How does purchase money security interest priority work under the PPSA?

The default rule under Ontario’s Personal Property Security Act is that, between security interests perfected by registration, priority follows the order of registration. A purchase money security interest, or PMSI, is the main exception. It lets the lender that financed a specific asset jump ahead of an earlier lender whose claim covers everything the debtor owns, provided its timing and notices are right.

What counts as a PMSI

The Act defines a PMSI to include a security interest taken in collateral by a person who gives value for the purpose of enabling the debtor to acquire rights in it, to the extent the value is applied to acquire those rights. It exists only to the extent the money was applied to acquire the asset, so it does not stretch to the lender’s other loans. Where several PMSIs compete, the seller’s has priority over another PMSI given by the same debtor.

Equipment and other non-inventory assets

For collateral other than inventory, a PMSI has priority over any other security interest in the same collateral given by the same debtor if it is perfected before, or within a short period after, the debtor or someone at its request takes possession. Miss that window and the PMSI priority is not available, so timing is the first thing to check.

Inventory needs a notice

A PMSI in inventory must be perfected when the debtor receives possession, and before that the lender must give written notice to every other secured party who had already registered a financing statement describing the same kind of inventory, inventory generally, or accounts. The notice must say the lender has or expects to acquire a PMSI and describe the inventory.

Why it matters on an acquisition

An acquisition lender often holds a general security agreement covering after-acquired property, so a later equipment financier’s PMSI can outrank it for that equipment. The Canada Small Business Financing Program guidelines show the response: a lender must obtain postponements of rank where an earlier general security catches the assets it finances. Quebec uses the Civil Code instead. Search the registry first, as described in what a PPSA search is.