The PPSA confirms that buyers and secured parties can buy or take further security despite the seller/grantor being subject to restrictive covenants (contractual restrictions) in security agreements against sales or granting further security¹.

Breach of such restrictive covenants may still create a default under the relevant loan or security agreements, and secured parties or buyers should always be careful of the tort of inducing a breach of contract.

Sellers/grantors will also be liable in damages for breach of such restrictive covenants.

Under the general (non-PPSA) law, it is a very difficult and uncertain area as to whether the breach of a restrictive covenant against selling collateral or granting further security voids the sale or grant of further security. This is because (so the argument runs) contractual restrictive covenants can create quasi proprietary “equities” that run with the collateral and bind a purchaser or subsequent secured party in certain circumstances where they have knowledge of the prior “equity”².

The PPSA clears this up by confirming the validity of the sale or grant of further security, despite any breach of a contractual restrictive covenant (negative pledge).