HSD Finance lends Frank $5,000 , they take a mortgage over his motor vehicle as security. The car mortgage is registered on the PPSR.

Frank, sells his car to Francis for $5,500, he does not tell Francis that there is a registered mortgage over the car and Francis fails to search the PPSR.

What is the position with the mortgage after sale?

Question

HSD Finance lends Frank $5,000 , they take a mortgage over his motor vehicle as security. The car mortgage is registered on the PPSR.

Frank, sells his car to Francis for $5,500, he does not tell Francis that there is a registered mortgage over the car and Francis fails to search the PPSR.

What is the position with the mortgage after sale?

BlackTom AI · Accepted Answer

Question and options restated:
- A motor vehicle is mortgaged to HSD Finance for a $5,000 loan, with the car mortgage registered on the PPSR. Frank sells the car to Francis for $5,500, without telling Francis about the mortgage, and Francis does not search the PPSR.
- Options:
  1) HSD will need to commence legal proceedings against Frank to recover the money.
  2) The mortgage continues to exist and Francis will need to pay HSD to have the mortgage discharged.
  3) Francis will need to commence legal proceedings against Frank to recover the money.
  4) The mortgage is automatically discharged on sale.

Analysis of each option:
Option 1: HSD will need to commence legal proceedings against Frank to recover the money.
- Why this is unlikely: Even if Frank is the seller and personally liable, the more relevant question is who has personal liability versus who bears the risk related to the secured asset. The PPSR mortgage attaches to the car, and the buyer’s obligation is to respect that security if they are aware of it. The mere fact that Frank is the seller does not automatically mean HSD must sue Frank to recover the money; the secured asset (the car) remains subject to the mortgage, potentially creating a right against the car itself rather than against Frank personally.

Option 2: The mortgage continues to exist and Francis will need to pay HSD to have the mortgage discharged.
- Why this is correct: The PPSR-registered security interest attaches to the car. When Francis buys the car in good faith but does not discover the encumbrance (and does not search the PPSR), the security interest does not disappear. The mortgage continues to attach to the vehicle, and Francis becomes the new owner subject to that security. To clear title or discharge the mortgage, Francis would need to deal with HSD (e.g., pay the debt or obtain discharge). This reflects the continuing priority and effect of a registrable security interest over the collateral, irrespective of the buyer’s knowledge or due diligence.

Option 3: Francis will need to commence legal proceedings against Frank to recover the money.
- Why this is incorrect: The obligation to repay the loan remains with the debtor who signed the loan agreement (Frank). Francis is the buyer of the car and did not borrow from HSD; he would typically have a claim against Frank, if any, for misrepresentation or breach, but the central issue posed by the question is the status of the mortgage on the car after the sale. The more direct action for clearing the mortgage is with HSD, not Francis against Frank, in the context of the PPSR-secured loan.

Option 4: The mortgage is automatically discharged on sale.
- Why this is incorrect: Security interests registered on the PPSR do not automatically extinguish upon sale of the collateral. A buyer may take subject to the security interest unless there is a discharge or release obtained from the secured party. The sale of the asset does not by itself erase the security interest; it continues until properly discharged or otherwise released by the secured party (HSD).

Summary of reasoning:
- The core principle is that a PPSR-registered security interest attaches to the collateral and survives transfers of ownership unless the secured party discharges it. The new owner (Francis) takes subject to the mortgage and would need to engage with HSD to resolve or discharge the mortgage. The other options misstate liability, the automatic discharge rule, or the necessity of suing the wrong party.

79708 Contemporary Business Law - Autumn 2025 5-Property - Trial Quiz

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