PPSA security interests are not all about the “day 1” (original) collateral, or even after-acquired property. In addition, security interests automatically attach to proceeds of collateral upon the collateral being sold or otherwise dealt with¹.

For example, if a secured party holds a mortgage over a truck, and the truck is sold, the mortgage will automatically attach to an account (book debt) for payment of the purchase price that arises in favour of the truck owner (grantor of the truck mortgage) from the purchaser of the truck.

This ability of secured parties to follow value through their security interests automatically attaching to proceeds is similar to, but much wider than, the equitable principle of tracing proceeds. Tracing in equity requires (on the better view) that there be a breach of an existing fiduciary duty before the remedy is enlivened, which greatly limits the application of the tracing remedy to security interests. This led to the use of trusts and fiduciary agent language in retention of title clauses in sale agreements, to try to enliven the equitable principle of tracing where retention of title property is disposed and proceeds such as cash or accounts are generated.

By contrast, the PPSA applies the equivalent of the equitable tracing remedy for the benefit of every secured party in respect of all security interests, by providing that security interests automatically attach to proceeds. Secured parties who actually understand what the PPSA does for them in this regard will think that Christmas has been extended until early 2012 when the PPSA commences.

Security interests must also be perfected against proceeds. Perfection against proceeds can be either by a wide registration against classes of collateral sufficiently broad to cover both the original collateral and proceeds², or by a specific registration within five (5) business days of the proceeds being generated. Security interests are temporarily perfected for five (5) business days against proceeds to allow secured parties who are not otherwise perfected against proceeds a chance to perfect against proceeds³.

For completeness, there is no need to take extra steps to perfect a security interest against proceeds that take the form of money deposited into an ADI account, cash itself (currency), cheques or an insurance payment payable upon damage to collateral⁴, provided that a registration covered and adequately perfected the security interest in the original collateral. This is sometimes called deemed perfection.