- 26.1 Accession, processing and commingling of goods
- 26.2 The difference between accession, commingling, processing and manufacture
- 26.3 Example of processing or manufacture by diagram
- 26.4 Accession of goods
- 26.5 Processing, comingling and manufacture of goods
- 26.6 Priority of competing security interests that each continue into the product or mass
- 26.7 Relationship between security interests over goods continuing into a product, and existing security interests that attach to the product
- 26.8 PMSIs continuing into product or mass retain their super priority
- 26.9 Proceeds of the product or mass
- 26.10 Identification of proceeds in ADI accounts
The diagram below illustrates a scenario where goods subject to a security interest (paint supplied on conditional sale by retention of title terms) are processed or manufactured into other goods (a car – the product) where the product is subject to other security interests. The product (car) is then sold for money deposited into the grantor D’s bank account. From above, the same rules apply for commingling, processing and manufacture because in each case goods lose their identity and become part of a larger product or mass.
Diagram 11
1. Loan
2. Security interest over all present and after-acquired property
3. Supply of red paint (on credit)
4. Security interest over red paint (intention of title sale)
5. Purchase price from Buyer
6. Transfer of red car
To explain the diagram in more detail, the debtor/grantor D manufactures and sells cars. Assume that D’s main assets are the cars it manufactures, and a bank account.
Bank A is the main financier to D. Bank A lends money to D for working capital purposes, takes a security interest over all present and after-acquired property of D, and duly registers the security interest on the PPS Register.
D buys red paint from a paint supplier on conditional sale by retention of title terms to spray paint its cars before selling the cars. The paint is likely to be inventory in D’s hands because D holds the paint as raw materials to produce cars1. The paint supplier is savvy and realises that the PPSA helps suppliers like him/her by offering clearer remedies when the goods that they supply are comingled or processed into other goods, whereas under pre-PPSA law, retention of title arrangements were often inadequate.
The first step for a supplier such as the paint supplier is to ensure that his/her security interest is properly perfected. This is because, as we shall see below, it is very important to the accession and comingling rules that security interests are perfected before goods become acceded to, or processed into, other property.
The paint supplier, as supplier of goods that are inventory in the hands of D on conditional sale by way of retention of title terms, will have an inventory PMSI. The paint supplier must register the PMSI against D even before the paint supplier supplies the paint (because the paint is goods) to D. Assume the paint supplier, savvy as he is, does so. Assume also that the paint supplier is very conscious that his paint gets used by D to paint cars, and is processed into other products, being the cars.
As we shall see, the paint supplier probably does not need to register his security interest against the product(s) (the cars) to ensure that it continues into the painted cars as finished products – the PPSA appears to provide that the paint supplier’s security interest in the paint continues into D’s cars (the processed product) automatically. However, the paint supplier should still perfect against all proceeds to ensure his/her security interest in paint, which is likely to continue into cars when painted, is perfected against all proceeds generated from sales of the painted cars (products).
The discussion returns to the example and the diagram after first explaining how the accession and processing/ comingling rules for goods work.
