Taking Free of a Security Interest

The Act contains express provisions for when personal property may be taken free of a security interest. Generally speaking, a party cannot acquire free title to goods subject to a security where they are a party to the creation of the security interest.

Good title will be acquired by a transferee of collateral subject to a security interest where:

  • the security interest is unperfected;
  • serial numbers are misstated in a registration of prescribed property;
  • consumer property purchased and valued below $5,000; and
  • property purchased in the ordinary course of business.

Unperfected security interests

A purchaser for value will take personal property free of an unperfected security interest provided it is not party to the creation of the security interest.

Serial number defects

Motor vehicles, watercraft, aircraft and various intangible property rights may be registered by serial number. If they are ‘consumer property’ they must be registered by serial number.

A buyer of serial-numbered property takes free of a security interest if a search of the PPS register by serial number immediately before the time of sale or lease, would not disclose a registration. This rule will not apply the buyer themselves or on behalf of another, which holds the personal property as inventory or the buyer is a party to the creation of the security interest.

 Motor vehicles

A buyer or lessee for new value of a motor vehicle takes free of a security interest if:

  • The regulations provide that motor vehicles of that kind may, or must, be described by serial number; and
  • A search by serial number of the register between the start of the previous day and the time of the sale or lease would not have disclosed a registration; and
  • The seller or lessor granted the security interest and has lost the right to possess the motor vehicle.

There are a number of exception to the rule, namely:

  • The secured party is in possession of the motor vehicle immediately before the time of the sale or lease;
  • The motor vehicle is bought at a sale held by or on behalf of an execution creditor;
  • The buyer or lessee held, or holds the motor vehicle as inventory on behalf of another person;
  • The person has actual or constructive knowledge of the security interest; and
  • Where the seller is prescribed by the regulations and receives new value.

Ordinary course of business

A buyer or lessee takes personal property free of a security interest given by the seller or lessor (including proceeds) if it was acquired in the ordinary course of the seller’s or lessor’s business of selling or leasing property of that kind.

The section will not apply to serial-numbered property that the buyer themselves or on another’s behalf, holds as inventory or in any case where the buyer or lessee has actual knowledge that the sale/lease is in breach of the security agreement. There is no duty on third parties to make reasonable inquiries.

Personal, domestic or household property

Personal property under $5,000 acquired for new value with the intention of using it for personal, domestic or household purposes will be acquired free of a security interest.

The section does not apply to personal property described by regulations, or where the buyer or lessee acquires the property with actual or constructive knowledge that the sale or lease is a breach of the security agreement that provides for the security interest. There is also a subjective exception, where the buyer of consumer property believes and it is actually the case, that the market value of the property is more than $5,000.

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