7. Seventh: “normal PMSIs” – section 62. All other PMSIs, again provided they comply with the PMSI Rules (see paragraph 13.4.2 immediately above)
8. Eighth: perfected v’s perfected – earliest priority time wins - sections 55(4) and 55(5). In competitions between two perfected security interests, the interest with the earliest priority time wins, subject to any secured party later perfecting by control or having a PMSI
9. Ninth: perfected v’s unperfected – perfected always wins - section 55(3). In competitions between one perfected and one unperfected security interest, the perfected security interest wins
10. Tenth: execution creditors can defeat unperfected security interests - section 74. Execution creditors who obtain garnishee or other court orders to enforce judgment debts over collateral, or take possession of collateral to enforce a judgment or court order, before security interests are perfected over the collateral, defeat unperfected security interests in the collateral; and
11. Eleventh: unperfected v unperfected – priority is by order of attachment - section 55(2). In competitions between two unperfected security interests, the first to attach wins1.
Transfers of collateral, where secured parties of the buyer make new advances
A priority rule (in section 34) which is not included in the above priority waterfall relates to situations where collateral is transferred (sold)2, security interests granted by the seller are not extinguished by the transfer, and security granted by the buyer of the collateral (either existing future-property security that attaches to after-acquired property once acquired by the buyer, or new security) attaches to the collateral. There is then a priority contest between the security interests granted by the seller, and the buyer, both of which attach to the collateral.
A secured party taking a security interest granted by the seller (original secured party) and whose security interest is not extinguished by the transfer, is temporarily perfected against the buyer for up to 24 months, assuming the buyer has not granted, and does not grant, any security interests which also attach to the collateral acquired3.
If the buyer of collateral has granted existing security interests (such as future-property security interests that attach to after-acquired property), or grants new security interests following acquisition of the collateral, which attach to the transferred collateral, then a perfected original secured party (of the seller) has the benefit of temporary perfection against the buyer as follows4:
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if the original secured party expressly or impliedly consented to the transfer, for five (5) business days from the transfer time5; or
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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, up to a maximum period of 24 months from the date of transfer6.
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Considerable time could elapse before a secured party of the seller realises (acquires actual or constructive knowledge) that a transfer of collateral has occurred, hence the 24 month (maximum) temporary perfection period.
It will, of course, be a difficult exercise to determine exactly when a secured party acquires constructive knowledge of a transfer, to determine the time from when the five (5) business day temporary perfection window starts running. The PPSA includes a definition of constructive knowledge – see Chapter 27 (Knowledge) for discussion.
Original secured parties (of the seller) must re-perfect against the buyer within the five (5) business day temporary perfection windows outlined above (paragraph 13.5.8) to maintain continuous perfection and so continue to enjoy the same priority time against the buyer that they enjoyed against the seller. Otherwise, secured parties taking security interests granted by sellers will become unperfected.
Notice to re-perfect unperfected security interests granted by sellers
Even if an original secured party (of a seller) fails to re- perfect against a buyer of collateral within the temporary perfection windows outlined above (paragraph 13.5.8) and so becomes unperfected, and the buyer of collateral grants, or has granted, other security interests which attach to the collateral acquired and are perfected, even then all is not lost for original secured parties.
The PPSA allows an original secured party yet another chance to re-perfect against the buyer, provided the collateral is not registered with a serial number. If an original secured party (of the seller) becomes unperfected because they fail to re-perfect against a buyer within the applicable temporary perfection windows, they can in any event give a prescribed form notice to all other secured parties with a registered security interest granted by the buyer and attached to the transferred collateral (not registered against by serial number) and re-perfect against the buyer, and gain priority over other security interests granted by the buyer which attach to the transferred collateral7.
However, the above rule does not apply where other secured parties of the buyer have made new advances to the buyer before an (unperfected) original secured party taking a security interest from the seller re-perfects against the buyer and gives notice of that re-perfection to other secured parties.
Secured parties of the buyer who make new advances to the buyer before an (unperfected) original secured party (of the seller) re-perfects against the buyer and gives notice of that re-perfection, take priority to the extent of those new advances, provided the buyer purchased the collateral without actual or constructive knowledge that the acquisition may have breached the terms of a security agreement held by an original secured party (of the seller)8. It is the knowledge of the buyer (not the secured party of the buyer) that is relevant here.
Secured parties of the buyer who provide new advances to the buyer in these circumstances would not defeat security interests perfected by control9.
See paragraphs 18.16.1 to 18.16.26 of Chapter 18 (Priority) in Part 3: A Long Run Through for further discussion of the priority of security interests granted by sellers and buyers of collateral when collateral is transferred.
Rescission or termination of sales or leases that extinguished security interests - re-attachment of security interests to returned collateral, and priority
In some cases where collateral is sold or leased, security interests over the collateral can be extinguished by the sale or lease. However, if the sale or lease transaction is later rescinded or terminated, and the collateral is returned to the grantor, then security interests re-attach to collateral upon return to the grantor. Security interests must, of course, be perfected against the grantor upon the return of collateral to the grantor. If an extinguished secured party who held a security interest over transferred collateral remains validly registered against the grantor when the grantor regains possession of the collateral, the perfection re-enlivens and the secured party maintains their original priority time against the collateral10. See paragraphs 18.16.24 to 18.16.26 of Chapter 18 (Priority) for further discussion.
New security interests granted by buyer win if perfected first
If a security interest is extinguished upon a transfer of goods, and the buyer/lessee of the goods grants a security interest that attaches to the goods acquired (Buyer Security Interest), and then the goods are regained by the seller/lessor upon rescission or termination of the sale or lease contract and a security interest previously granted by the seller/lessor re-attaches to the same goods, then the Buyer Security Interest wins provided it is perfected before the grantor regains possession of the goods11.
See generally paragraphs 21.15.1 to 21.15.8 of Chapter 21 (The Extinguishment Rules) for further discussion.
Accession, processing and comingling of goods
There are specific priority rules that apply where goods are the subject of accession, processing or comingling into another product or mass. These rules are discussed in Chapter 26 (Accession, processing and comingling of goods).
Notes;
1 PPSA section 55(2)
2 The PPSA uses the word “transfer” in this context. It clearly includes sales, but whether it includes leases or other forms of dispositions would presumably depend on the circumstances.
3 PPSA section 34(1)(a)
4 PPSA section 34(1)
5 PPSA section 34(1)(c)(i)
6 PPSA section 34(1)(a) read with section 34(1)(c)(ii)
7 PPSA section 68(1)
8 PPSA section 68(2)
9 PPSA section 66, note 1
10 PPSA section 37(2)
11 PPSA section 76(3)
