- 21.1 The Extinguishment Rules – Introduction
- 21.2 Table Summarising the Extinguishment Rules by Class of Collateral
- 21.3 The Extinguishment Rules - Commentary
- 21.4 Buyer or lessee of personal property subject to unperfected security interests – section 43
- 21.5 Sales or leases of serial-numbered property – motor vehicles, watercraft, aircraft/engines and intellectual property (patents, trade marks, designs and plant breeder’s rights) – section 44
- 21.6 Private sales or leases of motor vehicles – sections 45(1) - (2)
- 21.7 Buying motor vehicles from licensed dealers – sections 45(3) - (4)
- 21.8 Buying or leasing from a seller/lessor in the ordinary course of business – section 46
- 21.9 Low value (below $5,000) consumer property (except serial numbered property) – section 47
- 21.10 Currency – section 48
- 21.11 Prescribed financial markets – investment instruments and intermediated securities – section 49
- 21.12 Investment instruments – section 50
- 21.13 Intermediated securities – section 51
- 21.14 Temporarily perfected security interests – section 52
- 21.15 Returned goods following sale or lease
- 21.16 Subrogation by extinguished secured parties to rights in relation to collateral sold or leased
Re-attachment of security interests upon return of collateral that is goods
The PPSA has special rules for the continuation of security interests where (A) a security interest is extinguished upon the grantor selling or leasing goods (the rules apply only to goods), but (B) the grantor later regains possession of the goods because, for instance, the grantor rescinds or otherwise exercises a right of enforcement under the contract of sale or lease, or the lease term expires.
Security interests in goods that are extinguished by a sale re-attach to the goods upon the grantor regaining possession of the goods upon, for example, the rescission of the sale contract1. The same applies if security interests are extinguished by the grantor entering into a lease of goods, if the term of the lease expires or the lease is rescinded, and the goods are returned to the grantor2.
Sales of accounts generated by selling goods, but then goods are returned
A similar situation arises where the grantor sells or leases goods but agrees to defer payment such that the sale/lease generates an account payable to the grantor. What happens if the grantor assigns the account to a third party (Party Y) to realise the value in the account (Party Y buys the account), but the sale or lease transaction is then rescinded or unwound and the grantor regains possession of the goods?
In these circumstances, given that the grantor has regained the goods, the account generated from the sale/lease of the goods is likely to extinguish or be placed into serious jeopardy. This situation would, without more, prejudice Party Y because the account that Party Y purchased from the grantor and paid the grantor for may be worth significantly less, or nothing at all. The PPSA strikes a balance here by providing that Party Y has a “deemed” security interest in the goods regained by the grantor, which is deemed to be granted by the grantor, and which secures the purchase price paid by Party Y to the grantor for the account purchased3.
Priority of re-attached security interests
Security interests that re-attach upon the return of goods to the grantor following earlier extinguishment by a sale or lease, must be perfected. If the extinguished secured party who held a security interest over transferred goods remains validly registered against the grantor when the grantor regains possession of the goods, the perfection re-enlivens and the secured party maintains its original priority time4.
The priority of re-attached or “deemed” security interests in returned goods then falls to be determined, against other security interests in the same collateral, and potentially against each other, by the usual rules of priority time, and time of attachment.
Priority contests between re-attached security interests and deemed security interests held by purchasers of accounts
The PPSA provides that where a security interest re- attaches to returned goods and that security interest is perfected, it will defeat a “deemed” security interest of Party Y (see paragraphs 21.15.3 and 21.15.4 above) in the goods where Party Y bought accounts generated from the sale/lease of the goods5.
New security interests granted by the buyer win if perfected
In situations where:
(a) buyer/lessee of goods grants a security interest that attaches to goods acquired (Buyer-Granted Security Interest);
(b) the goods are regained by the seller/lessor upon rescission or termination of the sale or lease contract; and
(c) a security interest previously granted by the seller/lessor re-attaches to the same goods, or a party such as Party Y (see paragraphs 21.15.3 and 21.15.4 above) who has purchased accounts generated upon the sale/lease obtains a deemed security interest in the goods,
then in both cases the Buyer-Granted Security Interest wins provided it is perfected before the grantor regains possession of the goods6.
