REPORT TO THE CANADIAN CONFERENCE ON … · Edmonton, Alberta, 21- 23 June 2017. REPORT TO THE...

REPORT TO THE CANADIAN CONFERENCE ON PERSONAL PROPERTY SECURITY LAW ON PROPOSALS FOR CHANGES TO

THE PERSONAL PROPERTY SECURITY ACTS

Prepared by a Working Group of the Canadian Conference on Personal Property Security Law(CCPPSL) and ratified at the CCPPSL Annual Meeting in

Edmonton, Alberta, 21-23 June 2017

REPORT TO THE CANADIAN CONFERENCE ON PERSONAL PROPERTY SECURITY LAW ON PROPOSALS FOR CHANGES TO THE PERSONAL

PROPERTY SECURITY ACT Summary Table of Contents

Proposals for Changes to the Canadian Personal Property Security Acts .................................................. 1

I. Introduction ......................................................................................................................................... 1

II. Proposals Relevant to All or Most Jurisdictions Including Ontario ......................................................... 4

(1) Security Interests in Electronic Chattel Paper ............................................................................. 4

(2) Purchase-Money Security Interests and Cross-Collateralization .............................................. 18

(3) Refinancing and Purchase-Money Security Interests................................................................ 25

(4) Allocation of Payments ............................................................................................................. 28

(5) Security Interests in Statutory and Contractual Licences .......................................................... 31

(6) Time for Determining the Priority of a Security Interest ........................................................... 39

(7) Notice of Enforcement .............................................................................................................. 52

(8) Payment of Debts and Transfers of Negotiable Property ......................................................... 53

(9) Knowledge of Buyers and Lessees of Collateral ........................................................................ 67

(10) Account Debtors’ Rights.......................................................................................................... 69

(11) Effect of Future Advances on Buyers and Lessees .................................................................. 80

(12) Conflict of Laws ....................................................................................................................... 81

III. Provisions Relevant to All Jurisdictions Except Ontario .................................................................. 133

(1) Mandatory Serial Number Registration .................................................................................. 133

(2) Dual Search Criteria ...................................................................................................................... 137

(3) Discharge of Unauthorized Registrations ................................................................................ 143

(4) Effect of Discharge of Registrations ........................................................................................ 146

(5) Attachment and After-Acquired Crops ................................................................................... 150

(6) Serial Number Description in the General Collateral Field...................................................... 152

IV. Proposals Relevant to Specific Jurisdictions ..................................................................................... 156

(1) Time of Perfection and Bankruptcy ......................................................................................... 156

(2) Priority to Accounts ................................................................................................................ 157

(3) Subordination ......................................................................................................................... 164

Detailed Table of Contents

I. Introduction ........................................................................................................................................... 1

(1) Background ................................................................................................................................. 1

(2) The Genesis of the Proposals ...................................................................................................... 2

(3) Implementation of the Proposals in Individual Jurisdictions ...................................................... 3

II. Proposals Relevant to All or Most Jurisdictions Including Ontario ......................................................... 4

(1) Security Interests in Electronic Chattel Paper ............................................................................. 4

(a) Background .................................................................................................................... 4

(b) Developments in the United States ............................................................................... 8

(c) Recommendation ........................................................................................................... 9

(d) Proposed Provisions ..................................................................................................... 12

(e) Comment ..................................................................................................................... 15

(f) ) Transition .................................................................................................................... 17

(g) Application ................................................................................................................... 18

(2) Purchase-Money Security Interests and Cross-Collateralization .............................................. 18

(a) Background .................................................................................................................. 18

(b) Recommendation ........................................................................................................ 19

(c) Proposed Provisions ..................................................................................................... 20

(d) Comment ..................................................................................................................... 21

(e) Transition ..................................................................................................................... 25

(f) Application .................................................................................................................... 25

(3) Refinancing and Purchase-Money Security Interests ................................................................ 25

(a) Background .................................................................................................................. 25



(d) Transition ..................................................................................................................... 28

(e) Application ................................................................................................................... 28

(4) Allocation of Payments ............................................................................................................. 28

(a) Background .................................................................................................................. 28

(b) Allocation of Payments in the United States and Australia ............................................ 29


(d) Comment ..................................................................................................................... 30

(e) Transition ..................................................................................................................... 31

(f) Application .................................................................................................................... 31

(5) Security Interests in Statutory and Contractual Licences .......................................................... 31

(a) Background .................................................................................................................. 31

(i) Statutory Licences ............................................................................................ 31

(ii) Contractual Licences ....................................................................................... 34

(b) Statutory Reforms ........................................................................................................ 35

(c) Summary ...................................................................................................................... 37

(d) ) Recommendations ..................................................................................................... 37

(e) Proposed Provisions ..................................................................................................... 37

(f) Comment ............................................................................................................................ 38

(g) ) Transition ................................................................................................................... 38

(h) Application ................................................................................................................... 38

(6) Time for Determining the Priority of a Security Interest ........................................................... 39

(a) Background .................................................................................................................. 39


(c) Proposed Provision ...................................................................................................... 45

(d) Comment ..................................................................................................................... 49

(c) Transition ..................................................................................................................... 51

(d) Application ................................................................................................................... 51

(7) Notice of Enforcement .............................................................................................................. 51

(a) Background .................................................................................................................. 51


(c) Proposed Provision ....................................................................................................... 52

(d) Comment ..................................................................................................................... 53

(e) Transition ..................................................................................................................... 53

(f) Application .................................................................................................................... 53 (8) Payment of Debts and Transfers of Negotiable Property ......................................................... 53

(a) Background .................................................................................................................. 53


(c) Proposed Amendments ................................................................................................ 58

(d) Comment ..................................................................................................................... 61

(e) Transition ..................................................................................................................... 66

(f) Application .................................................................................................................... 67

(9) Knowledge of Buyers and Lessees of Collateral ........................................................................ 67

(a) Background .................................................................................................................. 67


(c) Proposed Changes ........................................................................................................ 69

(d) Transition ..................................................................................................................... 69

(e) Application ................................................................................................................... 69

(10) Account Debtors’ Rights .......................................................................................................... 69

(a) Background .................................................................................................................. 69


(c) Proposed Changes ........................................................................................................ 71

(d) Comments .................................................................................................................... 71

(e) Transition ..................................................................................................................... 79

(f) Application .................................................................................................................... 80

(11) Effect of Future Advances on Buyers and Lessees .................................................................. 80

(a) Background .................................................................................................................. 80


(c) Proposed Provision ....................................................................................................... 81

(d) Transition ..................................................................................................................... 81

(e) Application ................................................................................................................... 81

(12) Conflict of Laws ....................................................................................................................... 81

(a) Debtor Location Rules .................................................................................................. 81

(i) Background ..................................................................................................... 81

(ii) Comments ...................................................................................................... 89

(iii) Recommendation ......................................................................................... 102

(iv) Proposed Provisions ..................................................................................... 104

(v) Transition ..................................................................................................... 107

(vi) Proposed Section 7 Transitional Provisions ................................................. 109

(vii) Proposed Section 7.1 Transitional Provisions .............................................. 111

(viii) Application ............................................................................................ 112

(b) Law Applicable to Validity, Perfection and Priority ............................................... 112

(i) Law Applicable to “Priority” ......................................................................... 112

(ii) Effects of Post-Attachment Relocation of the Collateral or Debtor on Applicable Law ....................................................................................... 114

(iii) Law Applicable to Priority between Possessory and Non-Possessory Security Interests in an Instrument, a Negotiable Document of Title, Money and Chattel Paper; Distinction between Tangible and

Electronic Chattel Paper .............................................................................. 117

(iv) Renvoi .......................................................................................................... 119

(v) Proposed Provisions .................................................................................... 121

(c) Preserving Continuity of Perfection after a Change in the Applicable Law ........... 123

(i) Background .................................................................................................. 123

(ii) Recommendation ........................................................................................ 126

(iii) Proposed Provision ...................................................................................... 127

(iv) Transition ..................................................................................................... 128

(iv) Application ................................................................................................... 128

(d) Security Interests in Goods Intended to be Relocated within Thirty Days ............ 129

(i) Background .................................................................................................. 129



(iv) Transition ..................................................................................................... 130

(iv) Application ................................................................................................... 131

(e) Effect on Applicable Law of Absence of Public Registry in Jurisdiction Where Debtor is Located .................................................................................................. 131

(i) Background .................................................................................................. 131



(iv) Transition ..................................................................................................... 132

(iv) Application ................................................................................................... 132

III. Provisions Relevant to All Jurisdictions Except Ontario ............................................................... 133

(1) Mandatory Serial Number Registration ............................................................................. 133

(a) Background ............................................................................................................... 133

(b) Recommendation ..................................................................................................... 135

(c) Proposed Provisions .................................................................................................. 136

(d) Transition .................................................................................................................. 137

(e) Application ................................................................................................................ 137

(2) Dual Search Criteria .................................................................................................................... 137

(a) Background ............................................................................................................... 137

(b) The Original CCPPSL Approach.................................................................................. 139

(c) Other Legislative Approaches ................................................................................... 141

(d) Recommendation ..................................................................................................... 141

(e) Proposed Provisions .................................................................................................. 142

(f) Transition ................................................................................................................... 143

(g) Application ................................................................................................................ 143

(3) Discharge of Unauthorized Registrations ............................................................................... 143

(a) Background ............................................................................................................... 143


(c) Proposed Change ...................................................................................................... 145

(d) Transition .................................................................................................................. 146

(e) Application ................................................................................................................ 146

(4) Effect of Discharge of Registrations ....................................................................................... 146

(a) Background ............................................................................................................... 146


(c) Proposed Provisions .................................................................................................. 149

(d) Transition .................................................................................................................. 149

(e) Application ................................................................................................................ 150

(5) Attachment and After-Acquired Crops .................................................................................. 150

(a) Background ............................................................................................................... 150


(c) Proposed Provision .................................................................................................... 151

(d) Transition .................................................................................................................. 152

(e) Application ................................................................................................................ 152

(6) Serial Number Description in the General Collateral Field .................................................... 152

(a) Background ............................................................................................................... 152


(c) Proposed Provision ................................................................................................ 153

(d) Transition ............................................................................................................... 154

(e) Application ............................................................................................................. 154

(7) Sales or Leases of Low Value Customer Goods ...................................................................... 154

(a) Background ............................................................................................................ 154

(b) Recommendation .................................................................................................. 155

(c) Proposed Changes .................................................................................................. 155

(d) Transition ............................................................................................................... 156

(e) Application ............................................................................................................. 156

IV. Proposals Relevant to Specific Jurisdictions ................................................................................. 156

(1) Time of Perfection and Bankruptcy ..................................................................................... 156

(a) Background ............................................................................................................ 156

(b) Recommendation .................................................................................................. 157

(c) Proposed Provision................................................................................................. 157

(d) Transition ............................................................................................................... 157

(e) Application ............................................................................................................. 157

(2) Priority to Accounts ............................................................................................................ 157

(a) Background ............................................................................................................ 157

(b) Illustrative Scenarios .............................................................................................. 159

(c) Recommendation ................................................................................................... 162

(d) Proposed Change ................................................................................................... 162

(e) Transition ............................................................................................................... 162

(f) Application .............................................................................................................. 163

(3) Subordination 164

(a) Background ............................................................................................................ 164

(d) Recommendation .............................................................................................................. 164

(c) Proposed Provisions ............................................................................................... 165

(d) Transition ............................................................................................................... 165

(e) Application ............................................................................................................. 165

1

PROPOSALS FOR CHANGES TO THE CANADIAN PERSONAL PROPERTY SECURITY ACTS

1. INTRODUCTION

(1) Background

Almost all the Canadian Personal Property Security Acts (the “PPSAs” or the “Acts”1) were

initially enacted or re-enacted with substantial modifications during the 1980s and early

1990s. The very considerable body of case law involving the Acts that has been generated

during the last four decades does not indicate that the legislation has been a source of

significant problems for the persons affected by it or for the courts applying it. Indeed,

Canadian personal property security law has provided the pattern for similar legislation in

several countries. Nevertheless, in view of the central position occupied by personal

property security law in the Canadian economy, it is important that the Acts be periodically

examined and, if necessary, updated. Important changes to the Acts were made in recent

years to accommodate the Securities Transfer Acts that were adopted in all jurisdictions.

Large-scale revision of the PPSAs is unwarranted. However, changes are needed to address

a range of matters such as perceived omissions, troublesome court interpretations, wording

ambiguities, the need to ensure that the Acts reflect recent changes in business practices and

the growing importance of inter-jurisdictional financing transactions. When enacted, nine of

the eleven Acts were substantially uniform and the other two were structurally and

conceptually similar to their counterparts in other jurisdictions. However, over the last three

decades, the initial uniformity has been eroded in some respects. Consequently, an additional

reason for a re-examination of the Acts at this time is to assess non-uniform features in order

to determine whether they merit inclusion in all of the Acts. It is recognized that the goal of

complete uniformity of personal property security law is unrealistic.

1 R.S.A. 2000, c. P-7 (Alberta, “APPSA”); R.S.B.C. 1996, c. 359 (British Columbia, “BCPPSA”); C.C.S.M. c. P35 (Manitoba, “MPPSA”); S.N.B. 1993, c. P-7.1 (New Brunswick, “NBPPSA”); S.N.L. 1998, c. P-7.1 (Newfoundland, “NFPPSA”); S.N.W.T. 1994, c. 8 (Northwest Territories, “NWTPPSA”); S.N.S. 1995-96, c. 13 (Nova Scotia, “NSPPSA”); S.N.W.T. 1994, c. 8 (Nunavut, “NPPSA”); R.S.O. 1990, c. P.10 (Ontario, “OPPSA”); R.S.P.E.I. 1988, c. P-3.1 (Prince Edward Island, “PEIPPSA”); S.S. 1993, c. P-6.2 (Saskatchewan, “SPPSA”); R.S.Y. 2002, c. 169 (Yukon, “YPPSA”).

