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Definition

A purchase money security interest (PMSI) is a particular type of security interest. A PMSI is distinguished from a standard security interest in two main ways: its manner of creation and the priority it receives relative to other security interests in the same collateral.

A PMSI is a security interest in collateral that secures the assistance provided by the secured party to the grantor to enable their purchase or acquisition of rights in the collateral.

Commercial context

A PMSI is likely to arise in four main scenarios.

Firstly, a PMSI will arise where funds are provided by a financer or other lender to a grantor for the purchase of the personal property. This is the most common transaction that gives rise to a PMSI and covers such transactions as purchases of motor vehicles where finance is provided at the point of sale.

Secondly, a PMSI will arise where the secured party has advanced personal property and all or part of the purchase price remains outstanding. The most common transactions in which this occurs are supply by retention of title clause. This typically involves the transfer of possession of collateral with title only passing after the full payment price is paid.

Thirdly, a PMSI will arise in a PPS lease transaction. A PPS lease is defined in the Personal Property Securities Act 2009 (Cth) as a lease or bailment for at least one year, could last for more than one year, or for an indefinite period. Both financing leases and operational leases can fall within the definition of PPS lease.

There has been a recent change to the legislation regarding PPS Leases and Bailments.

Finally, a PMSI will arise in a consignment transaction.

PMSIs typically arise in commercial rather than consumer transactions. Other than where a motor vehicle is the collateral, a PMSI will not arise in property that the grantor intends to use for personal domestic or household purposes.

Read More - Purchase money security interests | PPSR