subject to retention of title by the supplier. In this case, the supplier’s PMSI in the machine does not arise until the purchase takes place; or
- If equipment is provided under an operating lease for an indefinite term. In this case, if the operating lease was entered into on or after 20 May 2017, the PMSI does not arise until the lease has been in effect for more than 2 years.
Prior to this decision, the “solution” postulated by commentators to the apparent impossibility of satisfying the timing requirement in such situations, was to regard the reference to “possession” in section 62 as a reference to “possession in the capacity as grantor of the PMSI” rather than to mere “possession”2 or to possession as grantor of some other security interest (as was unsuccessfully argued by Samwise at trial).3
The decision of the Full Court in this case in effect confirmed the correctness of that approach.
Samwise Pty Ltd (trading as Bill’s Motorcycles) (Bill’s Motorcycles) carried on a business selling and servicing Kawasaki motorcycles.
From 2012 Bill’s Motorcycles was provided with floor plan finance for its inventory of motorcycles by Commercial Distribution Finance Pty Ltd (CDF).
Bill’s Motorcycles’ banker was ANZ, which provided credit facilities and held a fixed and floating charge from Bill’s Motorcycles over all its present and future property and a guarantee from its parent, Samwise Holdings Pty Ltd (the appellant) (Samwise).
Bill’s Motorcycles gave a guarantee in favour of Samwise in respect of the latter’s liability to ANZ under the guarantee referred to in the previous paragraph. To secure its liability under the guarantee to its parent, Bill’s Motorcycles also gave a security interest in all its present and future property to Samwise under a general security deed, registered in June 2014.
On 12 April 2016, Bill’s Motorcycles executed a bailment agreement with Allied Distribution Finance Pty Ltd (Allied), under which floorplan finance was provided to Bill’s Motorcycles by Allied.
On 14 April, Allied registered (among other things) a PMSI in all motorcycles from time to time bailed under the Bailment Agreement.
As at 15 April 2016, Bill’s Motorcycles was the bailee of 40 new Kawasaki motorbikes owned by CDF and provided under its floor plan finance facility. Those motorbikes had been in the possession of Bill’s Motorcycles for varying periods of up to several months.
On 15 April 2016, Allied acquired ownership of the 40 motorbikes in the possession of Bill’s Motorcycles which were previously owned by CDF.
On 18 April 2016, Allied issued bailed goods notices to Bill’s Motorcycles in respect of each of the 40 motorbikes. Giving the notices caused a PMSI to attach to each of the motorbikes.4
In June 2016, administrators were appointed to Bill’s Motorcycles, which subsequently went into liquidation.
In October 2016, Allied instituted proceedings, claiming its PMSI in each of the 40 motorbikes was entitled to priority over the all present and future property security interest of Samwise, pursuant to section 62 of the PPSA. Samwise contended that, as Bill’s Motorcycles had been in possession, under the arrangements with CDF, of the 40 motorbikes for some months prior to registration of Allied’s PMSI, the condition for super-priority of the PMSI which related to the timing of the registration had not been satisfied.
The Trial Judge5 had granted declaratory relief to Allied to the effect that its perfected PMSI had priority over all other registered security interests with respect to the 40 motorbikes. In doing so, his Honour (among other things) construed section 62(2)(b)(i) as directed to possession of the relevant goods as grantor of the PMSI and not possession of them simpliciter.
The appeal of Samwise from the Trial Judge’s decision in favour of the PMSI-holder, Allied, was dismissed.
The leading judgment was delivered by Doyle J (with whom Parker J agreed). Doyle J considered in detail, and was generally in agreement with, the reasoning of the Trial Judge. Kourakis CJ made some additional observations (with which Parker J agreed). The sole ground of appeal was that the Trial Judge erred in construing s62(2)(b)(i) as directed to possession as grantor rather than possession simpliciter.
- Applied the principles of statutory construction to determine that use of “the grantor” in that section was intended by the legislature as a use of the word as defined in s10 – which presupposes the existence of the PMSI – and not merely to identify the person or entity who ultimately becomes the grantor of the PMSI.6 In other words, Doyle J agreed with the Trial Judge’s construction of s62(2)(b)(i), observing that such a construction “anchors the temporal requirement for the conferral of super-priority to the time the PMSI is granted [and] is consistent with the rationales for both the conferral of super-priority and the requirement of timely notice”;7
- Agreed with the Trial Judge’s articulation of the rationale for conferral of super-priority on PMSI holders: that is, it is equitable to afford priority to security taken over property for which the security holder provided the money or other means of acquiring that property because, without such contribution and without the security being afforded priority, the grantor would not have acquired its interest in the property.8 Doyle J noted9 that there were differences of view as to the various policy arguments said to support the conferral of priority and generally remarked favourably on the reasoning used by the Trial Judge to determine that s62(2)(b)(i) is directed to possession as grantor rather than possession simpliciter, including the avoidance of arbitrary or capricious outcomes and of the ‘impossibility’ issue referred to above;10
- Rejected the existence of a sound basis in policy for confining super-priority to circumstances involving new assets,11 noting that s14(5) expressly provides “a purchase money security interest does not lose its status as such only because the purchase money obligation is renewed, refinanced, consolidated or restructured (whether or not by the secured party)”;12 and
- Considered case law from the USA and Canada and the similarities and differences between the provision equivalent to s62(2)(b)(i) in their respective personal property securities legislation and the PPSA,13 concluding that the weight of authority from those jurisdictions favours the construction adopted by Trial Judge.14 Doyle J was not persuaded by the reasoning used to determine the outcome in one Canadian case which ran contrary that weight of authority.15
Following this decision:
- Asset financiers can be more confident about their PMSIs being afforded super-priority in circumstances where the customer has possession of the relevant asset at the time the PMSI is granted provided their registration which perfects their PMSI states that the security interest is a PMSI and is made within the applicable time period, such time period being determined by reference to when the customer possessed the goods as grantor of the PMSI; and
- There is more certainty for insolvency practitioners and the holders of ‘all property’ security interests about the circumstances in which a PMSI will (or will not) have super-priority.
This article was written by Karen Fairbairn, Partner.
Publication Editor: Grant Whatley, Partner.
1See [126.96.36.199] of Review of the Personal Property Securities Act 2009 – Final Report by Bruce Whittaker, Commonwealth of Australia 2015.
2Ibid at [188.8.131.52.1], second paragraph.
3Referred to by Doyle J at  of Samwise Holdings Pty Ltd v Allied Distribution Finance Pty Ltd & Ors  SASCFC 95 (Appeal Case).
4See  of the Appeal Case.
5Allied Distribution Finance Pty Ltd v Samwise Holdings Pty Ltd (2017) 355 ALR.
6At  –  of the Appeal Case.
7At  of the Appeal Case.
8At  of the Appeal Case.
9At  of the Appeal Case.
10At  –  of the Appeal Case.
11At  –  of the Appeal Case.
12At  of the Appeal Case.
13At  –  of the Appeal Case.
14At  of the Appeal Case.
15At  of the Appeal Case, for the reasons given at  – .