2

While there are some significant differences between the Ontario Act and the Acts of other

jurisdictions, many of the proposals set out below can be implemented in Ontario. It is

important to note in this context that there is support for change in the OPPSA that would

bring some features of the Act in line with the Acts of other jurisdictions. The Personal

Property Security Subcommittee of the Business Law Section, Canadian Bar Association

made several recommendations to the Ontario Government for changes to the OPPSA. Some of

the recommendations to adopt features of the Model Act in other jurisdictions have been

implemented by the Ontario Legislature. In February of 2015, the Minister of Government and

Consumer Services established a panel of experts to provide advice on priorities for reform of

business law. In its June 2015 report entitled “Business Law Agenda: Priority Findings &

Recommendations Report”, the panel concluded that consideration should be given to identifying

opportunities for harmonization of personal property security law with the other provinces. There

is good reason to expect that the proposals set out below will be taken into consideration in any

further efforts to modernize the OPPSA.

(2) The Genesis of the Proposals

The decision to undertake an examination of the PPSAs was made at the 2014 annual meeting of

the Canadian Conference on Personal Property Security Law, a non-governmental organization

that provides a forum for exchanges of views and experience among civil servants involved in the

operation of personal property registries and academic experts in Canadian personal property

security law. Several members who are either government lawyers with responsibility for this

area of law or academic experts in personal property security law agreed to undertake the

examination and preparation of proposals. Most, but not all of the proposed provisions are

supported by all members of the group. The following persons comprise the group:

Professor Ronald Cuming, College of Law, University of Saskatchewan (convenor)

Professor Clayton Bangsund, College of Law, University of Saskatchewan Professor Tamara

Buckwold, Faculty of Law, University of Alberta

3

Cynthia Callahan-Maureen, Director, Pensions and Personal Property Security, Financial and

Corporate Sector Policy, Ministry of Finance, Government of British Columbia

Professor Anthony Duggan, Faculty of Law, University of Toronto ( e d i t o r )

Professor Catherine Walsh, Faculty of Law, McGill University

Professor Roderick Wood, Faculty of Law, University of Alberta

(3) Implementation of the Proposals in Individual Jurisdictions Most of the proposed provisions set out below can be implemented in jurisdictions in the form

in which they are presented. However, consequential amendments to existing Acts may be

necessary in order to accommodate them. Not all of the proposed provisions are relevant to

every jurisdiction. The recommendations are set out in categories that reflect this feature. In

addition, each recommendation identifies the jurisdictions to which it is relevant.

While there is no complete uniformity among jurisdictions with respect to legislative drafting

conventions, it is recommended that the format of the proposed provisions set out herein be

employed as much as possible. Several of the provisions address complex matters and have been

formulated by members of the group after careful study and extensive consultation.

Furthermore, consistency in drafting is an important aspect of inter-jurisdictional uniformity.

With the exception of the OPPSA, and, to a lesser extent the YPPSA, the section numbering of

the Acts is substantially uniform. Consequently, the provisions in the recommendations have

been given section numbers, based largely on the SPPSA, that provide guidance as to where

each provision is to be included in an Act.

4

II. PROPOSALS RELEVANT TO ALL OR MOST JURISDICTIONS

INCLUDING ONTARIO

(1) Security Interests in Electronic Chattel Paper

(a) Background Chattel paper is a kind of personal property that was not recognized under pre-PPSA law; it was

“created” by the PPSA. The following is a brief description of the essential nature of chattel

paper and the priority structure of the Act applicable to it.

As defined in the PPSA,2 chattel paper is “one or more writings that evidence both a

monetary obligation and a security interest in, or lease of, specific goods.” Chattel paper is a

composite of two types of property: a monetary obligation and an interest in specific tangible

personal property. Because of its unique nature and role in financing, important aspects of

security interests in chattel paper are governed by special PPSA rules.

Chattel paper is central to automobile and equipment financing in most parts of Canada. It is

very convenient in that it allows a buyer or lessee of this type of property to arrange both

the purchase or lease with the secured financing through the seller or lessor. There is no need to

make a separate arrangement with a lender. The purchase contract provides that the seller has a

security interest in the item purchased. In the case of a long term lease, the lessor is the owner

of the item leased. In both cases, the contract provides for payment obligations on the part of

the purchaser or lessee. The seller or lessor then transfers its rights under the sales or lease

contract to either a financing organization which is often associated with the manufacturer of the

item sold or a bank that engages in this specialized type of financing. The transferee of the sale

or lease contract pays the seller or lessor the discounted value of the buyer’s or lessee’s

payment obligation and makes an arrangement with the buyer or lessee for discharge of the

payment obligations under the sales or lease contract by payment to the transferee. It is also

2 See, e.g., Saskatchewan PPSA, s.2(1)(f).

5

possible for the transferee to take the contract as security for a loan made to the seller or lessor.

In each case, the physical contract transferred to the financing organization is chattel paper.

Whether the finance organization purchases the chattel paper or takes it as collateral, the

organization is referred to as a “purchaser” of the chattel paper and the interest transferred

is referred to as a “security interest.” The PPSA treats the seller, lender, or lessor who

generated the chattel paper as the “debtor” and the purchaser of the chattel paper as the

“secured party”. This relationship is distinguished from the secured sale, loan or lease

relationship that is the basis of the chattel paper. The chattel paper purchaser acquires a

“security interest” in the interest of the seller, lender or lessor, as the case may be. The

chattel paper may be held by the initial purchaser or securitized through additional sales.

The PPSA gives to chattel paper an element of negotiability. A security interest in chattel paper

may be perfected by registration. However, under prescribed circumstances, physical acquisition

of the chattel paper gives a superior priority status. If the seller, lender or lessor gives a security

interest in chattel paper to two or more successive purchasers of it, the chattel paper purchaser

who gives new value and who takes possession of the chattel paper without knowledge of the

other interest is given priority over a secured party-purchaser who has perfected its interest by

registration. A secured party who does not take possession of the chattel paper can protect its

interest from defeat in this context by indicating clearly on the chattel paper that it is subject to

its security interest. This would give notice to any subsequent purchaser who took possession of

the chattel paper that the prior interest exists under circumstances in which t h e

p u r c h a s e r would have knowledge of the security interest.

A purchaser of chattel paper who takes possession of it in the ordinary course of its business and

for new value is given priority over a supplier who acquires a security interest in chattel paper as

proceeds generated through the sale of that inventory. The chattel paper purchaser is given

priority even though it may be aware that the chattel paper is subject to a perfected security

interest in the chattel paper as proceeds.

6

The increasing digitization of commercial transaction documentation raises the issue as to

whether the PPSA should provide for electronic chattel paper or quasi-electronic chattel paper.

Electronic chattel paper is in use in the United States and a demand for changes in Canadian law

to facilitate it can be expected in the very near future.

The context within which this issue arises is demonstrated in the following simple scenario:

Buyer enters into a secured purchase contract to acquire a vehicle. (This could also be a

secured loan or a lease). The purchase contract may be in hard copy format or may be in

electronic format. The seller (usually a dealer) then sells the chattel paper (i.e., the purchase

contract) to a purchaser or gives a security interest in it to a lender. If the purchase contract

(chattel paper) is in electronic format, it is “transferred” electronically to the chattel paper

purchaser. If the purchase contract is in hard copy format, the rights it represents (but not the

hard copy contract) are similarly transferred electronically to the chattel paper purchaser. In

both situations, the electronic chattel paper is the legal equivalent of the hard copy contract

that, under current law, would be transferred to the purchaser.

This creates few problems in cases where no competing interests in the electronic chattel paper

arise. The chattel paper purchaser is seen as the transferee of the rights of the seller, lessor or

lender against the buyer, lessee or borrower. However, where there is competition between two

or more parties claiming rights in the chattel paper, it is necessary to have priority rules that

provide a predictable outcome. It follows that, should the PPSA facilitate electronic chattel

paper, the Act must prescribe a statutory equivalent of physical possession of hard copy chattel

paper. A feature of hard copy chattel paper is its uniqueness: there is only one original contract

and it is this original that is transferred to the chattel paper purchaser. Of course, copies can be

made, but, in law, there can be only one original contract.

The problem with electronic chattel paper is that there is no concept of “original copy.” There is

a first manifestation of the electronic configuration of the data comprising the chattel paper, but

it is very difficult to identify it as the first of its kind. In order for the PPSA to recognize

electronic chattel paper, it must require the creation of mechanisms under which only one

7

authoritative manifestation is transmitted to the chattel paper purchaser. This “document” must

be identifiable as such. Any other manifestations must be treated as nothing more than evidence

of the existence of the relationship between the buyer, lessee or borrower and the secured seller,

lessor or lender. The authoritative document must be treated as the electronic equivalent of

endorsed hard copy chattel paper. The authoritative document is communicated to and securely

maintained by the transferee or a designated custodian. In this way, the transferee “controls” the

electronic chattel paper.

There would be nothing to prevent a fraudulent seller from transferring the same electronic

manifestation of a secured sale, lease or loan to two or more transferees, just as there is nothing

in the PPSA to prevent a seller from transferring a “copy” of a sales, leasing or loan transaction

to two or more transferees. When this occurs, it is necessary to determine which of the

transferred copies is the “original.” In the case of electronic chattel paper, it would be necessary

to establish on the basis of available evidence that it is the authoritative manifestation of the

electronic chattel paper. This is accomplished by requiring that the purchaser acquire and

maintain control of the electronic chattel paper at a security level in which only the transferee

may effect changes in the electronic information that comprises the chattel paper and controls

further transfer of the chattel paper to an assignee or under a securitization arrangement.

While any changes in the PPSA designed to facilitate electronic chattel paper transactions will

set the standards that must be met in order for an electronic document to be treated in law as

authoritative (i.e., controlled by the transferee), it would be unwise to specify in the legislation

the mechanisms through which these standards can be met. Technology evolves rapidly and will

provide various methods to accomplish this. For example, the evolving development of “block

chain” data configuration may significantly reduce or eliminate the problem of creating and

preserving an authoritative document involved in a chattel paper transaction.

8

(b) Developments in the United States Section 9-102(a)(11) of the United States Uniform Commercial Code3 defines the term “chattel

paper” as including “a record or records that evidence both a monetary obligation and a security

interest in specific goods…, or a lease of specific goods”. Section 9-102(a)(31) defines

"electronic chattel paper" as chattel paper evidenced by a record or records consisting of

information stored in an electronic medium. Section 9-330(a) provides:

(a) A purchaser of chattel paper has priority over a security interest in the chattel paper that

is claimed merely as proceeds of inventory subject to a security interest if:

(1) in good faith and in the ordinary course of the purchaser's business, the purchaser

gives new value and takes possession of the chattel paper or obtains control of the

chattel paper under Section 9-105; and

(2) the chattel paper does not indicate that it has been assigned to an identified

assignee other than the purchaser.

(b) A purchaser of chattel paper has priority over a security interest in the chattel paper

which is claimed other than merely as proceeds of inventory subject to a security interest if

the purchaser gives new value and takes possession of the chattel paper or obtains control

of the chattel paper under Section 9-105 in good faith, in the ordinary course of the

purchaser's business, and without knowledge that the purchase violates the rights of the

secured party.

Section 9-105 provides:

(a) A secured party has control of electronic chattel paper if a system employed for

evidencing the transfer of interests in the chattel paper reliably establishes the secured

party as the person to which the chattel paper was assigned.

3 United States Uniform Commercial Code – Secured Transactions.

https://www.law.cornell.edu/ucc/9/9-102#record

https://www.law.cornell.edu/ucc/9/9-102#goods

https://www.law.cornell.edu/ucc/9/9-102#chattelpaper



https://www.law.cornell.edu/ucc/9/9-102#proceeds

https://www.law.cornell.edu/ucc/9/9-102#inventory

https://www.law.cornell.edu/ucc/9/9-102#goodfaith

https://www.law.cornell.edu/ucc/9/9-102#newvalue


https://www.law.cornell.edu/ucc/9/9-105#9-105



https://www.law.cornell.edu/ucc/9/9-102#proceeds

https://www.law.cornell.edu/ucc/9/9-102#inventory

https://www.law.cornell.edu/ucc/9/9-102#newvalue

https://www.law.cornell.edu/ucc/9/9-105#9-105

https://www.law.cornell.edu/ucc/9/9-102#goodfaith

https://www.law.cornell.edu/ucc/9/9-102#securedparty


https://www.law.cornell.edu/ucc/9/9-102#electronicchattelpaper

9

(b) A system satisfies subsection (a) if the record or records comprising the chattel paper

are created, stored, and assigned in such a manner that:

(1) a single authoritative copy of the record or records exists which is unique, identifiable

and, except as otherwise provided in paragraphs (4), (5), and (6), unalterable;

(2) the authoritative copy identifies the secured party as the assignee of the record or

records;

(3) the authoritative copy is communicated to and maintained by the secured party or its

designated custodian;

(4) copies or amendments that add or change an identified assignee of the authoritative

copy can be made only with the consent of the secured party;

(5) each copy of the authoritative copy and any copy of a copy is readily identifiable as a

copy that is not the authoritative copy; and

(6) any amendment of the authoritative copy is readily identifiable as authorized or

unauthorized.

(c) Recommendation It is recommended that the PPSA be amended to provide for the use of electronic chattel paper.

These amendments would address the anticipated request for law designed to facilitate electronic

chattel paper. It is also recommended that these amendments, for the purposes of establishing

control, “track” features of Article 9 of the US Uniform Commercial Code dealing with

electronic chattel paper. The basis for this is to take advantage of several years of experience

with the use of electronic chattel paper in some US states. A central feature of the changes

necessary to effect this recommendation is that the concept of “control” of electronic chattel

paper be adopted as a substitute for possession of hard copy chattel paper.

Section 10(1)(a) and (d) of the Saskatchewan PPSA provide that, with exceptions not relevant to

this recommendation, a security interest is enforceable against a third party only where the

secured party has taken possession of the collateral or the debtor has signed a security agreement



https://www.law.cornell.edu/ucc/9/9-102#communicate

10

that contains a description of the collateral. This provision was drafted at time when digital

documentation was not in use. This is no longer the case. Consequently, it is necessary to

recognize in the context of the PPSA that a security agreement and signature on that agreement

may be in electronic format.

The Saskatchewan Electronic Information and Documents Act4 ( and similar Acts in other Canadian jurisdictions) provides in part as follows:

3 In this Part:

(a) "electronic" means created, recorded, transmitted or stored in digital or other

intangible form by electronic, magnetic or optical means or by any other similar

means;

(b) "electronic signature" means information in electronic form that a person has

created or adopted in order to sign a document and that is in, attached to or

associated with the document;

5(3) The provisions of this Part relating to the satisfaction of a requirement of any law

apply whether or not the law creates an obligation or provides consequences for doing

something or for not doing something.

