Security Interests and Sale of Collateral 17 Sep 2018

Security Interests and Sale of Collateral

What happens where you have a security interest registered against property (“collateral”) under the Personal Property Securities Register (“PPSR”) and the debtor sells that property to a third party? Can you still enforce your security interest and repossess the property?

Pursuant to section 45 of the Personal Property Securities Act 1999, a security interest that is registered against collateral continues regardless of whether the collateral has since been sold to a third party. That is, unless you expressly or impliedly agree to the sale and your interest in the collateral ceasing. This means if you have a security interest registered against some collateral, you will still be able to enforce that interest even though the person named as the debtor no longer owns the particular piece of property. Further to this, section 45 also establishes that the secured party also has an interest in the proceeds of the sale of the collateral.

A good example of this is a sale of a car with a loan. Say you are person X and you sell a car to person Y under a loan and you register a security interest against that car as a form of protection should they ever default on their loan. Person Y then sells the car to person Z without your knowledge (and, most importantly, without your express or implied agreement). You can still enforce that security interest over the car, even though it is no longer owned by the debtor, person Y. Furthermore, because the collateral has been sold to a third party, person X actually has an interest in both the car itself, and in the proceeds that person Y obtained from the sale of the car. There is a limitation, however, and the amount secured is limited to the value of the collateral at the sale of the collateral.

In conclusion, a security interest does not cease to exist when the collateral is sold to a third party unless the secured party has agreed to that being the case. This is a great example of why you might consider it a good idea to utilise the PPSR register and register your security interests.

For a more basic outline the PPSR register and registering security interests, see our article here: https://www.parryfield.com/ppsr-personal-property-securities-register/

If you have any questions in relation to PPSR, registering or searching for security interests, please feel free to get in touch with Grant Adams at grantadams@parryfield.com or Steven Moe at stevenmoe@parryfield.com or on 03 348 8480. We have teams in Riccarton, Rolleston and Hokitika who would be happy to assist you.