All-PAAP punctured: PMSI triumph over Kawasaki motorcycles

This week’s TGIF considers a priority contest which turned on the construction of section 62 of the PPSA and the reference to a grantor obtaining possession.

What happened?

Bill’s Motorcycles (Bill’s) carried on a business as a motorcycle dealer selling and servicing Kawasaki motorcycles.

In 2012, Bill’s granted a security interest to its floorplan financier (CDF). Floorplan finance is commonly used by motor vehicle dealerships to allow borrowing against specific inventory. The security interest to CDF was registered on the PPSR.

In 2014, Bill’s granted a security interest in all of its present and after-acquired personal property in favour of the fifth defendant (Samwise). The AllPAAP was registered by Samwise on the PPSR.

The Kawasaki Agreement

In April 2015, Kawasaki entered into a distribution agreement with a new financier (ADF) which contemplated the financier entering into bailment agreements with Kawasaki dealers under which ADF would provide floorplan finance.

Under the proposed arrangements, the motorcycles would be sold by Kawasaki to ADF and then provided to dealers under a bailment agreement. Title to the motorcycles would remain with ADF.

The bailment agreement between ADF and Bill’s

On 12 April 2016, the bailment agreement was executed by Bill’s and, two days later, ADF registered the agreement on the PPSR as a PMSI over all motorcycles bailed to Bill’s from time to time.

As at 15 April 2016, Bill’s was the bailee of 40 new motorcycles then owned by CDF (the previous floorplan financier). These motorcycles had been in Bill’s possession for up to several months.

On 15 April 2016, Kawasaki purchased those motorcycles from CDF, sold them to the new financier (ADF) who then issued 40 bailed goods notices to Bill’s in respect of the recently purchased motorcycles.

On 16 June 2016, administrators were appointed to Bill’s and ADF sought a declaration that it’s security interest over the 40 motorcycles had priority over all other security interests.

The issue in dispute

The priority issue turned on the construction of s 62(2)(b)(i) of the PPSA the relevant parts of which are extracted below:

(2) The purchase money security interest has priority if…

(b) the purchase money security interest is perfected by registration at the time

(i) for inventory, that is goods, the grantor…obtains possession of the inventory.

The question before the Court was whether the reference to a grantor obtains possession of the inventory is a reference to:

• the grantor simply obtaining possession of the inventory; or

• the grantor obtaining possession of the inventory in question as grantor of a PMSI.

Samwises’ primary contention was that ADF’s PMSI did not have priority over its AllPAAP as Bill’s had already obtained possession of the 40 motorcycles on bailment from CDF, well before ADF’s security interest was created, and thus the condition in s 62(2)(b)(i) was not satisfied.

The Decision

The Court disagreed and declared that the PMSI held by ADF entitled it to priority.

In reaching his conclusion, Justice Blue stepped through the essential provisions of the PPSA and, in particular, the necessary elements in a priority contest – the existence of a security interest, attachment to collateral, enforceability against third parties and registration. A perfect state of affairs.

With respect to the argument put forward by Samwise, his Honour observed that such an outcome would be an unlikely intention to attribute to the legislature.

In his reasoning, his Honour opined that:

• the text of s 62(2)(b)(i), considered in isolation, could be equally read as referring to the grantor obtaining possession of the inventory in question as grantor of the PMSI or to the grantor simply obtaining possession;

• the proper interpretation should be guided by the rationale of the scheme which affords priority to security holders who provide the means for the inventory to be acquired; and

• the mere fact that the grantor had possession of the property in some other capacity was irrelevant.

Critical to his Honour’s decision was the fact that a PMSI cannot be registered until it is granted by the grantor. In his view, it would be a strange construction if, in a case in which the person who becomes the grantor happens to have pre-existing possession, the law requires the impossible, namely that the PMSI be registered before it has been granted, come into existence and before the advance of consideration by the security interest holder.

Comment

This decision reinforces the priority position of PMSIs in the PPSA context and serves as a reminder of the evident purpose of the legislature in affording priority to PMSI holders. Those who advance monies so property can be purchased should not lose priority over collateral (already in the possession of the grantor in some other capacity) which ultimately could not have been acquired absent the provision of funds.

Thus, on its proper construction, s 62(2)(b)(i) refers to the grantor obtaining possession as grantor of the PMSI in the inventory in question.