8 A requirement pursuant to any law that any information or document be in writing is

satisfied if the information or document:

(a) is in an electronic form; and

(b) is accessible so as to be usable for subsequent reference.

4 2000, SS 2000, c.R-7.22.

11

9 A requirement pursuant to any law for a person to provide any information or

document in writing to another person is satisfied if the person provides the information

or document in an electronic form and the information or document:

(a) is accessible by the other person; and

(b) is capable of being retained by the other person so as to be usable for subsequent

reference.

10 A requirement pursuant to any law for a person to provide any information or

document to another person in a specified non-electronic form is satisfied if the person

provides the information or document in an electronic form and the information or

document:

(a) is provided in the same or substantially the same form;

(b) is accessible by the other person; and

(c) is capable of being retained by the other person so as to be usable for subsequent

reference.

14(1) A requirement pursuant to any law for the signature of a person is satisfied by an

electronic signature.

(2) Notwithstanding subsection (1), the Lieutenant Governor in Council may make

regulations prescribing documents or classes of documents for which a requirement

pursuant to any law for the signature of a person is satisfied by:

(a) an electronic signature; and

12

(b) proof that, in view of all the circumstances, including any relevant

agreement and the time the electronic signature was made:

(i) the electronic signature is reliable for the purpose of identifying the person; and

(ii) the association of the electronic signature with the relevant electronic

document is reliable for the purpose for which the electronic document

was made.5

There appears to be no need to amend the PPSA in order to give legal efficacy to a

security agreement referred to in section 10. The requirements of writing and signature fall

within the above-noted provisions of the Electronic Information and Documents Act, 2000.

(d) Proposed Provisions (changes noted) 2(1)(f) “chattel paper” means one or more writings records that evidence both a

monetary obligation and:

(ii) a security interest in, or lease of, specific goods; or

(ii) a security interest in, or lease of, specific goods and accessions;

2(1)(0.1.1) "electronic chattel paper" means chattel paper created, recorded, transmitted

or stored in digital or other intangible form by electronic, magnetic or optical

means;

2(1)(rr.2) “tangible chattel paper” means chattel paper evidenced by a record or

records consisting of information that is inscribed on a tangible medium.

2(1.2) A secured party has control of electronic chattel paper if the record or records

comprising the chattel paper are created, stored, and transferred in such a manner that:

5 No such regulations have been promulgated in Saskatchewan.


https://www.law.cornell.edu/ucc/9/9-102#electronicchattelpaper


13

(a) a single authoritative record of the electronic chattel paper exists which is

unique, identifiable and, except as otherwise provided in paragraphs (d), (e), and (f),

unalterable;

(b) the authoritative record identifies the secured party as the transferee of the record;

(c) the authoritative record is communicated to and securely maintained by the

secured party or its designated custodian;

(d) copies or amendments that add or change an identified transferee of the

authoritative record can be made only with the consent of the secured party;

(e) each copy of the authoritative record and any copy of a copy is readily identifiable as

a copy that is not the authoritative record; and

(f) any amendment of the authoritative record is readily identifiable as authorized

or unauthorized.

10(1)(c.1) the collateral is electronic chattel paper and the secured party has control

pursuant to subsections 2(1.2);

24(1) Subject to section 19, possession of the collateral by the secured party, or by another

person on the secured party’s behalf, perfects a security interest in:

(a)tangible chattel paper;

(b) goods;

(c) an instrument;

(d) Repealed. 2007, c.S-42.3, s.108.

(e) a negotiable document of title; or

(f) money;

except where possession is a result of seizure or repossession. 24.2(1) A security interest in electronic chattel paper may be perfected by control of the collateral under subsection 2(1.2).

https://www.law.cornell.edu/ucc/9/9-102#communicate

14

(2) A security interest in electronic chattel paper is perfected by control only when the

secured party has control as provided in subsection 2(1.2).

(7)A purchaser of chattel paper who takes possession of it in the ordinary course of

the purchaser’s business and for new value has priority over any security interest in the

chattel paper that:

(a) was perfected pursuant to section 25, if the purchaser does not have knowledge at

the time of taking possession that the chattel paper is subject to a security interest; or

(b)has attached to proceeds of inventory pursuant to section 28, whatever the extent

of the purchaser’s knowledge.

31(9) Subject to subsection (10), a purchaser of chattel paper who takes possession of

the tangible chattel paper, or who obtains control of electronic chattel paper as provided

in subsection 2(1.2), in the ordinary course of the purchaser’s business and for new value,

has priority over any security interest in the chattel paper if the chattel paper does not indicate

that it has been assigned to an identified assignee other than the purchaser.

(10) When the rights arising under tangible chattel paper are transferred to a purchaser

as electronic chattel paper and the tangible chattel paper is transferred to another purchaser

who takes possession of it for new value and in the ordinary course of that purchaser’s

business, the interest of the purchaser of the tangible chattel paper has priority over the

interest of the purchaser of the electronic chattel paper if the tangible chattel paper does not

indicate that it has been assigned to an identified assignee other than the purchaser of the

tangible chattel paper.

35(1) Where this Act provides no other method for determining priority between security

interests:

(a) priority between perfected security interests in the same collateral is determined by

the order of occurrence of the following:


15

(i) the registration of a financing statement, without regard to the date of

attachment of the security interest,

(ii) possession of the collateral under section 24, without regard to the date of

attachment of the security interest,

(iii) control under subsection 2(1.2),

(iv) perfection under section 5, 7, 26, 29 or 77,

whichever is earlier,

(b) a perfected security interest has priority over an unperfected security interest, and

(c) priority between unperfected security interests is determined by the order of

attachment of the security interests.

(e) Comment The proposed new definitions and amendments are designed to provide specific recognition of

electronic chattel paper as a special form of chattel paper. They apply where the contract that

comprises the chattel paper is in electronic form or where the contract is in hard copy form but

the chattel paper is transferred to the purchaser in electronic form.

The proposed new subsection 2(1.2) sets the conditions that must be met for a secured party to

have control of electronic chattel paper. For the most part, the subsection tracks the details of

UCC, section 9-105. However, the Article 9 approach is different in that it states in general

terms the requisite standard followed by “safe harbour” provisions. This approach is likely to

lead to litigation in any case where not all of the enumerated safe harbour measures have

been employed but the purchaser takes the position that it has met the general standard. The

recommended approach is to prescribe the requirements that must be met in order for “control”

to exist. However, these requirements may be replaced by regulation where new forms of data

transmission and storage become available.

The proposed new clause 10(1)(c.1) recognizes that control is the equivalent of possession of

tangible chattel paper.

16

The proposed subsections 31(9) and (10) collapse the currently recognized distinction (in PPSA

ss. 31(7)(a) and (b)) between original collateral claimants and proceeds claimants, and instead

designate “marking”, or “stamping”, as a universal proxy for purchaser knowledge. Under the

proposed provisions, a chattel paper purchaser is entitled to acquire chattel paper by possession

or control for new value in the ordinary course of business except where the chattel paper is

marked. Actual knowledge of prior interests in the chattel paper, whether original collateral or

proceeds, will not prejudice the purchaser’s rights unless those interests are marked onto the

chattel paper. The proposed formulation will enhance the PPSA’s facilitation of chattel paper

financing and avoid the potential for costly fact-finding missions regarding purchaser

knowledge. Chattel paper purchasers are able to transact freely with respect to unmarked chattel

paper. Prior secured parties or purchasers are able to protect themselves by acquiring possession

or control of the chattel paper, or by ensuring that the chattel paper is marked.

The proposed new subsection 31(10), which has no counterpart in UCC Article 9, addresses a

priority competition that will arise where the chattel paper is generated in hard copy format, but

the seller, lessor or lender transfers the chattel paper in electronic format to purchaser 1 and

fraudulently transfers possession of the hard copy to purchaser 2. Subsection 31(10) departs from

the Article 9 approach in that it does not accept that the treatment of the hard copy contract as

electronic chattel paper results in the hard copy ceasing to be chattel paper. Consequently, it is

quite possible for the chattel paper to be in two forms and transferred to two different purchasers.

The potential for this scenario to exist will be very significant since, for the foreseeable future, it

is unlikely that consumer secured sales or lease contracts will be in exclusively electronic

format.

Comment 3 to UCC, section 9-105 states in part: “When tangible chattel paper is converted to

electronic chattel paper, in order to establish that a copy of the electronic chattel paper is the

authoritative copy it may be necessary to show that the tangible chattel paper no longer exists or

has been permanently marked to indicate that it is not the authoritative copy.” However, this is

not law, and it leaves in doubt the outcome where the electronic chattel paper purchaser took

reasonable steps to ensure that the tangible chattel paper no longer exists but, in fact, failed.

The prima facie conclusion suggested by the comment is that the electronic chattel paper is not

the authenticated copy with the result that the purchaser does not have control, and,

17

consequently, does not have a perfected security interest (or any interest). Under the subsection

31(10) approach, the failure to destroy or mark the hard copy does not preclude “control”. The

security interest in the electronic chattel paper is perfected and, consequently, is protected

against the trustee in bankruptcy and unsecured creditors.

The practical argument for the subsection 31(10) approach is that many purchasers of electronic

chattel paper will want to leave the hard copy form of the chattel paper in the possession of the

seller, lessor or lender. This avoids the administrative cost of having to destroy or mark the hard

copy. If these measures are required in order to have control in all cases, the purchaser could just

as easily perfect by possession of the hard copy. The risk with which the purchaser of the

electronic chattel paper is likely to be concerned is not the chattel paper seller’s dishonesty, but

the seller’s bankruptcy. The proposed approach addresses this concern. There would be no

requirement to destroy or mark the hard copy in order to prevail against the trustee. Arguably,

this approach makes electronic chattel paper more attractive.

There is a precedent for this approach in the context of security interests in serial numbered

goods held as equipment where registration against the debtor’s name gives perfection against

the trustee but not against other interests.

The effect of subsection 31(10) would be to place the obligation on the transferee of the

electronic version of the chattel paper to take steps to ensure that the seller, lessor or lender is not

able to mislead a purchaser of the hard copy contract. As noted above, it is very likely that most

chattel paper purchasers will be willing to trust the sellers, lenders and lessors from whom they

purchase electronic chattel paper. However, if not, they can take measures to avoid the priority

risk addressed in the subsection. This can be accomplished by physically marking the hard copy

contracts with a notice that the paper has been transferred, or by requiring that the original

contracts be surrendered to a trusted third party.

(f) Transition The proposed provisions are intended to take effect as of the coming into force of the

amendments but to apply only to interests acquired after that date.

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(g) Application

The proposed provisions are relevant to all jurisdictions.

(2) Purchase-Money Security Interests and Cross-Collateralization

(a) Background A problem that received a great deal of attention in the United States and one that has received

some judicial attention in Saskatchewan and Ontario arises when a secured financier (generally a

supplier) provides purchase money inventory financing under a series of transactions with a

debtor. Over the period of the relationship, items of inventory are sold and the debtor makes

payments, but neither the debtor nor the secured party can demonstrate that payments made by

the debtor were related to any particular delivery of inventory. When large amounts of inventory

are delivered over a long period of time under several separate contracts or subcontracts,

allocation of payments would involve a great deal of bookkeeping.

The issue is demonstrated through the following simple example:

SP (secured party) enters into a supply contract under which SP agrees to deliver to Debtor

items of inventory under a secured financing arrangement providing that Debtor will make

periodic payments. SP delivers items A and B under this arrangement.

If A is sold and the payment made by Debtor to SP is notionally allocated to item A, SP

retains a purchase- money security interest (pmsi) in item B that was not sold. However, if

the payment is notionally allocated to item B, the result is that the pmsi obligation

associated with item B is discharged. The debt associated with the item A remains unpaid.

SP can claim a security interest in item B to secured the obligation relating to A under a

clause in the agreement giving SP a security interest in all of Debtor’s inventory, but

this security interest does not have pmsi priority status. SP will want to cross-

collateralize its pmsi status in item A so as to give it a pmsi security interest in item B.

This will be important to SP in a priority conflict between SP and a bank to which the debtor

gave a non-pmsi security interest in all of its present and after-acquired property before entering

19

into the agreement with the supplier. The bank has priority with respect to any collateral of the

debtor that is not subject to SP’s pmsi.

As a matter of commercial efficiency, SP should not be required to keep detailed records as to

how payments made by Debtor are allocated in order to minimize the amount of purchase-

money debt discharged by the payments, and in practice such records may not in fact be kept.

However, cross-collateralization under which a pmsi secures a non-purchase money obligation

is not possible under the current PPSA. Under the definition of “purchase- money security

interest”, the only security interest that qualifies is one “taken in collateral... to the extent that it

secures all or part of the purchase price of the collateral” or one “taken in collateral (to secure

value) ... to the extent the value is applied to acquire the collateral.” This wording makes it

clear that a pmsi in collateral is strictly proportionate to the extent it secures the price of the

collateral or the value used to acquire the collateral. In the context of the scenario above, the

pmsi obligation associated with item B was discharged.

(b) Recommendation

It is proposed that limited cross-collateralization be recognized in the context of purchase-

money financing arrangements involving inventory. This would reduce the administrative

costs and legal uncertainty associated with inventory financing arrangements. It would

recognize that an inventory financier has a pmsi in all collateral in which it held a pmsi even

though the obligation relating to that collateral has been discharged, or it is not possible to

determine how the payments made by the debtor were allocated by the financier, as long as an

obligation relating to another pmsi transaction between the same parties remains outstanding. If

enacted, the proposal would give a pmsi financier priority with respect to any collateral that

was formerly subject to a pmsi to secure under-collateralized debt arising under separate, related

pmsi transactions.

The proposal would replicate the basic approach contained in UCC 9-103(b), but would be more

limited in that it would restrict cross-collateralization to a "related" transaction. Purchase- money

security interest cross-collateralization is supportable where there is some relationship between

the pmsi transactions. However, where the transactions are unrelated, general ‘background’

lenders might be reluctant to extend secured financing to small businesses without assurance that

20

their debtors' interests in property formerly subject to purchase- money security interests will

not be subject to new purchase-money security interests created under entirely separate

transactions entered into after the original pmsi obligation has been paid out. In order to address

this concern, the proposal would not recognize ex post facto consolidation of pmsi obligations.

