The PPSA recognises the need to promote commerce in a market economy with the various extinguishment rules to facilitate the free sale and leasing of property. The PPSA balances this policy objective by recognising that the loss caused by extinguishments of security interests should not fall squarely on the shoulders of secured parties. That would be unfair.

The PPSA provides that where security interests are extinguished by sales or leases of collateral, then in addition to security interests automatically attaching to proceeds generated from the sale or lease, secured parties are subrogated to (take the benefit of) the rights that the seller or lessor retains in relation to the property sold or leased47. For example, the grantor may retain rights to receive an unpaid purchase price or future rent due under leases. This would seem to enable extinguished secured parties to step in and collect any unpaid purchase price or rent (if the collateral is leased) directly from the buyer or lessee, where collateral is sold or leased and a security interest is extinguished by that transfer.

The remedy of subrogation is potentially important. Even though security interests automatically attach to proceeds generated by transfers of collateral, the proceeds may be lost if paid into an overdrawn ADI account, or an ADI account subject to a security interest held by the account bank that is perfected by control.

For example, if a truck subject to a mortgage is sold for cash, and the sale extinguishes the mortgage, then the mortgage will automatically attach to the cash paid for the truck. However, if the cash sale proceeds are deposited into an ADI account and the ADI account bank holds a security interest over the account, then the ADI account bank (being perfected by control over the ADI account) will have first priority over the funds unless the truck mortgage is a transitional security interest.

The truck mortgage secured party then has, in addition, the right to subrogate to any rights that the truck owner/ truck mortgage grantor retains against the buyer, such as to claim any amounts of the purchase price that remain unpaid.

An unpaid seller has an equitable lien over property sold for the unpaid purchase price. These liens arise by operation of the general law (accordingly, they are not PPSA security interests), and arise for sales of both personal property and land¹. An extinguished secured party presumably could step in (subrogate) to such a lien and enforce it against the property sold to receive any amounts of unpaid purchase price.

In a sale transaction, if the purchase price has already been paid to the seller, then that will extinguish the purchaser’s obligation to pay the price². Once the sales proceeds have been paid to the seller in full, there would appear to be few, if any, rights in relation to the collateral remaining to which the secured party could subrogate. The extinguished secured party’s remedy in that instance would be the attachment of its security interest to the sale proceeds.

Leases may offer more subrogation prospects to secured parties than sales because there will often be rent due in the future, which presumably would be rights in relation to the collateral, to which an extinguished secured party could subrogate under section 53 and receive.