Consistent with the general principle under the PPSA that security interests automatically attach to proceeds of collateral¹, security interests over goods that become part of a product or mass and so continue into the product or mass, should attach to any proceeds generated by the sale of the product or mass. The PPSA is unclear on this point, but it should follow from first principles.

Returning to the example and diagram above, assume D sells the cars that it paints with the paint supplier’s red paint to purchasers in return for cash payments, which D deposits into its ADI account.

Bank A’s security interest (a general security interest) will automatically attach to cash coming into D’s ADI account as proceeds of the sale of cars. The paint supplier’s retention of title (PMSI) security interest, which continued into the car, should also automatically attach to proceeds of the cars when the cars are sold by D. In each case, perfection against the cash sale proceeds in D’s ADI account is automatic. This is because perfection against proceeds that are cash in ADI accounts is automatic and does not require registration, provided that a security interest was perfected by registration over the original collateral². The paint supplier would retain its PMSI status in the funds in the ADI account and defeat Bank A in respect of those funds (assuming Bank A is not the account bank and perfected by control), provided the sale proceeds remain identifiable or traceable.

The paint supplier can potentially follow the value of the paint supplied to D right through the manufacturing value chain to the cash payment paid by purchasers of cars manufactured by D and deposited into D’s ADI account. Not a bad day for a paint supplier!