In other words, it would not be possible for the parties to enter into a consolidation

agreement providing full pmsi cross-collateralization of obligations arising under prior separate

agreements. The proposal would facilitate cross-collateralization only where there is a

continuing relationship that involves purchase-money security interests so that the secured

party need not keep separate accounts for each separate sub-transaction as the current

definition requires. Beyond this, there is a risk of prejudice to prior secured parties of the same

debtor.

(c) Proposed Provisions (additions underlined)

2(1)(jj) "purchase money security interest" means:

(i) a security interest taken in collateral to the extent that it secures all or part of its

purchase price;

(ii) a security interest taken in collateral by a person who gives value for the purpose of

enabling the debtor to acquire rights in the collateral, to the extent that the value is

applied to acquire those rights;

(iii) the interest of a lessor of goods pursuant to a lease for a term of more than one year;

or

(iv) the interest of a consignor who delivers goods to a consignee pursuant to a

commercial consignment;

but does not include a transaction of sale and the lease back to the seller and, for the

purposes of this definition, "purchase price" and "value" include credit charges and interest

payable for the purchase or loan credit; and, when the collateral is inventory, subsections

(6) and (7) apply.

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(6)A purchase money security interest in inventory:

(a) secures any obligation arising out of a related transaction creating an

interest referred to in clauses 2(1)(jj)(i) or (ii);

(b)extends to other inventory in which the secured party holds or held a security

interest under a related transaction that secures or secured an obligation referred to in

clause 2(1)(jj)(i) or (ii).

(7) For the purposes of subsection (6), a transaction is related to another transaction when

the possibility of both transactions is provided for in the first transaction or an agreement

between the parties entered into prior to the first transaction.

(8)A purchase-money security interest does not lose its status because:

(a) the purchase-money collateral also secures an obligation that is not a purchase-

money obligation;

(b)collateral that is not subject to a purchase-money security interest also secures

the purchase-money obligation; or

(c)the purchase-money obligation has been renewed, refinanced, consolidated,

or restructured.

(d) Comment

The effect of the proposal is demonstrated in the following scenarios:

Scenario 1:

June 1: Debtor enters into a security agreement with SP1 giving it a security interest in “all

present and after-acquired personal property.” SP1 effects a registration.

July 1: Debtor enters into an inventory financing agreement with SP2 providing for a series of

loans over a period of time to allow Debtor to purchase inventory and granting SP2 a security

22

interest in the inventory. SP2 effects a registration. The agreement also provides that, as each

loan is made, the amount of the loan will be consolidated with amounts then owing and that

the security interest in the inventory will secure the entire amount owing. Debtor is required to

make payments every 30 days in amounts that will be set according to the amount outstanding

during the previous payment period.

August 1: Loan 1 in the amount of $10 is made by SP2 and used by Debtor to purchase widgets.

(Loan 1 Widgets)

Before the widgets are received by Debtor, SP2 gives SP1 the notice required by subsections

34(3)-(4).

August 25: Debtor sells the Loan 1 Widgets.

August 30: Debtor makes the first payment ($5) to SP2 as required by the agreement. (At this

point, SP2 does not have a security interest to protect the remaining $5 that is owing.)

September 1: Loan 2 in the amount of $10 is made by SP2 and used by Debtor to purchase

widgets. (Loan 2 Widgets)

September 30: Debtor makes a payment of $10 to SP2 as required by the agreement.

October 1: Debtor is insolvent.

At the date of insolvency, Debtor owed $5 to SP2. Assume that at this point the Loan 2 Widgets

are worth $10. The issue is whether or not this debt is secured by a pmsi in the Loan 2 Widgets.

SP1 claims priority on the basis of having first effected a registration.

Under the terms of the agreement, the $10 was applied to the then existing $15 debt reducing it

to $5. In effect, the payment was allocated proportionally: $3.34 to the Loan 1 obligation and

$6.66 to the Loan 2 obligation. The issue is whether the balance of collateral value in the Loan 2

Widgets can be treated as securing (on a purchase-money basis) the $1.66 notionally owing for

Loan 1. In other words, can the Loan 1 obligation be cross-collaterally secured with the pmsi in

the Loan 2 Widgets? If enacted, the proposal would permit this.

23

Scenario 2:

June 1, Debtor enters into a security agreement with SP1 giving it a security interest in “all

present and after-acquired personal property”. SP1 effects a registration.

July 1, Debtor enters into an inventory financing agreement with SP2 providing for a series of


interest in inventory. SP2 effects a registration. The agreement also provides that each loan is to

be repaid as soon as the collateral purchased with the loan has been sold. It also provides that the

security interest in any of the collateral secures any amount owing by Debtor to SP2.

Before the inventory is received by Debtor, SP2 gives SP1 the notice required by subsections

34(3)-(4).

August 1, Loan 1 in the amount of $10 is made by SP2 and used by Debtor to purchase widgets.

(Loan 1 Widgets).

August 10, the Loan 1 Widgets are sold by Debtor. (At this point, SP2 has no security interest

in the Loan 1 Widgets). Debtor failed to repay the August 1 loan.

August 15, Loan 2 in the amount of $10 is made and used by Debtor to purchase widgets. (Loan

2 Widgets).

August 20, the Loan 2 Widgets are sold and the consideration is partly cash and partly the value

of used widgets traded in by customers of Debtor.

August 21, Debtor pays to SP2 the amount of Loan 2 with the result that this loan is discharged.

(i.e., the $10 payment was explicitly allocated to Loan 2).

September 30, Debtor is insolvent.

At the date of insolvency Debtor owes $10 to SP2, which is the amount of the unpaid Loan 1.

The issue here is whether or not SP2 has a purchase-money security interest in the traded in

24

proceeds widgets to secure Loan 1. SP1 claims priority on the basis of its first in time

registration.

The proposal would allow SP2 to claim a purchase-money security interest in the Loan 2 widgets

to secure the Loan 1 obligation.

Scenario 3:

June 1, Debtor enters into a security agreement with SP1 giving it a security interest in “all

present and after-acquired personal property”. SP1 effects a registration.

July 1, Debtor enters into an inventory financing agreement with SP2 providing for a series of


interest in the inventory. SP2 effects a registration. The agreement provides that as each loan is

made the amount of the loan is consolidated with amounts then owing and that the security

interest in the inventory secures the entire amount owing. Debtor is required to make payments

every 30 days of amounts that will be set according to the amount outstanding during the

previous payment period.

Before the inventory is received by Debtor, SP2 gave SP1 the notice required by subsections

34(3)-(4).

August 1, Loan 1 in the amount of $10 is made by SP2 and used by Debtor to purchase widgets.

(Loan 1 Widgets).

August 30, Debtor pays $10 to SP2 as provided in the agreement. (At this point, SP2 has no

security interest in the Loan 1 Widgets).

September 2, Loan 2 in the amount of $10 is made by SP2 and used by Debtor to purchase

widgets. (Loan 2 Widgets).

The Loan 2 Widgets depreciate in value so that at the date of Debtor’s insolvency they are worth

$5.

25

September 30, Debtor is insolvent.

The issue here is whether, as a result of the agreement, SP2 has a pmsi in the Loan 1 Widgets

that secures the $5 still owing in connection with the purchase of the Loan 2 Widgets. The

proposal would recognize that it does. The Loan 1 Widgets are inventory in which the secured

party held a security interest under a related transaction.

(e) Transition

The amended provisions are intended to take effect as of the coming into force of the

amendments but to apply only to interests acquired after the date of commencement.

(f) Application


(3) Refinancing and Purchase-Money Security Interests

(a) Background

An issue arises in the context of the definition of purchase-money security interest (pmsi) in

cases where a pmsi security interest in collateral is “refinanced”, either by the original secured

party having the pmsi under an agreement providing that the pmsi debt is discharged and

replaced by the new obligation, or by another secured party who loans money to the debtor to

“pay out” the original secured party. The money supplied by the original or refinancing secured

party is used to pay out the pmsi obligation and is not used by the debtor to acquire new rights in

the collateral. Conceptually, there is no longer a pmsi in the collateral since the obligation it

secures has been discharged. However, from a purely practical point of view, refinancing an

obligation secured by a pmsi merely results in replacement not discharge of the obligation. While

two courts of appeal (Battlefords Credit Union Limited v. Ilnicki,6 ; Unisource Canada Inc. v.

Laurentian Bank of Canada 7) have “stretched” the law to arrive at the conclusion that the

6 [1991] 5 WWR 673 (Sask.C.A.). 7 (2000) 47 OR (3d) 616 (Ont. C.A.).

26

refinancer acquires a pmsi, a direct legislative solution is desirable in order to remove any doubt

in the matter.

(b) Recommendation

The solution is to provide that purchase money status is not lost when a purchase-money

obligation is refinanced. Where the pmsi obligation is refinanced by the original secured party,

the pmsi priority is retained notwithstanding that a new agreement is entered into between the

debtor and the secured creditor under which the original pmsi debt is discharged and replaced by

an equivalent obligation. See proposed new clause 2(8)(c), Part 2 (c), above.

A different approach is required where the pmsi obligation is discharged by payment to the

original secured party by a refinancing secured party who wishes to have the pmsi status of the

original financer. Under existing PPSAs, this could be accomplished by an agreement between

the original secured party and the refinancing secured party pursuant to which the former assigns

his or her interest to the latter and amends the registration records to reflect the agreement.

However, there will be circumstances in which the original secured party will not be prepared to

assign his or her interest to the refinancing secured party. Indeed, the original secured party may

well be hostile as a result of potential loss of the return on its investment resulting from the

refinancing.

The right of the debtor to discharge the original pmsi obligation through refinancing with another

secured party is a matter addressed in the agreement with the secured party or the otherwise

applicable law. However, in those situations where it is not prohibited by the agreement or is

permitted by law regardless of the terms of the agreement, the proposal would facilitate

refinancing that results in preservation of the pmsi status associated with the refinanced

obligation. This is accomplished by deeming that the discharge of the original pmsi obligation

results in a statutory assignment of the pmsi security interest from the original secured party to

the refinancing secured party. The refinancing secured party is a successor in interest to the pmsi

of the original secured party. This does not create a new pmsi that changes in any way the

priority outcome that existed before the refinancing occurred. As a result it avoids the problem

27

that arose in MacPhee Chevrolet Buick GMC Cadillac Ltd. v. S.W.S.Fuels 8 and Unisource Canada, Inc v. Lautrentian Bank of Canada .9.

The deemed assignment approach contained in the proposal does not address perfection.

The original secured party may not be willing to amend the registration of the pmsi to reflect

that the refinancing secured party is the secured party of record. In any event, the original

secured party is likely to discharge, or may be required by the debtor to discharge, the

registration relating to its security interest once it receives the payout. Under the proposal the

refinancing secured party may effect a registration relating to the security interest it acquired

under the statutory assignment. If this occurs before the registration relating to the original

secured party’s interest has expired or has been discharged, the pmsi priority is retained

subject only to the requirement that other secured parties are notified. Such notices are

required since otherwise the competing secured parties will not know that the registration

effected by the refinancing secured party relates to a pmsi to which they would be subject.

They may assume that this registration simply relates to a non-pmsi that would be

subordinate to their interests. In order to avoid this, it is important that these secured parties

be informed that the registration relates to a deemed assigned pmsi to which they are subject.

(c) Proposed Provisions

34(13) When refinancing of an obligation referred to in subclause 2(1)(jj)(i) or (ii) occurs pursuant

to a refinancing agreement between the debtor and a secured party other than the secured party

who provided the credit or value referred to in the subclauses, and

(a) the original registration relating to the purchase money security interest securing

the obligation is amended to identify the secured party named in the refinancing agreement

as a secured party; or

(b)before expiry or discharge of the original registration relating to the security

interest a registration relating to the purchase money security interest is effected disclosing

the secured party named in the refinancing agreement as the secured party, or the security

interest is otherwise perfected;

8 2011 NSCA 35.

28

9 [2000] O.J. No. 687 (Ont.C.A.). the purchase money security interest is deemed for priority purposes to have been assigned to

the secured party who provided value to the debtor pursuant to the refinancing agreement.

(14)A purchase money security interest that is deemed to have been assigned as provided in

subsection (13) has the same priority it had immediately prior to the deemed assignment with respect to a

competing security interest but, where clause (13)(b) applies, is subordinate to advances made or

contracted for by the holder of a perfected competing security interest after expiry or discharge of the

original registration relating to the purchase money security interest and before written notice of the

deemed assignment is given to the holder.

(d) Transition

The amended provisions are intended to take effect as of the coming into force of the

amendments but to apply to interests acquired after the date of commencement.

(e) Application


(4) Allocation of Payments

(a) Background

A purchase-money security interest in collateral may secure the purchase money obligation as

well as another obligation. When the debtor makes a payment to the secured party, it will often

be necessary to determine which obligation it is to be directed towards. For example:

SP takes and perfects a purchase-money security interest in D`s tractor to secure a

purchase-money loan of $50,000. SP later refinances by advancing an additional $50,000

to D. D then repays $40,000 towards the consolidated obligation of $100,000.

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In the absence of a contractual or statutory formula for the allocation of payments or an intention

on the part of the debtor at the time the payment is made, some courts have held that the

payments should be applied in the order that the obligations were incurred.10

It is presently uncertain how this issue will be dealt with in Canada, although there is some

support for a “first in, first out” approach that would allocate payments on the basis of when they

first arose. This uncertainty should be removed in the context of the PPSA.

(b) Allocation of Payments in the United States and Australia

The United States UCC and the Australian PPSA (AUSPPSA) provide a default rule that governs

when the parties have not specified how the payment should be allocated.

UCC §9–103(e)(3) provides the following order of allocation:

1. unsecured obligations in the order that they were incurred;

2. purchase-money security interests in the order they were incurred.

3. Non-purchase-money security interests (presumably in the order they were incurred).

Applying the UCC provision to the example above, the payment is allocated first to the

purchase-money security interest with the result that it is eroded so that only $10,000 remains

as a purchase-money obligation.

Subsection 14(6) of the Australian PPSA provides for the following order of allocation:

1. unsecured obligations in the order that they were incurred;

2. non purchase money security interests in the order they were incurred;

3. purchase money security interests in the order they were incurred.

Applying the Australian provision to the example above, the payment is allocated to the later

loan with the result that the purchase-money obligation is fully preserved.

