The Personal Property Securities Act 2009 (Cth) introduced a concept that can significantly protect a trade supplier when a customer becomes insolvent: the purchase money security interest, or PMSI. For suppliers of goods on credit, understanding how a PMSI works — and how to perfect one — is one of the most practical things they can do to reduce exposure.
What is a PMSI?
A PMSI is a type of security interest that a supplier takes over goods it has sold on credit. What makes it special is its priority: a perfected PMSI takes priority over other security interests in the same goods, including a bank's general security agreement (GSA) over all present and after-acquired property. This is sometimes called "super-priority."
A PMSI is created when a supplier sells goods on credit terms that include a retention of title (ROT) clause — meaning title in the goods does not pass to the buyer until payment is made. To be effective against a liquidator or administrator, the PMSI must be registered on the Personal Property Securities Register (PPSR) before the goods are delivered.
A worked example
Warehouse Plus is a supplier of commercial shelving. It sells $80,000 of shelving to Fit-Out Co on 60-day terms, with a ROT clause in its terms of trade. Fit-Out Co's bank holds a general security agreement over all of Fit-Out Co's assets. One month after delivery, Fit-Out Co goes into liquidation without having paid for the shelving.
Without a PPSR registration: Warehouse Plus's ROT clause is ineffective against the liquidator. The shelving forms part of the general asset pool. The bank's GSA gives it priority as a secured creditor. Warehouse Plus stands in line as an unsecured creditor — and receives cents in the dollar, if anything.
With a registered PMSI: Warehouse Plus's security interest in the shelving was perfected before delivery. It has super-priority over the bank's GSA in relation to those specific goods. Warehouse Plus can claim the shelving (or its proceeds) ahead of the bank. In many cases, this means recovering the full value of the goods rather than a fraction.
The critical timing rule
For inventory (goods held for sale), the PPSR registration must occur before the goods are delivered to the grantor. If the goods are delivered first and registered later, super-priority is lost. This means the PPSR registration process must be part of your standard supply workflow, not an afterthought.
What your terms must say
Your terms of trade must include a properly drafted ROT clause that constitutes a security agreement under the PPSA. The clause must also grant the supplier the right to enter the buyer's premises to recover the goods if the buyer defaults. Without a valid security agreement, there is no security interest to register.
Practical steps for suppliers
- Have your terms of trade reviewed to confirm they contain a PPSA-compliant ROT clause
- Register a PMSI on the PPSR before delivering goods to a new credit customer
- Monitor PPSR registrations for expiry — they lapse if not renewed
- Train your accounts team to treat PPSR registration as part of the credit onboarding process
If you supply goods on credit and have not reviewed your PPSR registrations recently, speak to Merion about how this fits into your overall credit risk management.