If a commercial consignment or a PPS Lease is extinguished for want of perfection upon the grantor’s bankruptcy, administration or liquidation, the consignor or lessor can claim their loss as damages by proving as an unsecured creditor in the grantor’s liquidation or administration¹.

There is a formula to determine the loss suffered by secured parties upon extinguishment of their unperfected PPS Lease or commercial consignment. The loss is the greater of:

(a) an amount determined by a formula agreed between the parties in the lease or consignment agreement (the parties can agree their own method to calculate the loss); and

The damages claim would be an unsecured claim in the bankruptcy, administration or liquidation of the grantor. Depending on the dividend to unsecured creditors in the insolvency, the damages claim may be of little benefit.

Not all unperfected security interests that are extinguished upon the bankruptcy, administration or liquidation of the grantor will have a damages claim – it is only commercial consignments and PPS Leases. The conceivable policy drivers here are twofold. First, secured parties under these transactions may be particularly susceptible to forgetting or overlooking perfection, and may be unfairly prejudiced by the avoidance of their security interests for non-perfection upon the bankruptcy, administration or liquidation of the grantor.

Second, secured obligations under PPS Leases and commercial consignments may be hard to quantify, unless the lease or consignment contract is clear on how much remains owing if the collateral is lost (by it vesting in the grantor’s estate upon insolvency). The ability to claim damages could be important if the lease or consignment contract does not provide for a liquidated sum to be payable upon loss of collateral by virtue of the security interest vesting in the grantor.