10 See In Re Conn, 33 UCC Rep 701 (1982).

30


2(6) A payment made by a debtor to a secured party must be applied:

(a) in accordance with any method of application to which the parties agree;

(b) in accordance with any intention of the debtor manifested at or before the

time of the payment if the parties do not agree on a method; or

(c) if neither clause (a) nor (b) applies, in the following order:

(i) to obligations that are not secured, in the order in which those

obligations were incurred;

(ii) to obligations that are secured, but not by purchase money

security interests, in the order in which those obligations were incurred;

(iii) to obligations that are secured by purchase money security interests, in

the order in which those obligations were incurred.

(d) Comment

The proposed provision produces the same result as the Australian approach. The $40,000

payment is allocated to the non-pmsi loan, leaving the purchase-money obligation fully secured.

This allocation formula seems to accord more closely with the expectations of the parties, as a

secured party would ordinarily wish to preserve its priority status. In any event, the provision

operates as a default rule that the parties can vary through contract, and in the absence of an

agreement it is open to the debtor to specify at the time of payment which obligation the payment

is to be allocated against.

Both the Australian PPSA and UCC Article 9 limit their formulas to instances where “the

extent to which a security interest is a purchase-money security interest depends on the

application of a payment to a particular obligation.” This appears to be unnecessarily

restrictive. The allocation of payments issue is not restricted to instances where a purchase-

money obligation is combined with a non-purchase-money secured obligation, but will also

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apply where a payment is made by a debtor who has incurred both a secured obligation and

an unsecured obligation.

(e) Transition

The proposed provisions is intended to take effect as of the coming into force of the amendments

and to apply to all security interests whether they arise under an agreement made before or after

the coming into force of the amendments.

(f) Application


(5) Security Interests in Statutory and Contractual Licences

(a) Background

(i) Statutory Licences

A question that has been much litigated, particularly in Ontario, is whether a statutory

licence qualifies as personal property for the purposes of the PPSA. The following example

illustrates the context in which the issue typically arises.

Debtor runs a commercial fishing business and holds a fishing licence from the

relevant government authority. SP makes a loan to Debtor and takes a security

interest in all Debtor’s present and after-acquired personal property. Debtor ends up

in financial difficulty and SP appoints a receiver. The receiver is keen to sell Debtor’s

business on a going-concern basis because this will bring in a higher return than the

piecemeal sale of Debtor’s assets. But the business is worthless without the licence.

Whether the receiver can transfer the licence as part of the sale depends on whether SP’s

security interest extends to the licence. This question, in turn, depends on whether the licence

is “personal property” within the meaning of the security agreement and the statute. Taking

Nova Scotia as an example, PPSA, s. 2(1)(ad) defines “personal property” to mean:

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“goods, chattel paper, investment property, a document of title, an instrument, money or

an intangible”.

There is a similar provision in all the other provincial and territory PPSAs.

Each of these expressions is in turn defined. A statutory licence does not fit the definition

of goods, chattel paper, investment property, document of title, instrument or money. But it

may fall under the catch-all definition of “intangible”, which reads as follows:

“Intangible” means personal property that is not goods, chattel paper,

investment property, a document of title, an instrument or , money” (Nova Scotia

PPSA, s.2(1)(w)).

The question, therefore, is whether a statutory licence qualifies as personal property. In Saulnier

v. RBC, 11 the Supreme Court of Canada held that a fishing licence is personal property for the

purposes of the Nova Scotia PPSA and the federal bankruptcy laws because it is analogous to a

profit a prendre A profit a prendre is an established property right which gives the right-

holder entry onto the right-giver’s land for the purpose of collecting and removing commodities

situated on the land (e.g., trees, stones, minerals, game, etc.). In Saulnier, the court held that a

fishing licence was not, strictly speaking, a profit a prendre, but it was sufficiently similar to

justify concluding that, like a profit a prendre, it was property.

In the course of its judgment, the court identified strong policy reasons for treating a

fishing licence as property in the PPSA context:

A commercial fisher with a ramshackle boat and a licence to fish is much better off

financially than a fisher with a great boat tied up at the wharf and no licence. Financial

institutions looking for readily marketable loan collateral want to snap up licences

issued under the federal Regulations, which in the case of the lobster fishery can have

a dockside value that fluctuates up to a half million dollars or more. Fishers want to

offer as much collateral as they can to obtain the loans needed to acquire the

equipment to enable them to put to sea (at para.13).

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11 [2008] 3 SCR 166. In short, if a fishing licence qualifies as property, it can be used as collateral which, in

turn, facilitates access to credit.

It is commonly thought that allowing a security interest to be taken in a statutory licence

might interfere with the licensing authority’s control over who may hold the licence and that this,

in turn, might compromise the public policy underlying the licence regime. But the court

dispelled this concern, pointing out that the PPSA gives the secured party no greater rights

than the debtor himself had (nemo dat quod non habet). The debtor holds the licence

subject to the licensing authority’s discretion as provided by the licensing statute and,

likewise, the debtor’s right to transfer the licence is subject to the authority’s discretion.

Therefore, the secured party’s rights to hold and transfer the licence are also at the authority’s

discretion. In other words, the secured party steps into the shoes of the debtor and takes the

licence “warts and all” (at para.50).

The “warts and all” concept has two particular implications in the PPSA context:

(1) a security interest in a statutory licence does not interfere with the licensing

authority’s discretion and so there is no threat to public policy; and

(2) when a secured party is negotiating for a security interest in a licence, it must

take account of the risk that the licensing authority might exercise its discretion

contrary to the secured party’s interests, for example, by blocking a proposed future

sale of the licence, or by cancelling or refusing to renew the licence. On all these

fronts, the secured party is as vulnerable as the debtor/licensee and it must make a

commercial decision about whether to assume the risk.

It is hard to fault the court’s policy analysis in Saulnier but, unfortunately, its statement of the

law is open to question. The problem is that while the profit a prendre analogy may be easy

enough to draw in the case of a fishing licence, because a fishing licence gives the

licensee rights of entry and expropriation, not all licences have this characteristic. For

example, the analogy between a taxi licence and a profit a prendre would be harder to draw

and the same point could be made about nursing home licences and milk or tobacco quotas.

These types of licence, like a fishing licence, may represent major commercial assets and

34

potentially valuable loan collateral, but the reasoning in Saulnier invites the conclusion that

they are not personal property.

(ii) Contractual Licences

A contractual licence is a form of agreement under which licensor A gives licensee B

permission to use A's property. Licensing is a common method for the sharing of intellectual

property rights (patents, copyrights, trademarks, and the like). In form, a contractual licence is

a promise by A to B that B may use A's property for the duration of the agreement. The

licence may contain a provision prohibiting B from assigning its rights or, alternatively,

stipulating that B may not assign its rights without A’s consent. Can B use the licence as

collateral? As in the case of a statutory licence, the answer depends on whether a

contractual licence is “personal property” within the meaning of the PPSA.

Saulnier was concerned with statutory licences, but the case has implications for

contractual licences as well. In Saulnier, the court remarked that “a simple licence [probably

could not] itself be considered property at common law”. But it went on to say that “if not

property in the common law, a fishing licence is unquestionably a major commercial

asset”(at para.23). The same is true of a contractual licence such as an intellectual property

licence. It ought to follow that if a fishing licence can be used as collateral (subject to the”

warts and all” limitation), so too can an intellectual property licence. If the licence agreement

provides that the licensee may not transfer its entitlement without the licensor’s consent, the

secured party would be subject to the same limitation. Therefore, if it wanted to enforce its

security interest by selling the licence, it would first have to seek the licensor’s approval.

On the other hand, if the licence agreement absolutely prohibited transfer of the licence,

the secured party would obtain no rights in the licence at all unless, perhaps, it was able

to negotiate with the licensor for a waiver of the prohibition. The problem is that the

Saulnier profit a prendre analogy does not work for intellectual property licences and the

like and so, despite the policy arguments, these licences may not qualify as property after all.

35

(b) Statutory Reforms

Two provinces, Saskatchewan and British Columbia, have expressly addressed the licence issue.

Section 2(w) of the Saskatchewan PPSA defines “intangible” to include a licence and section

2(z) defines “licence” to mean:

“a right, whether or not exclusive:

(i) to manufacture, produce, sell, transport, or otherwise deal with

personal property; or

(ii) to provide services;

that is transferable by the grantee with or without restriction or the consent of the

grantor.”

The provision applies to both statutory and contractual licences. A statutory licence falls outside

the definition unless it is transferable. It follows that, if the governing statute absolutely prohibits

transfers, the licence is not personal property to which the PPSA applies. On the other hand, the

fact that transfer of the licence is at the licensing authority’s discretion does not take the licence

outside the PPSA definition. Likewise, a contractual licence falls outside the definition if the

licence agreement prohibits assignment. On the other hand, if there are no restrictions on

assignment, or if assignment is permitted subject to restrictions, the licence is personal property

and it may be used as collateral. Enforcement of the security interest will typically involve sale

of the licence to a willing buyer, along with the business to which the licence relates. In this

connection, Saskatchewan PPSA, s. 57(3) provides that the secured party may seize the licence

upon giving notice to the debtor and also to the grantor of the licence, while s.59(18) provides

that the licence may be disposed of only in accordance with the terms and conditions under

which the licence was granted. These provisions reflect the “warts and all” principle.

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British Columbia PPSA, section 1(1) defines “licence” to mean:

“a right, whether or not exclusive, that may be transferred by the holder with or without

restriction or the consent of the grantor and that entitles the holder to do any of the

following:

(a) manufacture, produce, sell, transport, grow, harvest or otherwise deal with

personal property;

(b) provide services;

(c) acquire personal property;

(d) harvest timber, or grow and harvest Christmas trees, under an agreement

referred to in section 12 of the Forest Act.”

Paragraphs (a) and (b) are similar to the Saskatchewan version, except for the addition of the

references to “grow” and “harvest” in paragraph (a) and the addition of paragraphs (c) and

(d), which have no counterparts in the Saskatchewan version. Paragraph (c) is intended to

cover cases, such as the right to remove gravel from a gravel pit, which might otherwise be

characterized as an interest in land and therefore outside the scope of the statute. Paragraph (d)

appears to overlap with paragraph (a) and is arguably unnecessary. Sections 58(2)(e) and

59(18) correspond with sections 57(3) and 59(18) of the Saskatchewan PPSA. Section 61(4) is

an additional provision relating to the foreclosure remedy:

Despite any other provision of this Part,

(a) if the collateral is a licence, the licence may be retained, held or disposed of under

subsection (3) only in accordance with

(i) the terms and conditions of the licence, and

(ii) the terms and conditions that, by law or contract, apply to the licence.12

12 There is also a special provision in s.61(4)(b) governing forest agreements: “if the licence is a forest agreement, the licence may be held, retained or disposed of under subsection (3) only if the minister responsible for the Forest Act has consented to the application of subsection (3) to the licence”.

https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-157/latest/rsbc-1996-c-157.html#sec12_smooth

https://www.canlii.org/en/bc/laws/stat/rsbc-1996-c-157/latest/rsbc-1996-c-157.html

37

(c) Summary

The purpose of the provisions was to remove uncertainty as to whether statutory and contractual

licences were personal property. So far as the other provinces and territories are concerned, the

uncertainty persists in the wake of Saulnier. In some respects, Saulnier has made the problem

worse by suggesting that a licence is not personal property unless it can be analogized to a profit

a prendre. Many, perhaps most, licences may be disqualified on that basis. Statutory reforms are

needed to clarify the law.

(d) Recommendations

It is recommended that the PPSA definition of “intangible” be amended to make it clear that an

intangible includes a licence and that a definition of the term “licence” be added. It is also

recommended that provisions be included similar to those contained in the Saskatchewan and

British Columbia Acts dealing with enforcement against licences.

(e) Proposed Provisions

s.2(1)(z) “licence” means a right, whether or not exclusive, to:

(i) manufacture, produce, sell, transport, grow, harvest or otherwise deal with personal

property;

(ii) provide services; or

(iii) acquire personal property

that is transferrable by the licensee with or without restriction or the consent of the licensor,

and for the purposes of this provision a licence that is transferrable includes a licence that is

subject to cancellation and reissuance by the licensor to another party at the request of either the

licensee or the secured party.

57(3) Where the collateral is a licence, the secured party may seize the collateral by giving

notice to:

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(a) the debtor; and

(b) the grantor or successor to the grantor of the licence.

59(18) Notwithstanding any other provision of this Part, where the collateral is a licence, the

collateral may be disposed of only in accordance with the terms and conditions under which the

licence was granted or which otherwise pertain to it.

61(8) Despite any other provision of this Part:

(a) if the collateral is a licence, the licence may be retained, held or disposed of under

this section only in accordance with

(i) the terms and conditions of the licence, and

(ii) the terms and conditions that, by law or contract, apply to the licence.

(f) Comment

The proposed definition of licence is substantially the same as the British Columbia version,

except for the closing words, which are new. In some licensing regimes, the licence is not

transferable, but the same effect is achieved through cancellation of the existing licence and

issuance of a new licence to the new party. The proposed additional words would cover this

possibility.

Proposed sections 57(3) and 59(18) correspond with the current provisions in the Saskatchewan

and British Columbia PPSAs. Proposed section 61(8) corresponds with section 61(4) of the

British Columbia statute.

(g) Transition

The proposed provisions can be implemented in all jurisdictions so as to apply to security

interests taken in licences before the provisions come into effect.

(h) Application

The provisions are relevant to all jurisdictions except Saskatchewan and British Columbia. Minor modifications are required to the existing provisions in British Columbia and Saskatchewan.

39

(6) Time for Determining the Priority of a Security Interest

(a) Background

In most cases, the priority of a security interest is determined by two factors: whether the interest

is perfected or unperfected and, if perfected, by the date of the perfecting step. The means by

which a security interest in personal property is typically perfected under the PPSA is by

registration of the interest in the manner prescribed by the Act and regulations (see SPPSA s.

25). As between two security interests perfected by registration, the residual priority rule gives

priority to the first to register (see SPPSA s. 35(1)(a)). Registration is central to the

determination of priorities because a registry search allows the searching party to ascertain

whether a person’s property is encumbered by a security interest that might have priority over an

interest acquired by that party. A secured party may in some contexts perfect a security interest

by taking possession or acquiring control of the collateral but, since registration is by far the

most common means of perfection, this discussion will generally be addressed to registration or

the lack thereof. However, the issue considered may also arise where perfection is established

by other means and is thereafter lost.

