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CAFBA PPS Case Study – Priorities & Processes

Monday 29, Jun 2020

CAFBA provides this case study on the PPS processes required to release a priority security interest over a financed vehicle when a general security interest is in place. It focusses on the processes and timing involved to enable the sale and new finance to proceed. It is based on a member’s recent experience in assisting a customer in this situation.

 

The key terms are:

  • Purchased Money Security Interest (PMSI) which is a security interest in financed goods that may take priority over other security interests if registered properly
  • General Security Interest, also known as an AllPAP, which gives the financier a security interest over all property the business purchases at any time while the security agreement is in place
  • Grantor means the customer (debtor) or lessee who has given a security interest over an asset or more generally

 

The Challenge

A PMSI must be properly registered to obtain ‘super priority’ over a general security interest already registered over all property a company holds and purchases.

 

PMSI Priority Concept

A PMSI gives priority over an earlier registered general security agreement –

  • Over specific goods, if the PMSI registered no later than 15 business days after grantor takes possession
  • Over inventory (an ongoing supply, e.g. bailment, raw material supply), if the PMSI is registered before possession is obtained by grantor

While a particular equipment finance product satisfies the criteria of a PMSI, it will not be given a PMSI priority unless registered in the timelines outlined above. When a PMSI is registered outside these timelines, the general priority rules apply. This means the PMSI will be subject to the priority of any earlier registration, such as the general security interest.

 

Scenario

1. The seller financed a commercial vehicle with Financier A.

2. Financier A registered its security interest on the PPSR as a PMSI priority.

3. However, the seller had already given its bank a general security interest over all its property, which the bank registered on the PPSR prior to the PMSI registration.

4. The loan to Financier A had not been paid out when its customer (the seller) decided to sell the secured vehicle.

5. The purchaser obtained finance from Financier B for a secured loan to buy the vehicle.

6. Financier A provided a payout statement so its loan could be paid out by Financier B.

7. However, Financier B did not settle the purchaser’s loan until the seller’s bank released the vehicle from its general security agreement.

8. Before giving its release, the bank queried with its customer (the seller) the purpose of the vehicle’s sale and what effect that may have on the customer’s business.

9. The settlement of the vehicle sale was delayed by 2 weeks waiting on the seller’s bank to confirm it would release the vehicle from coverage by its general security agreement.

 

General Application of PPS law

Given the general security interest was in place before the PMSI registration was made, the release process was appropriate in this context. This is because the bank’s general security agreement already established security over the customer’s present and after-acquired property, which included the vehicle financed later with Financier A.

The default rule under the PPS regimen is that the first financier or bank to register their security interest on the PPSR will have priority over a later registration if their common customer becomes insolvent. Often, a bank’s or financier’s general security agreement will expressly prohibit the disposal of any the grantor’s property, both present and future, without the bank’s consent.

In this case study, the PMSI priority over the vehicle simply meant that, if the seller became insolvent, Financier A had a priority claim over the vehicle and its sale proceeds, with the bank having a subsidiary one.

It is for this reason Financier B requested the seller’s bank to release its security interest over the vehicle from its general security agreement.

 

Banking and Finance Industry – Standard Release Documents

In 2012, the Australian Banking Association (then the Australian Bankers Association) and the Australian Finance Industry Association (then the Australian Finance Conference and the Australian Equipment Lessors Association) developed and distributed standard forms of release and priority documents to facilitate efficient transactions between incoming and outgoing financiers and banks.

The supporting protocol suggested 5 business days as a reasonable time for an outgoing financier or bank to consider whether it would agree to a release or priority arrangement and confirm it in writing.

 

Member Guidance

When assisting customers with the sale or finance of goods that are already secured, it is important to know if a general security agreement covers those goods. If yes, Members will need to inform their customers of the delays involved with this process.

 

 


This note is only for benefit of CAFBA members and of general information. It should not be relied upon as a substitute for specific legal advice.


 

Steve Edwards

Director / Solicitor

CreditWise

 

June 2020