Keeping with the above example, the security interests of both Bank A and the paint supplier attach to the funds in D’s ADI account as proceeds of the original collateral (the red car) to which their respective security interests attached. In fact, Bank A's security interest, covering all D's assets, attaches also as original collateral.

Assume next that D makes a transfer from the ADI account by EFT transfer to pay debts, thereby reducing the balance of the ADI account. The recipient of the transfer will likely have priority under section 69 provided the recipient has no actual knowledge that the payment may breach the terms of either Bank A’s or the paint supplier’s security agreements.

Whose collateral (money) is withdrawn from the ADI account, that of Bank A or the paint supplier? Are there any rules under the PPSA to identify proceeds that are funds deposited into an ADI account, where there have been withdrawals from the ADI account?

The PPSA is silent on the point. The definition of proceeds (in section 31 of the PPSA) provides that proceeds are identifiable or traceable personal property, derived directly or indirectly from a dealing in collateral (or proceeds of collateral).

If proceeds that are funds deposited into an ADI account can no longer be identified because there have been withdrawals from the account, or there are insufficient account records to identify the proceeds, then the definition of proceeds (the reference to “traceable”) appears to entertain the application of equitable identification rules developed in the context of equitable principles of tracing trust and other property the subject of a fiduciary relationship into a mixed fund.

Tracing is predominantly an equitable principle¹.

If equitable identification rules are to be applied to these situations under the PPSA to support tracing, then the key identification rules include the following:

(a) where amounts are deposited into a fund (for example, an ADI account), and then all funds in the ADI account are withdrawn to pay creditors or discharge debts or liabilities and the balance is reduced to zero, the right to trace those funds is extinguished². The same result would follow if the funds are paid into an overdrawn account such as an overdraft. Section 69 of the PPSA (discussed at paragraph 18.4.2 of Chapter 18 (Priority)) would produce these results in many cases;

(b) where funds are deposited into a mixed fund, and the mixed fund comprises:

(i)  money of innocent parties (often the beneficiaries under the trust whose funds were misappropriated and mixed into another fund); and

(ii)  money of a wrongdoer (usually the trustee who has committed a breach of trust and fiduciary duty by misappropriating trust funds to his own account),

then any withdrawals from the mixed fund are taken first to dissipate the wrongdoer's funds³. It is difficult to see how this identification rule might be applied to the PPSA given that there is no obvious “wrongdoer” in many PPSA priority disputes; and

(c) where the mixed fund comprises the funds of many innocent parties, withdrawals are deemed to reduce each party's share in the fund rateably. The primary rule in relation to a mixed fund is that gains and losses are borne by the contributors to the fund rateably⁴, in proportion to the size of their claims. The rule in Clayton’s Case⁵, which is that withdrawals from a mixed fund are deemed to dissipate funds in the mixed fund in the order in which funds were deposited into the fund – “first in, first out” – should also be considered, but is of questionable application in the modern context because it is generally regarded as unfair.

It remains to be seen whether, and how, these identification rules, which developed mainly under trust law, will be applied under the PPSA where original collateral or proceeds (other than goods) to which different security interests attached are mixed into the same fund such as an ADI account.