PPSA and the extinguishment rules
Insolvency Update – Spring 2013
A little known extinguishment rule is s 34 which deals with transferred collateral. The general consensus is that this can include the movement of collateral from one status to another. For example, the movement of funds from one account to another. However, the assignment of collateral from one secured party to another is also a transfer.
Section 34 broadly provides that a secured party benefits from temporary perfection for 5 business days after discovering a transfer of the underlying collateral whether the transfer was authorised or not. Where the secured party is unaware of the transfer, the security interest is temporarily perfected for the period ending 24 months after the transfer – s 34(1)(a).
Discovery is determined by whether the secured party has actual or constructive knowledge. Constructive knowledge is defined s 297 by reference to the honest and prudent person test.