- 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
Many motor vehicles are bought through car dealers or caryards. Car dealers and yards that hold a license to deal or trade motor vehicles issued by a licensing authority in an Australian State where the sale or lease transaction occurs will be licensed dealers for PPSA purposes1.
In a sale or lease of a motor vehicle from a licensed dealer, the buyer/lessee takes the motor vehicle free from security interests granted by the seller/lessor (the car dealer) or another party2 if the buyer or lessee:
(a) buys or leases for new value;
(b) the buyer or lessee does not hold the motor vehicle bought or leased as inventory in their own business; and
(c) the buyer or lessee has no actual or constructive knowledge that the sale or lease would breach the terms of a security agreement that governs a security interest which exists over the motor vehicle3.
The advantages of buying a motor vehicle from a licensed dealer are potentially significant, and twofold, as below.
First, purchasers from licensed dealers are protected from security interests granted either by the selling dealer or any other party (for example, this may capture circumstances where the dealer/seller is only in possession of the vehicle under a commercial consignment and does not own it, and the owner has, in addition, granted security over the motor vehicle)4.
This protection will not always apply when purchasing motor vehicles privately. In private sales of motor vehicles, the sale will extinguish a security interest where the owner has lost the right to possess the motor vehicle, which could, presumably, arise where the motor vehicle has been leased or consigned to another5.
Second, another advantage of buying a motor vehicle from a licensed dealer is that buyers or lessees from licensed dealers do not need to have searched the PPS Register on the previous day or the same day of buying/leasing. Private buyers/lessees need first to obtain a clear search against the serial number of a motor vehicle either on the previous day or the same day of purchase or lease.
Sales or leases of all motor vehicles – extinguishment rules do not apply where the secured party takes possession
The extinguishment rules for all motor vehicles do not apply where the secured party takes and is in possession of the motor vehicle immediately before the sale or lease6. This is because a buyer or lessee would surely be put on notice that a security interest exists over the motor vehicle given that some party other than the seller or lessor (for example, a finance company) has possession of it. Secured parties wanting to protect themselves against unauthorised disposals should consider their ability to take possession of motor vehicles (for example, by exercising a right in a security agreement to repossess collateral following a default).
Sales of motor vehicles by execution creditors do not extinguish perfected security interests
The extinguishment rules do not apply to sales of motor vehicles by execution creditors7. If an unsecured creditor obtains judgment for an amount owing, and seeks a writ of execution against a grantor’s motor vehicle assets to satisfy the judgment and then seeks to have the Sherriff seize and sell motor vehicle(s) to enforce the judgment, the sale cannot extinguish and jump ahead of secured parties with perfected security interests over the motor vehicle.
Notes:
1 PPS regulations, regulation 2.2. (link)
2 PPSA section 45(3) and 45(4). (link)
3 Note that this knowledge requirement gives more protection to buyers or lessees from licensed dealers (compared to private purchases of motor vehicles). By contrast, in private sales or leases of motor vehicles, the requirement is that the buyer or lessee have no knowledge that a security interest exists over the motor vehicle – it is clearly easier and more common to know of the existence of a security interest, rather than know that a sale or lease breaches terms of a security agreement.
4 PPSA section 45(3) (link)
5 PPSA section 45(1)(c) (link)
6 PPSA sections 45(2)(a) and 45(4)(a) (link)
7 PPSA sections 45(2)(b) and 45(4)(b) (link)
