5. Fifth, accounts – section 64. Security interests over accounts (including purchasers such as factors or invoice financiers) generated from sales of inventory, as original collateral and granted for new value, defeat PMSIs (but see section 59 discussed below) that may attach to the same accounts as proceeds of sales of the inventory to which the PMSIs attached as original collateral.
To defeat inventory PMSIs that attach to accounts as proceeds, the incoming secured party over the accounts (factor) must either:
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register over the accounts (presumably as future property – see discussion below) before the PMSI is registered against the inventory which when sold will generate the accounts over which the factor will take security1; or
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if not registered before the PMSI, the factor must give 15 business days notice to the holder of the PMSI which describes the inventory that, when sold, will generate the accounts, before the factor’s security interest over the accounts attaches or is registered (whichever is earlier)2.
The author's interpretation is that both options (i) and (ii) above appear (the PPSA is unclear) to operate prospectively. Assuming this is correct, factors (secured parties over accounts generated from inventory) can only take advantage of the priority rule in section 64 to trump PMSIs which attach to accounts (as proceeds) generated from inventory sales, in respect of accounts to be generated in the future from inventory sales, not in respect of existing accounts.
Although this priority rule sits ahead of PMSIs in the priority waterfall, it clearly has a limited scope of operation and will not defeat all PMSIs - only inventory PMSIs in some circumstances.
This priority rule creates a space for factors to operate - to buy or take security interests over future accounts to be generated from inventory sales, free from defeat by PMSIs over the underlying inventory sold that would otherwise attach to the accounts as proceeds with PMSI super-priority.
This is one instance where “normal” security interests may defeat PMSIs.
If a grantor has granted a security interest that has attached to and been perfected against its existing accounts such as an all-assets security interest (first security interest), then the priority of the first security interest could not be upset by a factor by operation of the priority rule in section 64 alone. However, the factor may be able to rely on section 59 of the PPSA, which attempts to resolve "circularity" in priority disputes. The factor has priority over the PMSI holder, the PMSI holder has priority over the first security interest, therefore (by operation of section 59) the factor may have priority over the first security interest.
This priority rule allows factors to defeat inventory PMSIs in limited circumstances to provide invoice financing options to businesses.
This priority rule in relation to (future) accounts generated from inventory sales appears behind security interests perfected by control in the waterfall. There may be little overlap in respect of original collateral, however, priority disputes may occur in relation to proceeds. For example, if a security interest perfected by control (for instance, the security interest of a bank over an ADI account held with it) comes into competition with a security interest over an account (receivable) generated from inventory sales because the proceeds of the account (once collected) are deposited into the ADI account, then the security interest perfected by control wins3.
This priority rule is complex, and it is discussed further at paragraphs 18.8.1 to 18.8.22 of Chapter 18 (Priority) in Part 3: A Long Run Through.
Security interests over accounts or chattel paper that are outright transfers (that is, an assignment) of accounts will not be circulating security interests, despite many accounts being deemed to be circulating assets unless the secured party takes control of them4. Accordingly, invoice financiers are best placed to take security interests over accounts by way of outright assignments.
To this extent title still matters under the PPSA. Contrast pre-PPSA case law, which requires that a secured party has actual control over the proceeds of accounts (receivables) to enjoy a fixed (instead of a floating) charge over the accounts5
6. Sixth: “strong PMSIs” – section 63. PMSIs of sellers, lessors and commercial consignors (strong PMSIs) provided they comply with the PMSI Rules (see below).
Strong PMSIs will defeat “normal PMSIs” granted by the same grantor (see below – seventh in the waterfall) in the same collateral.
To qualify for PMSI “super priority” all PMSIs (strong and normal) must comply with what are termed the PMSI Rules in this book.
The PMSI Rules6 are that:
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- perfection must be by registration;
- the registration must nominate that the security interest is a PMSI;
- where the collateral is inventory the PMSI must be registered before the collateral is either supplied to the grantor (for inventory that is goods), or the security interest attaches (for other inventory):
- where the collateral is equipment (not inventory), the PMSI must be registered within 15 business days of the secured party supplying goods to the grantor, or 15 business days of the security interest attaching (for collateral other than goods).
PMSIs appear in the priority waterfall after the priority rules relating to security interests perfected by control and security interests over (future) accounts generated from sales of inventory. There is very limited scope for priority disputes in relation to original collateral because PMSIs cannot be taken over original collateral that is investment instruments, intermediated securities or negotiable instruments7, which are the three major classes of collateral against which security interests can be perfected by control.
However, if PMSI collateral is disposed of and the proceeds are used to acquire collateral which can be perfected against by control, and another secured party perfects a security interest by control over those proceeds, the PMSI would be defeated. For example, this would be the case where PMSI collateral is sold and the proceeds are deposited into an ADI account where the ADI account bank is owed money and holds a perfected security interest over the ADI account. Another example is where PMSI collateral is inventory
that when sold generates an account which has been taken security over under the priority rule in section 64 - inventory PMSIs will be defeated in relation to such accounts.
Notes:
1 PPSA section 64(1)(a)
2 PPSA sections 64(1)(b) and 64(2)
3 PPSA section 64 note 1
4 PPSA section 340(4A)
5 Agnew v The Commissioner of Inland Revenue (PC) [2001] 2 AC 710 (Agnew); and National Westminster Bank plc v Spectrum Plus Limited (HoL) [2005] UKHL 41 (Spectrum)
6 PPSA section 62
7 PPSA section 14(2)