The perfected status of a security interest subsists only for so long as the perfecting step or

condition continues in effect, except in the special instances in which automatic temporary

perfection is conferred by a statutory rule. A perfected security interest that had priority over

another on the basis of its earlier registration date will lose that priority if the registration

lapses or is discharged and is not reinstated within the 30 day grace period offered by the Act

(see SPPSA s. 35(7)) or, in Ontario, at any subsequent time (see OPPSA s. 30(6)).

As a practical matter, priority as between security interests will typically be determined when a

secured party takes action to enforce its security interest after the debtor defaults. The priority

ranking will determine both the hierarchy according to which funds generated by disposition of

40

the collateral are distributed and the title of a person who buys the collateral in the enforcement

proceedings. In a number of cases, a question has arisen as to whether the priority ranking of

the security interest or interests involved as determined when enforcement measures are taken is

altered by either a subsequent loss of perfection (typically through the lapse or discharge of a

secured party’s registration) or the establishment of perfection through fulfilment of a perfecting

step (typically by a registration having been made). In other words, are priorities fixed as at the

date enforcement measures are initiated?

The cases addressing the issue generally involve the enforcement of a security agreement

through the appointment of a receiver authorized to take possession of and sell collateral

comprising much or all of a business debtor’s asset base to satisfy the secured debt. The

appointment may be made either by a secured party acting extrajudicially under the terms of the

security agreement or by order of the court on application of the secured party. The date of the

receiver’s appointment has been identified as the relevant point for determining priorities.

Where the secured party enforces directly through seizure of the collateral, the date of seizure

might be viewed as the analogous date. While there are no cases on point dealing with

enforcement against an account or other intangible collateral, the date on which notice is given to

the account debtor or obligor directing payment to the secured party may be considered the date

of enforcement (see SPPSA s. 57(2)).

The scenarios that follow illustrate the problem, though it is not limited to these fact patterns:

Scenario 1A

Day 1 SP1 takes a security interest in property of Debtor and perfects by

registration.

Day 2 SP2 takes a security interest in the same property and perfects by

registration.

Day 20 Debtor defaults under the security agreement with SP1, who appoints a

receiver to take possession of the collateral (or enforces by other means).

Day 25 SP1’s registration lapses and is not reinstated within 30 days or at all.

41

SP1 had priority over SP2 when the receiver was appointed. As between competing

perfected security interests, the first to register has priority (see SPPSA s. 35(1)(a)(i)).

The lapse in SP1’s registration will be immaterial if priorities are fixed at the date of

enforcement. If they are not, SP2 will have priority over SP1 with respect to any

collateral that was not sold before the date SP1’s registration lapsed. This means that a

person who buys the collateral from the receiver will take subject to SP2’s interest unless

SP2 agrees to discharge it, which would undoubtedly be conditional on SP2 being paid

first from the proceeds of sale. Note that if SP1 re-registers within 30 days of the date its

registration lapsed, SP1’s priority over SP2 is maintained except with respect to any new

advances made or contracted for by SP2 between the date of lapse and the date of re-

registration (see SPPSA s. 35(7)). If SP1 re-registers later than 30 days after the date the

registration lapsed, SP2’s perfected security interest will have priority over SP1’s newly

perfected security interest as the first to register (see SPPSA s. 35(1)(a)(i) but compare

OPPSA s. 30(6)).

Scenario 1B

The same issue could arise if SP2 took and perfected its security interest after SP1

initiated enforcement measures and after SP1’s registration lapsed. If SP1’s priority is

determined as at the date of enforcement, SP1’s interest will be treated as perfected in a

priority competition with SP2 and will have priority over SP2’s interest. If SP1’s priority

is not affected by enforcement, SP2 would have priority over SP1.

Scenario 2A

Day 1 SP1 takes a security interest in property of Debtor. SP1’s interest attaches

but SP1 does not register or otherwise perfect.

Day 2 SP2 takes a security interest in the same property. SP2’s interest attaches

but SP2 does not register or otherwise perfect.

42

Day 20 Debtor defaults under the security agreement with SP1, who appoints a

receiver to take possession of the collateral (or enforces by other means).

Day 25 SP2 registers and perfects its security interest.

As in Scenario 1, SP1 had priority over SP2 when the receiver was appointed. As

between competing unperfected security interests, the first to attach has priority (see

SPPSA s. 35(1)(c)). The fact that SP2 subsequently took a perfecting step will be

immaterial if priorities are fixed at the date of enforcement. If they are not, SP2 will have

priority over SP1. The consequences with respect to sale of the collateral and distribution

of the proceeds are as described in Scenario 1.

Scenario 2B

The same issue could arise if SP2 both acquires a security interest and takes a perfecting

step after SP1 initiates enforcement measures. Logic would suggest that a post-

enforcement perfecting step taken by a new secured creditor would have no greater effect

on SP1’s position than one taken by a secured creditor who held a security interest that

was unperfected at the date of enforcement. If priorities are fixed at the date of

enforcement, SP1 would presumably have priority over any interest that might arise after

enforcement is initiated. If enforcement measures do not affect priority, SP2 could assert

priority over SP1, provided SP2 takes a perfecting step.

The problem illustrated by these scenarios rarely arises, since secured parties should and will

ordinarily take care to ensure that they have effected and maintained a valid registration to

establish and preserve a priority ranking. However, in the relatively few reported cases in which

it is has arisen, the courts have concluded that priority is to be determined as at the date of

enforcement action and, implicitly, is unaffected by subsequent changes in the registered status

of one or more of the competing interests involved (see especially Sperry Inc v Canadian

Imperial Bank of Commerce,13 referred to in several subsequent cases). On this view, if at the

13 (1985) 50 O.R.(2d) 267 ( C.A.) Sperry Inc involved competing security interests, both of which were unperfected at the date a receiver was appointed by the secured party who held the first security agreement. The Ontario Court

43

date of enforcement a security interest is perfected by registration, the priority status flowing

from perfection continues even if the registration subsequently lapses or is discharged and the

security interest loses its perfected status. Similarly, if both interests are unperfected at the date

of enforcement, priority goes to the first to attach and subsequent registration by one of the

secured parties does not alter the outcome.

The case law constitutes a judicial gloss on the PPSA priority rules under which, as a general

proposition, no priority consequences follow from the initiation of enforcement action. There is

a partial exception in Ontario, Manitoba and the Yukon, where seizure by a secured party acting

directly rather than through a receiver to enforce a security interest effectively perfects the

security interest (see Sperry Inc regarding the effect of appointing a receiver). In a case like

Scenario 1, if SP1 enforced by direct seizure of the collateral rather than through a receiver there

would be no risk that the perfected status and priority of SP1’s interest would be lost thereafter.

In Scenario 2, perfection and priority of SP1’s interest would be established by seizure. This is

not true in the other PPSA jurisdictions, where seizure for purposes of enforcement does not

constitute perfection and, even in the three provinces mentioned, enforcement by means other

than seizure presents the problem described. However, the result in Ontario follows, not from a

rule that freezes priority at the date of perfection, but rather from the rule under which seizure

amounts to perfection by possession.

A potential change in priority ranking after enforcement measures have been taken by a secured

party can have very serious consequences. In practice, enforcement will be initiated only by a

secured party who has priority over competing interests, since an enforcing creditor is assured of

recovering their claim only to the extent that their interest has priority. A secured party who

undertakes enforcement may incur very substantial expenses through a potentially extended

process of disposing of the collateral, particularly where a receivership is involved. A party

of Appeal held that priority was determined as at the date the receiver was appointed. The enforcing secured party had priority because its interest was first to attach. The Court’s conclusion as to priority was reinforced by the fact that the enforcing secured party effected a new registration after the receiver was appointed. Even if priorities were affected by action subsequent to the date of enforcement, the enforcing secured party had priority on the grounds that its security interest was perfected while the competing interest was not. Since the primary reason given for the court’s decision was that priorities are determined as at the date of enforcement, the result would presumably not have been different if the secured party whose interest was second to attach had registered and perfected after the date of enforcement.

44

whose security interest loses priority during the process of enforcement as a result of an

inadvertent lapse in registration may find themselves unable to complete the process of sale

without paying out others whose interests have correspondingly assumed priority over their own,

potentially defeating the enforcing creditor’s expectation of recovering some or all of the secured

debt as well as the expenses incurred in enforcement. At the same time, a party who knew or

was in a position to know that their interest was subordinate to that of the enforcing creditor

when they chose to extend funds or credit may be viewed as having garnered an undeserved

windfall if they are thrust into a priority position through a clerical error or inadvertence on the

part of the creditor who initially enjoyed priority.

The judicial view that priorities are established at the date of enforcement action and not affected

by subsequent registry changes is likely informed by perceived considerations of fairness based

on the consequences just described. In Scenario 1A, SP2 was subordinate to SP1 at the date of

enforcement and their position is not affected by the subsequent lapse in SP1’s registration. In a

Scenario 2A case, SP2 should not be allowed to leapfrog into a priority position and gain a

windfall at SP1’s expense by strategically registering their interest after SP1 has taken

enforcement action.

While this view may appeal to the courts and others for the practical reasons suggested, it is

inconsistent with the approach to priority embodied in the explicit rules of the PPSA. The

priority of a security interest depends on the fact and time of attachment and perfection. Seizure

of collateral or a corresponding enforcement step does not affect the debtor’s interest in the

property and is not a factor in the operation of any priority rule. Perfection plays a critical role in

the priority system because it is the condition that allows third parties who might deal with a

debtor to ascertain that the debtor’s property is subject to a property interest that might otherwise

be unknown. A secured party can control the risk of subordination to competing claims by

ensuring that its interest is properly registered and that the registration is maintained. A secured

creditor whose registration lapses is given some measure of protection by SPPSA s 35(7), but the

limited scope of that protection implicitly contradicts the view that priority is preserved in cases

other than those that fall within the rule.

45

A statutory formulation of the judicial rule that would effectively freeze priorities at the date of

enforcement carries the risk that a person who acquires an interest or makes an advance to a

debtor after enforcement action is initiated will be subordinated to an undiscoverable interest. In

the scenarios outlined, SP2 would be subordinate to SP1 with respect to a post-enforcement

advance even though SP2 might have searched the registry and relied on a search result that does

not disclose SP1’s interest. This undermines the function of the registry system, which is

designed to ensure that third parties can rely on a search result in determining whether and to

what extent to advance credit or lend funds to a debtor. If priorities are fixed at the date when

SP1 appointed a receiver or took another enforcement measure, SP2 will lose out to SP1 not only

with respect to any funds initially advanced but also with respect to the advance made while

SP1’s interest was off the registry.

One might conclude that the problem is sufficiently resolved by the existing case law. However,

the cases are small in number and limited to a few jurisdictions, and the reasoning advanced is

not beyond challenge. As a result, there is significant uncertainty as to the strength and scope of

the judicial rule that would fix priorities at the date enforcement is commenced.

A legislative solution through amendment of the Act is required, both to resolve the uncertainty

raised by the cases and to implement a fully considered policy choice. Stated generally, the

alternative policy choices outlined above could be implemented by either:

a. adding a statutory rule stating expressly that the initiation of enforcement does not

affect the priority of a security interest, or

b. adding a statutory rule stating expressly that priority as between security interests is

not affected by a change in the perfected status of either interest that occurs after the

initiation of enforcement with respect to one of them.

(b) Recommendation The view that a clear rule should be enacted to establish the date at which priority as between

security interests is fixed is beyond debate. While there may be a difference of opinion among

46

lawyers and others as to the policy that should be implemented by the rule, the approach

recommended is the first option outlined above: the Act should be amended to include a rule

expressly stating that the initiation of enforcement does not affect the priority of a security

interest.

The PPSA adopts as a fundamental principle the concept that priority is based on the perfected or

unperfected status of a security interest. This in turn advances the operational policy of ensuring that

creditors and potential creditors are in a position to determine the existence of prior claims against a

debtor’s assets through a registry search, and to make lending and credit decisions accordingly.

While there are a few instances in which a security interest may acquire priority through a perfecting

step other than registration, the alternative perfecting steps are designed to alert competing creditors

to the existence of a prior security interest through other means.

A rule that would fix priorities when enforcement is initiated would allow a secured party who has

not perfected its interest before taking action or who has allowed the perfected status of its interest to

lapse to assert priority. This approach may be justified by the view that competing parties are in

practice unlikely to advance funds or grant credit to the debtor after enforcement proceedings are

commenced. The approach recommended is based on the alternate view that competing parties may

act on the basis of a search result that does not disclose the enforcing creditor’s interest. A secured

party who wishes to take enforcement action can protect its priority position by ensuring that

its interest is perfected and remains so until enforcement proceedings are completed. As between

the enforcing creditor and a competitor, the enforcing creditor is in the best position to manage the

risk of recovering its claim.

The recommended approach also has the advantage of simplicity in the language and application

of the statutory rule. A rule fixing priorities at the time of enforcement would require

supplementary rules defining the time at which enforcement is initiated under the various types of

enforcement action that might be used, taking into account the range of circumstances in which it

might occur. The range of potential cases that must be addressed would include enforcement

through direct seizure of tangible collateral by a secured creditor, notification of account debtors in

the collection of accounts, the appointment of a receiver under the terms of a security agreement or

47

by the court, and retention of collateral in satisfaction of the secured debt. In some instances, it

would be difficult to define the initiation of enforcement in such a manner that the relevant time

could be clearly identified and readily ascertained.

The recommended approach subjects secured creditors to potential loss of priority due to an

inadvertent or unauthorized lapse in registration, or a registration discharge resulting from failure

to respond to notice of a third party demand to discharge under SPPSA section 50. However, these

risks can be ameliorated by appropriate monitoring practices on the part of secured parties. The

Acts generally provide a 30 day window of time after a registration lapses or is discharged within

which the secured party may reinstate the registration and thereby maintain the priority of the

security interest as against security interests that were subordinate before the lapse or discharge

occurred (see SPPSA s 35(7)). In Ontario, the period of time during which priority may be

restored by re-registering is unrestricted (see Ontario PPSA s 30(6)). Secured parties are notified

by the registry when a registration is discharged through the address provided for receipt of notice

and can invoke the protection against loss of priority offered by the Act. This provides a large

measure of protection against fraudulent or unauthorized discharges instigated by third parties as

well as against merely inadvertent discharges. Secured parties who do not monitor discharge

notices must be regarded as having accepted the consequences of an unintended loss of registered

status. Third parties who succeed in having a registration improperly discharged are liable for

breach of the statutory duty of good faith and potentially for fraud.

