PMSIs under the Ontario PPSA--special priority for suppliers.(International Section)(purchase money security interest )

Suppliers of goods take note! Establishing a valid purchase money security interest (PMSI) in goods financed by the supplier is well worth the extra time and effort. PMSI status is one of the protections afforded to suppliers under Ontario law to allow them to rise above the level of secured or unsecured creditor, acquire super-priority secured status in the goods supplied and avoid costly legal proceedings when the customer defaults.

What Is a PMSI?--Under Ontario law, a PMSI is either: (1) a security interest in collateral to secure payment of all or part of its purchase price (a "vendor's PMSI"); or (2) a security interest taken by a person who gives value for the purpose of enabling the debtor to acquire rights in or to collateral to the extent that the value is applied to acquire the rights (a "lender's PMSI").

Effect of a PMSI--A PMSI holder is given special priority under the Ontario Personal Property Security Act (PPSA) which entitles it to move ahead of prior registered security interests in the goods subject to the PMSI, and certain other parties with an interest in the collateral. PMSIs are an exception to the general priority rule under which, as between two registered secured creditors, the first to register generally has priority.

How to Acquire a PMSI--The supplier must first obtain a written security agreement creating the security interest or acknowledging the creditor's title to the goods until the full purchase price is paid. In addition certain technical requirements must be met, depending on the type of collateral involved.

Where equipment is the subject of the PMSI, the creditor must register the security interest by filing a financing statement under the PPSA against the customer's legal name before delivery of possession of the equipment to the customer or within ten days after delivery.

Where inventory is involved, some different technical requirements apply: (1) the creditor must ensure a financing statement is registered under the PPSA at the time the debtor obtained possession of the inventory, since an inventory PMSI holder does not have a ten-day grace period for registration as does an equipment PMSI holder; and (2) before the debtor receives possession of the inventory, the creditor must deliver written notice of the PMSI to all other secured creditors who have registered a financing statement in which the collateral is classified as inventory before the date of registration by the PMSI holder.

Rational for PMSIs