Transfers of collateral include sales, leases and possibly other dispositions. The discussion below centres upon sales of collateral, but also touches on leases of collateral from time to time.

Transfers of collateral by way of sale are tricky because they mean that the grantor of security interests over transferred collateral changes from the original grantor (say party A) to a new party (the buyer, say party B). Transfers mean that the perfection of a security interest is potentially no longer valid because the original grantor (the seller – Party A) against whom the secured party registered or otherwise perfected their security interest no longer owns or has rights in the collateral.

This is because perfection by registration on the PPS Register is primarily against the grantor, except for (A) consumer serial numbered property, and (B) commercial aircraft, which both must be registered against the serial number of the collateral – see the discussion at paragraph 22.3.4(c)(iii) of Chapter 22 (Registration and the PPS Register).

The PPSA forms a compromise to protect the various stakeholders upon transfers of collateral. There are potentially three stakeholders:

1. 1. the secured party holding a security interest over the transferred collateral granted by the seller (original secured party);

   2. the buyer or lessee of the collateral; and

   3. any secured party taking a security interest in the same collateral granted by the buyer.

The interests of each of these three groups of stakeholders is discussed below.

If a security interest is extinguished upon a sale or lease of collateral, then that is the end of the game against the original collateral for secured parties holding security interests granted by the seller or lessor. There is an exception where collateral is leased and the term of the lease expires and the collateral reverts to the grantor – see paragraphs 17.10.8 to 17.10.10 below for discussion about the re-attachment of extinguished security interests when leases expire.

As noted above, the ten (10) extinguishment rules provide for when a buyer or lessee of collateral will take the collateral free from a security interest.

In a similar way, if the secured party has expressly or impliedly consented to the extinguishment of their security interest upon transfers of collateral (for instance, inventory and other circulating assets under a circulating security interest), the security interest is extinguished by the transfer, and that is the end of the game against the original collateral¹.

Security interests extinguished by transfers of collateral will, of course, attach to any proceeds generated from the transfer and in which the grantor has an interest, such as cash sale proceeds deposited into an ADI account owned by the grantor/seller. Where security interests are perfected against proceeds, and proceeds remain identifiable and traceable, this should significantly mitigate any loss to secured parties whose security interests are extinguished by transfers of collateral.

Extinguishment of security interests by leases of collateral – expiry of lease term

If a grantor leases collateral and (by operation of the extinguishment rules or otherwise) the lease extinguishes security interests over the collateral for the benefit of the lessee, the extinguishment is only for the term of the lease.

Once the lease term expires and the grantor regains possession of the collateral, security interests that were extinguished by the lease re-attach to the collateral at the time the grantor regains possession of the collateral². If the secured party was perfected by registration before the security interest was extinguished by the grantor leasing the collateral, and the registration remains current when the grantor regains possession of the collateral upon expiry of the lease, then the perfection re-enlivens and the secured party maintains their original priority time³.

In essence, security interests perfected by registration, and which remain registered, spring back to life once a lease that temporarily extinguished the security interest expires and the grantor regains possession of the collateral. This is an incentive for secured parties extinguished by leases not to remove their registrations.

Security interests not extinguished upon transfer – temporary perfection against the buyer or lessee for up to 24 months if no security interest granted by the buyer or lessee attaches to the collateral

First, even if the terms of a security agreement prohibit the transfer of collateral without the consent of the secured party, the grantor can still transfer collateral by selling or leasing it in contravention of such restrictive covenants and the sale or lease will be valid⁴.

A secured party can assert a security interest that is not extinguished upon a transfer of collateral against the collateral in the hands of the unlucky buyer or lessee where the transfer generates proceeds⁵. Assuming the new buyer or lessee of the collateral has not granted any existing or new security interests that attach to the acquired collateral, then perfected security interests granted by the seller or lessor and which are not extinguished by the sale or lease, are temporarily perfected for up to 24 months from the time of transfer against the buyer or lessee⁶.

The original secured party (of the seller or lessor) has 24 months from the time of the transfer to perfect its security interest against the new owner or lessee of the collateral.

Security interests not extinguished upon transfer - priority contests between security interests granted by the seller and the buyer

In these circumstances, the secured party holding a security interest granted by the seller (the original secured party) has the benefit of temporary perfection against the new buyer⁸:

1. 1. for five (5) business days from the transfer time if the original secured party consented to the transfer; or
   2. otherwise, for five (5) business days from the original secured party having actual or constructive knowledge of the transfer and the buyer’s details to enable re-perfection against the buyer,

Even if an original secured party (of the seller) does not re-perfect against the buyer within the five (5) business day temporary perfection windows described above, all is not lost. Provided that secured parties to the buyer have not extended new advances to the buyer that are secured by security interests attached to the transferred collateral, the original secured party has a second chance to serve a notice under section 68 on all registered holders of security interests that attach to the transferred collateral, declaring their intention to re-perfect against the buyer. The notice must state the effect of section 68, which is that upon the giving of such notice and re-perfection, the original secured party will retain priority over the transferred collateral.

Only where a secured party of the buyer has made new advances to the buyer after the buyer acquires the transferred collateral but before an original secured party (of the seller) re-perfects against the buyer, which advances are secured by a security interest granted by the buyer and that has attached to the transferred collateral, does a secured party of the buyer have priority to the extent (only) of the new advances⁹.