The rule proposed has the effect of fixing priority as between security interests at the time that

title to the collateral is transferred to a buyer or transferee in enforcement proceedings. This

means that a change in priority ranking that occurs after the initiation of enforcement may

affect the title of a person who has bought or agreed to buy the collateral. The buyer will take

subject to a security interest that has assumed priority over the interest of the enforcing creditor.

However, a buyer in that position is not entirely vulnerable. Where the sale is conducted by the

secured party or a privately appointed receiver, the buyer would have recourse against the

secured party who has had the collateral sold without ensuring that it has priority. Where a court

appointed receiver is involved, the court will presumably not approve a sale without

confirmation of the priority status of competing claims.

48

The recommended approach is consistent with United States law, though Article 9 does not

address the issue directly.14 It does not conflict with the Ontario rule under which a secured party may perfect a security interest by taking possession of collateral for purposes of enforcement. If further certainty is required in Ontario, the rule could be made expressly subject to OPPSA section 22.

(c) Proposed Provision

35(10) The priority status of a security interest in relation to another security interest in

the same collateral as provided in this or any other Act is not affected by enforcement

measures taken by the holder of the other security interest.

14 Revised section 9-515(c) provides that if a security interest becomes unperfected upon lapse “it is deemed never to have been perfected as against a purchaser of the collateral for value.” In other words, it is retroactively unperfected as against a competing security interest, though not against the trustee in bankruptcy or the holder of a judgment lien. The express language of the provision is not qualified by any reference to enforcement proceedings. The point is implicitly reinforced by another change introduced by revised Article 9. Article 9 originally included a provision that applied to lapse during an insolvency proceeding. Under it the proceeding would “toll” the 5 year filing period; that is, the filing would be treated as having remained in effect until 60 days after the termination of the proceeding. This provision was eliminated in revised Article 9. The change is explained by Eldon H. Reiley, Security Interests in Personal Property, 3rd ed (West Group, looseleaf), §9:33 as follows:

Amendments to 11 USCA §362(b)(3) allow a secured party to file a continuation statement without obtaining relief from the automatic stay. These amendments are advanced as the reason for the change. Nevertheless, this change places a new burden on secured parties to police the duration of their filings during insolvency proceedings and to file continuation statements, when necessary during insolvency proceedings. It is obviously important to alert secured creditors to this change.

49

(d) Comment

The proposed approach puts the onus on an enforcing secured party to ensure that a valid

registration i s m a d e a n d m a i n t a i n e d with respect to the collateral in which its

interest is being enforced, or that perfection of its security interest is established and

maintained by other means. A secured party who fails to do so risks subordination to a

competing interest after enforcement measures are initiated to the same extent as it does before

enforcement. Third parties may rely on the registry to determine priority and need not

investigate whether enforcement action has been taken by a creditor whose interest does not

appear on a search result to ascertain their priority position.

The proposed provision speaks only to the priority of a security interest as against a competing

security interest. In jurisdictions where priority as between a security interest and the enforcement

rights of judgment creditors is based on registration of the competing claims, a corresponding

provision may be required in the PPSA or the judgment enforcement statute to achieve a parallel

result: priority as between a security interest and a judgment creditor should not be affected by

enforcement action taken by the secured creditor or directed by the judgment creditor. The PPSA

rules that determine the priority of a security interest as against a trustee in bankruptcy or

transferee of collateral make it clear that the relevant date for determining perfection and hence

priority is the time of bankruptcy or the time of the transfer: no clarifying rule is required.

The commencement of insolvency proceedings against the debtor may precipitate a stay of

proceedings by secured creditors: either by court order, in the case of receivership or proceedings

under the Companies’ Creditors Arrangement Act (CCAA), or by statute, in the case of

restructuring under the Bankruptcy and Insolvency Act (BIA). However, a secured party who

has not registered validly or at all before the stay comes into effect, or whose registration

lapses thereafter, is not likely to be precluded from registering in order to establish or re-

establish perfection of a security interest. The template court orders currently issued under the

CCAA and in receiverships include standard terms allowing secured parties to register their

interests unimpeded by the stay. A secured creditor must apply for a court order lifting the

BIA stay to facilitate a registration. However, the case law demonstrates that the courts

50

have been willing to lift a stay imposed in CCAA restructuring proceedings to allow secured

parties to effect a registration, and it is very likely that they would reach a similar conclusion

in respect of the stay imposed in a BIA commercial proposal. There is therefore no

appreciable risk of a judicial determination that would potentially invoke consideration of the

Sperry line of authority as a factor in a decision to lift or impose a stay. In any event, the

provision proposed above should signal a rejection of the Sperry approach and encourage the

court to allow registration activity to continue in the usual manner, without regard to insolvency

proceedings.

The proposed approach would have the following consequences:

Where a registration perfecting the security interest of an enforcing secured creditor

lapses or is discharged after enforcement is initiated, the security interest will be

subordinated to a competing perfected security interest except to the extent that priority is

preserved under SPPSA s 35(7) by a re-registration effected within 30 days.

In Ontario, the result could differ due to the approach taken in s. 30(6) of the OPPSA.

As in the other jurisdictions, a security interest may lose its priority status as against a

competing perfected security interest if the registration by which it was perfected lapses

or is discharged. However, the pre-lapse or pre-discharge priority status of the security

interest can be revived as against a security interest that was subordinate at the time of

lapse or discharge by a new registration made at any time before enforcement has been

completed through disposition of the collateral.

Example: In all of the scenarios outlined, SP2 will have priority over SP1 with respect

to all advances made by SP2, provided SP2 maintains the perfection of its security

interest or takes a perfecting step, as the case may be. A buyer in enforcement

proceedings by SP1 will take subject to SP2’s security interest unless it is discharged by

SP2.

In Ontario, a re-registration by SP1 made at any time after the original registration lapsed

would re-establish SP1’s priority over SP2 in Scenario 1A, except with respect to a

51

further advance made by SP2 while SP1’s interest was off the registry. However, SP1

would not have priority over SP2 in Scenario 1B if SP2’s rights arose before SP1 re-

registered.

(e) Transition The proposed provisions are intended to take effect as of the coming into force of the

amendments and to apply to all security interests whether they arise under an agreement made

before or after the coming into force of the amendments.

(f) Application


(7) Notice of Enforcement

(a) Background The discussion in Part (6) above, demonstrates the difficulty involved in finding a proper

balance between the interests of a secured party who has initiated enforcement measures and the

interests of others who are affected by the proceedings. The PPSA includes rules that require a

secured party who intends to dispose of collateral in enforcement proceedings to give

notice of the proceedings to a creditor whose interest is subordinate to that of the enforcing

party. However, nothing requires the enforcing secured party to give notice to a creditor

whose interest has priority. The existing notice requirements are based on the rules that

determine the title of a person who buys the collateral in enforcement proceedings. A buyer

takes free of a security interest subordinate to that of the enforcing secured party but takes

subject to a security interest that has priority, unless the holder of that interest agrees to

discharge its interest to facilitate the sale. Subordinate secured parties must be notified of the

pending elimination of their security interest. In theory, a secured party who has priority need

not be notified of the sale since it will not result in the loss of their security but, in practice, a

sale of collateral may affect that party’s position. For example, sale of the debtor’s assets may

52

terminate the debtor’s business and thereby eliminate the income stream that would

otherwise be available to continue payments to the secured party who has priority. For that

reason or others, a secured party who has priority may wish to seek a stay of proceedings

initiated by a subordinate secured party, or take other steps to protect its position. There is

judicial authority for the principle that proceedings by a subordinate secured creditor will be

stayed on application of the creditor who has priority if the proceedings would not yield proceeds

for satisfaction of the subordinate creditor’s claim.15

(b) Recommendation The notice provisions of Part 5 should be amended to provide that all secured parties, including

those who hold a security interest with priority over that of an enforcing secured party, are

entitled to receive a notice of disposition of the collateral.

(c) Proposed Provision

59(6) Not less than 20 days prior to disposition of the collateral, the secured party shall

give a notice to:

(a) the debtor or any other person who is known by the secured party to be an

owner of the collateral;

(b) a creditor or person with a security interest in the collateral whose interest

is subordinate to that of the secured party where:

(i) prior to the day on which the notice of disposition is given to the

debtor, the creditor or person with a security interest in the collateral has

registered a financing statement according to the name of the debtor or

according to the serial number of the collateral if the goods are

prescribed as serial numbered goods; or

15 See Holnam West Materials Ltd v Canadian Concrete Products, [1995] 1 WWR 155 (ABQB).

53

(ii) the security interest of the creditor or person with a security interest in

the collateral is perfected by possession at the time when the secured party

seized or repossessed the collateral; and

(c) any other person with an interest in the collateral who has given a written

notice to the secured party of that person’s interest in the collateral prior to the

day on which the notice of disposition is given to the debtor.

(d) Comment Clause 59(6)(b) is revised to ensure that all secured creditors who have registered their security

interest are aware of measures taken by another secured party to enforce against the collateral,

and can take any steps that may be appropriate to protect their interests.




(f) Application The proposed provisions are relevant to all jurisdictions.

(8) Payment of Debts and Transfers of Negotiable Property

(a) Background All PPSAs provide priority rules designed to preserve the negotiable quality of money and other

forms of property commonly used to pay debts or transfer a right to payment, such as cheques.

54

The goal is to ensure that security interests in currency and payment instruments do not interfere

with commercial activity and the free circulation of money or its equivalent.

The PPSAs currently provide rules for the transfer of an interest in “money”, being physical

currency, or an “instrument” as defined. Under the circumstances prescribed, a person who

acquires an interest in and takes possession of money or an instrument that is subject to a

security interest has priority over the security interest.

In jurisdictions other than Ontario, the Acts include a special rule under which a creditor who

receives an instrument drawn or made by a debtor and delivered in payment of a debt has priority

over any security interest in the instrument, regardless of whether the creditor knows that the

interest exists. In Saskatchewan and Manitoba, the same rule applies to payment of a debt by an

electronic transfer of funds initiated by the debtor. The creditor who receives the funds has

priority over a security interest in the account from which the funds were transferred, much as a

creditor paid by means of a cheque issued by the debtor has priority over a security interest in the

cheque. A transfer of funds under a preauthorized debit or transfer order is excluded from the

rule. A deposit-taking institution therefore cannot defeat a security interest in a depositor’s

account when it debits the account to discharge a debt owed to the institution by the depositor

unless it does so under to an authorization made at the time the debit occurs.

Aside from the Saskatchewan and Manitoba rules for debtor-initiated payments to creditors, the Acts do not address the consequences of a transfer of funds by electronic means. The omission

has resulted in conflicting case law, and the cases that do exist do not address all the

circumstances in which funds might be transferred electronically. In Flexi-coil Ltd. v. Kindersley

District Credit Union Ltd.,16 the Saskatchewan Court of Appeal extended the PPSA rule governing instruments to funds received by a credit union for deposit to a customer account by

means of electronic transfer, notwithstanding that the language of the provision is restricted to

instruments. In CFI Trust (Trustee of) v. Royal Bank of Canada, 17 the British Columbia

Supreme Court rejected the approach taken in Flexi-coil on the grounds that the statutory rule is

16 [1994] 1 WWR 1. 17 [2013] BCSC 1715.

55

limited by its terms to instruments. Both cases involved a debtor who received payments for

inventory subject to an inventory financer’s security interest. Payments were made by means of

cheques drawn and electronic funds transfers initiated by customers of the debtor and deposited

to the debtor’s bank account. In Flexi-coil, the depositary institution had priority over the

inventory financer’s proceeds security interest in both the cheques and the electronically

transferred funds. In CFI Trust, the depositary institution had priority over the inventory

financer’s security interest in the cheques under the equivalent of SPPSA section 31(4), but not

over the financer’s security interest in the electronically transferred funds. The British Columbia

court based its decision on a strict interpretation of the statute, not on a policy view as to whether

such transfers should be subject to the same rules as cheques in this context.

The existing rules for debtor-initiated payments apply only to payments made to a creditor in

satisfaction of a debt where the payment is effected by an instrument payable to the creditor (or,

in Saskatchewan and Manitoba, by electronic funds transfer). There is no specific rule in any

jurisdiction for a transfer of funds by means of a cheque or other instrument payable to a person

who is not a creditor. The recipient of the cheque will therefore take subject to a security interest

in the cheque if he or she does not fall within the rule that applies generally to a “purchaser” of

an instrument: only a purchaser who gives value and takes possession without knowledge of the

security interest can assert priority. A person who receives funds under a cheque payable to him

or her other than in payment of a debt is therefore subject to a different rule than one who

receives funds through a transfer of currency.

As a matter of policy, a person who receives a transfer of funds from a debtor should be in the

same position whether the funds are received in currency, by means of electronic transfer from

the debtor’s deposit account or under a cheque or other instrument drawn by the debtor and

payable to the transferee. The existing lacunae in the legislation should be filled to achieve that

result.

The existing rules governing transfers of negotiable and quasi-negotiable property, including

negotiable documents of title and chattel paper, are located in two sections of the Act. Section

20 of the Saskatchewan Act determines the priority of an unperfected security interest in a

56

document of title, an instrument or money. In some jurisdictions, the equivalent rule also applies

to chattel paper. Saskatchewan P P S A , section 31 and its counterparts in other jurisdictions

sets out priority rules that apply to perfected security interests in those forms of collateral. This

approach has two undesirable consequences. The first is the presumably inadvertent creation of

anomalous results. In some instances, a transferee who takes free of a perfected security

interest in the collateral does not take free of an unperfected security interest in the same

property. For example, a person who receives money as a gift takes free of a perfected security

interest if he or she does not have knowledge of the security interest (SPPSA s. 31(1)(a)), but

does not take free of an unperfected security interest (SPPSA s. 20(3)). These anomalies

should be resolved. Secondly, the provision of different rules in separate sections of the Act

makes it difficult to easily locate all of the priority rules that apply specifically to negotiable

property. The priority rules that apply to both perfected and unperfected security interests

should be integrated in one section of the Act.

Revisions of the Act designed to rationalize the priority rules that apply to negotiable property

should also address an inconsistency that currently exists between the priority rules that apply to

competing interests in instruments and negotiable documents of title (SPPSA ss. 31(4) and

(5), respectively). A “purchaser” who acquires an interest in an instrument for value will

have priority over a security interest in the instrument if the purchaser takes possession of the

instrument without knowledge of the security interest. The term “purchaser” encompasses a

person who acquires an interest, including a security interest, under any consensual transaction.

