- 21.1 The Extinguishment Rules – Introduction
- 21.2 Table Summarising the Extinguishment Rules by Class of Collateral
- 21.3 The Extinguishment Rules - Commentary
- 21.4 Buyer or lessee of personal property subject to unperfected security interests – section 43
- 21.5 Sales or leases of serial-numbered property – motor vehicles, watercraft, aircraft/engines and intellectual property (patents, trade marks, designs and plant breeder’s rights) – section 44
- 21.6 Private sales or leases of motor vehicles – sections 45(1) - (2)
- 21.7 Buying motor vehicles from licensed dealers – sections 45(3) - (4)
- 21.8 Buying or leasing from a seller/lessor in the ordinary course of business – section 46
- 21.9 Low value (below $5,000) consumer property (except serial numbered property) – section 47
- 21.10 Currency – section 48
- 21.11 Prescribed financial markets – investment instruments and intermediated securities – section 49
- 21.12 Investment instruments – section 50
- 21.13 Intermediated securities – section 51
- 21.14 Temporarily perfected security interests – section 52
- 21.15 Returned goods following sale or lease
- 21.16 Subrogation by extinguished secured parties to rights in relation to collateral sold or leased
A purchaser, mortgagee, pledgee, lessee or other holder in due course of investment instruments for value takes free of any security interests, provided that:
(a) the purchaser takes possession or control of the instrument; and
(b) they have no actual or constructive knowledge that the transaction breaches the terms of a security agreement that governs a security interest over the investment instrument1.
Investment instruments include shares, bonds, derivatives, foreign exchange contracts, options, units in a managed investment scheme, negotiable instruments and other prescribed financial products.
This rule is to facilitate investment instruments being sold or used as collateral. For instance,
(A) shares can be “lent” in securities lending transactions,
(B) bonds are often “repoed” (a sale of title in return for cash, subject to a re- transfer of title and return of slightly more cash (on account of interest) later), and
(C) negotiable instruments such as bills of exchange are often negotiated or discounted (sold) to others to hold them in due course.
This rule aims to preserve the “assignability” or “negotiability” of these very important sources of value in the Australian economy, provided the secured party takes possession or control, and unless there is actual or constructive knowledge that the transaction breaches the terms of an existing security agreement that governs a security interest over the investment instrument in question.
Notes:
1 PPSA section 50 (link)
