The Second Hand Car, The Insurance Policy and The PPSA

This scenario came from an enquiry from a colleague. Not all of the facts are available. That is not unusual in practice and it can complicate the response of the lawyer and the advice that the client is given.

The Facts
Person A owns a motor vehicle and grants a security interest over it to a Lender. The security interest is registered on the Personal Property Securities Register (PPSR). Person A subsequently sells the car to Person B, who fails to check the PPSR and misses the security interest of the Lender encumbering the vehicle.

Person B arranges and pays for insurance on the motor vehicle with the Insurer. The car is involved in an incident and is written off. The Insurer agrees to pay out the claim in respect of the written off motor vehicle.

Person A is a rogue and still owes money to the Lender. Person B and the Lender both assert claims to the insurance payout.

At first glance, the interest of the Lender appears to have priority over the interest of Person B.

Discussion

• The Lender can enforce the security interest against Person A, if it gave Person A notice of its registered security interest. (S.157(1) of the Personal Property Securities Act (“PPSA”))
• That would extend to the proceeds of sale (s.31(1)(a) and s.32 of the PPSA.)
• The Lender has no contractual relationship with Person B.
• The secured asset cannot be redeemed by the Lender because it has been written off.
• Only the proceeds of sale and insurance policy proceeds are available to the Lender to pursue.
• The PPSA explicitly incorporates “insurance payments” as “proceeds” pursuant to s31(1)(b).
• s.31(2) and s.32 enables the proceeds of a transaction to be traced

Person B may be able to take the motor vehicle free of the security interest of the Lender:

• Claiming it is a bona fide purchaser for value without notice in the ordinary course of business (See s.46(1) of the PPSA),
• If the Lender cannot prove that it gave Person A notice of its security interest (s.157(1)).
• If Person B can establish that situation, they take free (s 45) and none of the priority provisions have any relevance

Person B must take their interest subject to the encumbrance of Person A if:
•    Person B cannot prove that the Lender:
•    Registered their interest erroneously; or
•    Misdescribed the collateral.
•    The Lender can prove that it gave Person A notice of its security interest (s.157(1)).

However The Lender does not automatically prevail. The Lender would:

• Need to establish their ability to trace the proceeds; and
• Be subject to “bona fide purchase for value without notice”

The contest would be over the without notice component because the particulars of the security interest were entered on the PPSR.

The following questions arise:

• Whether a purchaser of a motor vehicle has an obligation to search the PPSR; and
• Whether a failure to search defeats the claim of bona fide purchaser because the security interest was registered.

Person B has the insurance policy over the motor vehicle. The Lender seeks to rely upon that insurance policy.  S.20 of the PPSA seems to prohibit the Lender enforcing the security interest against Person B directly. There seems to be no basis under the PPSA for the Insurer to pay the proceeds of the insurance policy over the motor vehicle directly to the Lender.

If the Insurer will not pay the proceeds of the insurance policy to Person B, proceedings may have to be commenced to enforce that payment.