The requirements for priority are more onerous with respect to negotiable documents of title. A

person who acquires an interest in a negotiable document of title for value and takes possession

without knowledge of a security interest in the document of title must take the document of title

by negotiation in order to claim priority over the security interest. There is no good policy

reason to treat negotiable documents of title differently than instruments, and no reason to require

negotiation with respect to either type of property as a condition of priority over a PPSA security

interest. The PPSA priority rules do not detract from the rights associated with negotiation of

instruments or documents of title under other law.

57

(b) Recommendation The primary rules governing security interests in money, instruments and the payment of debts

by electronic transfer are collected in SPPSA section 31 and its equivalents in other jurisdictions.

Section 31 should be revised to include rules governing electronic funds transfers more generally

and restructured to integrate those rules with the rules governing transfers of money and

instruments. In addition, the Act should be amended to ensure that the rules that apply to

transfers of funds are the same regardless of the mechanism used to effect the transfer, whether

by money, electronic funds transfer or transfer under an instrument payable to the transferee.

These rules appear in the proposed new subsections 31(2), dealing with money; (3), dealing with

electronic transfer of funds; and (4), dealing with instruments payable to the transferee.

Subsection (5) qualifies subsections (3) and (4), providing a more fully elaborated set of

provisions that prevent a deposit-taking institution from defeating a security interest in a

depositor’s account by debiting the account under a pre-authorized payment instruction.

Subsection (6) is designed to avoid any potential confusion over the relationship between these

provisions and an account debtor’s rights of set-off as defined by section 41. Subsection (1)

informs the meaning of the term "transferee" as used in these rules.

The proposed amendments would also simplify the Act by consolidating the priority rules

governing perfected and unperfected security interests in instruments, money, negotiable

documents of title and chattel paper in section 31. Saskatchewan subsection 20(3), which now

provides a priority rule for unperfected security interests in money, documents of title and

instruments, would be revised to delete the reference to those forms of collateral. The reference

to chattel paper should also be deleted in the jurisdictions in which it is included in the

corresponding provision. The amendment of section 20 is addressed in item 6 of this package.

The Ontario PPSA does not include rules governing security interests in money. Adoption of the

proposed provisions in Ontario would advance interjurisdictional harmonization of the rules

governing negotiable property.

58

The proposed amendments also consolidate the rules that apply to purchasers of instruments and

negotiable documents of title in one provision, following the format currently used for

instruments under SPPSA subsection 31(4). In addition, they delete superfluous language in the

existing rules. Under SPPSA subsection 31(4) as currently drafted, a purchaser of an instrument

who takes possession of the instrument has priority over a security interest perfected either

by registration under section 25, or temporarily perfected under other identified sections.

“Purchaser” includes a secured party as well as a person who acquires title (see SPPSA s.

2(1)(ii) “purchase”). Since only one security interest in a physical thing can be perfected by

possession, the effect of the rule is that a secured party or transferee who acquires possession

of an instrument has priority over a security interest in the instrument perfected by other

means. The reference to specified perfection rules is therefore unnecessary and should be

eliminated.

SPPSA subsection 31(7), dealing with interests in chattel paper, will be renumbered as a result of

the insertion of new provisions. This subsection would be revised under the proposed

amendments dealing with electronic chattel paper included in item 2 of this package, becoming

subsections (9) and (10).

(c) Proposed Amendments Amend SPPSA section 31 by deleting subsections (1) through (3) and substituting new

subsections (1) through (6). Delete current subsections (4) and (5) and substitute subsection (7),

consolidating and revising the existing rules. Renumber current subsection (6) as subsection (8)

and revise to eliminate a redundant reference to a “security” and refer to subsection (7) rather

than subsections (4) and (5). Revise and re-number current subsection (7) as indicated in item 2

of this package. SPPSA s. 20(3) or its equivalent is amended to delete reference to money, an

instrument and a negotiable document of title and, where appropriate in other jurisdictions,

chattel paper (see item 6 of the package).

31(1) A holder of money has priority over a security interest in it perfected pursuant

to section 25 or temporarily perfected pursuant to subsection 28(3) if the holder:

59

(a) acquires the money without knowledge that it is subject to a security

interest; or

(b)is a holder for value, whether or not the holder acquires the money

without knowledge that it is subject to a security interest.

(2)A creditor who receives payment of a debt owing by a debtor through a debtor-

initiated payment has priority over a security interest in:

(a) the funds paid;

(b) the intangible that was the source of the payment; and

(c) any instrument used to effect the payment;

whether or not the creditor has knowledge of the security interest at the time of

the payment.

(3)In subsection (2), “debtor-initiated payment” means a payment made by the

debtor through the use of:

(a) an instrument or an electronic funds transfer; or

(b)a debit, a transfer order, an authorization or a similar written

payment mechanism executed by the debtor when the payment is made.

(4)A purchaser of an instrument has priority over any security interest in the

instrument perfected pursuant to section 25 or temporarily perfected pursuant to

section 26 or subsection 28(3) if the purchaser:

(a) gave value for the instrument;

(b)acquired the instrument without knowledge that it is subject to a

security interest; and

(c)took possession of the instrument.

(5)A holder to whom a negotiable document of title is negotiated has priority over

a security interest in the document of title that is perfected pursuant to section 25

or temporarily perfected pursuant to section 26 or subsection 28(3) if the holder:

(a) gave value for the document of title; and

60

(b)acquired the document of title without knowledge that it is subject to a

security interest.

31(1) In this section, “transferee” does not include a person who acquires a

security interest in the money, the account or the instrument.

(2)A transferee of money takes free from a perfected or unperfected security interest

in the money if the transferee took possession and

(a) acquired the money without knowledge that it was subject to the security

interest; or

(b)gave value, whether or not the transferee acquired the money with

knowledge that it was subject to the security interest.

(3) Subject to subsection (5), a transferee of funds received by transfer from a

deposit account takes free from a perfected or unperfected security interest in the

account if the transferee

(a) acquired the funds without knowledge that the account was subject to the

security interest; or

(b)gave value, whether or not the transferee acquired the funds with

knowledge that the account was subject to the security interest.

(4)A transferee of an instrument drawn by a debtor and payable to the transferee

takes free of a perfected or unperfected security interest in the instrument and in the

account on which the instrument is drawn if the transferee took possession of the

instrument and

(a) acquired the instrument without knowledge of the security interest in

the instrument or the account; or

(b)gave value, whether or not the transferee had knowledge of the

security interest in the instrument or the account.

(5)A deposit-taking institution that receives payment of a debt by means of a transfer

from or debit to a deposit account of the debtor held by the institution takes free of a

security interest in the account only if the payment:

(a) is authorized by the debtor at or after the time the debt is payable by

the debtor to the institution;

(b) is effected through the use of a post-dated cheque drawn by the debtor; or

61

(c) is made under a written authorization executed by the debtor as part of a

loan under which the debtor became indebted to the deposit-taking institution,

that

(i) sets out specified amounts to be debited to or transferred from

the deposit account at specified times or intervals, or

(ii)authorizes debits to or transfers from the deposit account when

the credit in the deposit account exceeds an amount specified in the

written authorization,

and, in clauses (a) and (c), the authorization of payment is not made by the deposit-

taking institution as agent of the debtor.

(6) Nothing in subsection (5) detracts from the rights of an account debtor provided

in section 41.

(7) A purchaser of an instrument or a negotiable document of title has priority over

a perfected or unperfected security interest in the instrument or document of title if

the purchaser:

(a) gave value for the instrument or document of title;

(b)acquired the instrument or document of title without knowledge that it

is subject to a security interest; and

(c)took possession of the instrument or document of title.

(6)(8) For the purposes of subsections (4) and (5) (7), a purchaser of an instrument

or a security or a holder of a negotiable document of title who acquired it pursuant

to a transaction entered into in the ordinary course of the transferor’s business has

knowledge only if the purchaser acquired the interest with knowledge that the transaction

violates the terms of the security agreement that creates or provides for the security

interest.

(d) Comment The term “purchaser”, used in subsections (7) and (8), encompasses a person who acquires an

interest under any consensual transaction, including a person who acquires a security interest

(SPPSA ss. 2(1)(ii)). The rules in subsections (2), (3) and (4) apply, respectively, to a

“transferee’ of value in the form of money, electronically transferred funds or a cheque payable to

62

the recipient. These rules are designed to operate in favour of people who receive funds from a

debtor by way of payment or gift, regardless of the mode of transfer. Subsection (1) makes it

clear that the term “transferee” has a narrower meaning than the word “purchaser”. A person

who acquires a security interest in money, an account or an instrument under a security

agreement is not a “transferee” for purposes of these provisions. However, a secured party who

receives payment towards the secured debt by any of those methods is a transferee with respect

to the payment. Subsection 31(2), governing transfers of physical currency, retains the longstanding policy

implemented by the provision it replaces (SPPSA s. 31(1)) and has the same substantive effect,

except that it applies to unperfected as well as perfected security interests. A person who receives

money as a gift takes free of a security interest in the money if he or she takes without

knowledge of the security interest. A person who gives value in exchange for money takes free

of a security interest regardless of whether he or she knows of the security interest. That policy is

extended to transfers of funds effected by other means under subsections (3) and (4). These rules

are qualified by the general principle embodied in SPPSA subsection 65(3), under which all

rights under the Act are to be exercised in good faith and in a commercially reasonable manner.

A transfer of funds designed to defraud a secured party would contravene that provision. This

approach is consistent with, though not identical to, the approach to money and electronic funds

transfers implemented by Article 9 of the Uniform Commercial Code. A transferee of money and a

transferee of funds from a deposit account takes free of a security interest in the money or the

account unless the transferee acts in collusion with the debtor in violating the rights of the

secured party, regardless of whether the transferee gives value (UCC §9-332).

An electronic transfer of funds is not in itself property but merely a mechanism for transferring

property from one person to another. In this respect, an electronic transfer of funds differs from a

cheque, which is both an item of property in itself and a means of transferring value from the

drawer’s account to a transferee. Subsection (3) therefore stipulates that the transferee of funds

takes free of a security interest in the source account, not in the transfer mechanism.

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Subsection 31(5) operates to the same effect as current SPPSA s. 31(3)(b), but more fully

elaborates the circumstances in which a deposit-taking institution can take priority over a

security interest in funds or an instrument received in payment of a debt. The institution may

claim the benefit of the priority rules if it debits an account under an authorization given by the

depositor at the time the account is debited or in the other circumstances identified.

Subsection 31(6) is designed to ensure that subsection (5) is not taken to restrict the rights of set-

off available to a deposit-taking institution. An institution that cannot claim priority under section

31 over a security interest in an account from which funds are transferred or in the

instrument through which transfer is effected may nevertheless be able to defeat the security

interest by exercising the rights referred to in section 41.

The proposed amendments revise the rules that apply to purchasers of instruments and negotiable

documents of title, which currently appear in separate subsections and have slightly different

requirements. Under the current rules, only a person who acquires a negotiable document of title

by negotiation can assert priority over a security interest in the document of title. In contrast, a

person who acquires an interest in an instrument must take possession in order to have priority

over a security interest in the instrument, but need not take by negotiation. Proposed subsection

(7) eliminates this inconsistency, combining the rules that apply to instruments and negotiable

documents of title in one provision that follows the pattern currently applied to instruments.

The proposed amendments to sections 31 and 20, taken together, would allow a transferee for

value of money, an instrument, a negotiable document of title or chattel paper to take priority

over a perfected or unperfected security interest in the property involved only if the transferee

takes possession. Under SPPSA s. 20(3) as currently drafted, a transferee for value of an

instrument, money, or a negotiable document of title has priority over an unperfected security

interest if the transferee takes without knowledge of the interest. The rule does not require the

transferee to take possession of the collateral in order to have priority. The proposed

amendments would bring perfected and unperfected security interests within one rule, with the

result that a transferee must take possession of property of this kind in order to have priority over

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any security interest. This is a minor change and reflects commercial practice. A transferee of

negotiable and quasi-negotiable property who relies on an expectation of clear title will take

possession as a matter of course. In any event, it is anomalous to require a transferee to take

possession of collateral as a condition of priority over a perfected security interest but not as a

condition of priority over an unperfected security interest.

The operation of the proposed provisions with respect to a person who receives a transfer of

funds by electronic means is illustrated by the following scenarios.

Scenario A

Debtor is a widget dealership. Secured Party (SP) is a widget supplier who has a security

interest in the widgets sold to Debtor. Debtor sells a widget to Buyer, who pays by an

electronic transfer of funds that is credited to Debtor’s account with Bank. SP’s security

interest attaches to the positive balance in the account as proceeds of the widget in which

it held a security interest as original collateral. However, Debtor owes money under a

loan agreement with Bank and Bank pays itself by debiting Debtor’s account.

Bank’s position as against SP can be approached in either of two ways:

1. Bank’s debit against Debtor’s account may be viewed as a transfer of “funds”

from Debtor’s account. Subsection 31(3) applies in favour of Bank. Bank will

take free of a security interest in the account from which the funds were

transferred if the debit is made pursuant to a payment authorization given by

Debtor when the account is debited or under a term of the loan agreement that

gave rise to the debt owed by Debtor to Bank.

2. Bank can assert any right of set-off it might have as provided by section 41 of the

Act. Subsection 31(6) explicitly preserves those rights.

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Bank would be in the same position if Buyer paid Debtor by means of a cheque payable to

Debtor and deposited in Debtor's account with Bank. Bank is a purchaser of an instrument and

has priority over SP's security interest in the cheque under subsection 31(7).

Scenario B

Debtor is a widget dealership. Secured Party (SP) is a widget supplier who has a security

interest in the widgets sold to Debtor. Debtor sells a widget to Buyer, who pays by an

electronic transfer of funds that is credited to Debtor’s account with Bank. Debtor’s

account with Bank is in negative balance and remains in negative balance after “deposit”

of the funds transferred by Buyer. Bank applies the funds transferred to a debt owed by

Debtor to Bank.

SP does not have a claim against Bank with respect to the funds received from Buyer. SP has no

interest in the third party account from which the funds were transferred (Buyer's account) so has

no claim against Bank on that basis. Further, SP has no interest in Debtor’s account with Bank

because a transfer of funds into an account in negative balance does not give rise to property that

may be claimed by SP as proceeds (Flexi-coil Ltd. v. