Where a grantor has entered administration or liquidation, buyers of collateral from secured parties or receivers/ controllers appointed by them upon the exercise of a power of sale under an unperfected security interest are not affected by the operation of section 267 (section 267 voids unperfected security interests upon administration or liquidation), provided they (buyers) give new value and have no actual or constructive knowledge of the administration or liquidation of the grantor¹. Section 267(3) does not provide that a buyer in these circumstances takes goods title, merely that any title a buyer manages to acquire is not affected by the fact that the security interest under which the power of sale was exercised was unperfected and so void.

This safeguard will presumably operate most often where:

(a)  a grantor is in both receivership/controllership and administration or liquidation; and

(b)  the receiver/controller exercises a power of sale and it is later discovered that the security interest under which the power of sale was exercised was, in fact, unperfected.

It is difficult to see other applications for this protection for buyers – for it to apply, the grantor must already be in administration or liquidation – it does not apply (and does not need to apply) to a receiver’s sale before the onset of administration or liquidation.

The relevant knowledge element for a buyer who happens to buy from a receiver or controller selling (presumably inadvertently) under an unperfected security interest is that the buyer has no actual or constructive knowledge of the administration or liquidation of the grantor. It is not (but perhaps should be) knowledge of the fact that the security interest is unperfected.

This may not offer much practical protection to buyers out of insolvencies where the security interest under which the power of sale being exercised by the receiver or controller is discovered to be unperfected. Buyers are likely to have actual or constructive knowledge of the administration or liquidation of a grantor from doing the usual pre-purchase diligence through their advisors. Company searches on the selling entity will clearly show that the entity is in administration or liquidation.

Purchasers may be placed in a difficult position if it is later discovered that a security interest under which a receiver or controller (secured party) sells (or sold) an asset to them is (was) unperfected. Receivers or controllers selling assets, and buyers from them, should always conduct a thorough analysis of the perfection of the security interests under which they buy or sell assets.