The PPSA is clear that upon transfers or disposals of collateral, not only do security interests continue in collateral if not extinguished under the extinguishment rules, but security interests also automatically attach to the proceeds generated upon transfers or disposals of collateral1. Security interests have the same priority against proceeds as they had against the original collateral (that is, security interests retain their priority in proceeds), provided they are duly perfected against the proceeds2. See paragraphs 17.8.2 to 17.8.9 of Chapter 17 (Perfection) for how to perfect against proceeds.
The arrow that is "following personal property" in the symbol below represents both (A) the ability of secured parties to follow collateral into the hands of buyers or lessees and continue to assert their security interests when collateral is disposed of by grantors if the buyer or lessee does not come within an extinguishment rule, and (B) the fact that security interests automatically attach to proceeds generated when collateral is disposed.
Even if a security interest is extinguished upon a transfer of collateral, the secured party has a claim against proceeds generated by the transfer if they were perfected against the original collateral, and they are perfected against the proceeds generated from the transfer. The proceeds must remain identifiable or traceable3. See paragraph 17.7.4 of Chapter 17 (Perfection) for further discussion of the meaning of proceeds.
Claims against proceeds have the potential to significantly mitigate loss to secured parties from collateral being disposed in unauthorised ways.
For example, take a variation of the basic PPS priority diagram below, diagram 2, with the addition of a PMSI transaction for the debtor/grantor D to acquire a motor vehicle on finance. Assume that D acquires a motor vehicle on finance from a car dealer (Car Lessor) through a lease for a term of five (5) months. The car lease will be a PPS Lease (lease of a serial numbered good for a term exceeding three months), and so a PMSI (PPS Leases are PMSIs4).
Diagram 2
1. Lease of car, 5 month term
2. Security interest (lease) over car
3. Car purchase price (payment)
4. Sale (purported) of car
Assume the motor vehicle is equipment in D’s hands and that the Car Lessor’s equipment PMSI is registered within 15 business days of supply of the motor vehicle to D, and the registration nominates PMSI, and nominates the serial number of the motor vehicle, so all is regular.
Assume next that D (a mere lessee) purports to sell the motor vehicle to a buyer B for a cash payment into D’s ADI account. Query whether D can sell the car as a mere lessee, but that aside, the buyer B does not (cannot) come within an extinguishment rule, because B does not (cannot) obtain a clear search of the PPS Register against the serial number of the motor vehicle before buying, given that the Car Lessor’s security interest is duly registered against the serial number of the motor vehicle. See Chapter 21 (The Extinguishment Rules) for detail on the extinguishment rules in general, and on the extinguishment rule in section 45 which deals with private sales of motor vehicles subject to security interests. In this situation, the PMSI security interest of the Car Lessor will not be extinguished and will continue to attach to the motor vehicle in the hands of the unlucky buyer B, and also attach to the sale proceeds paid by B to D and deposited into D’s bank account.
Further, the PPSA provides that secured parties in these circumstances can enforce their security interests against both the car in the hands of the unlucky buyer B, and the proceeds that the buyer B paid for the car and which are deposited into D’s ADI account, limited to the value of the car when sold to B5.
The ability of secured parties to follow collateral upon transfers if their security interest is not extinguished is significant because it means that secured parties are placed in a strong position.
The PPSA attempts a balancing act between protecting the interests of secured parties, and protecting the interests of buyers or lessees of property to ensure they can take property free and clear from security interests.
Notes:
1 PPSA section 32(1). The grantor and the secured party can contract out of this, by providing in the security agreement or otherwise that a security interest will not attach to proceeds of collateral.
2 PPSA section 32(5)
3 PPSA section 31
4 PPSA section 14(1)(c)
5 PPSA section 32(2)
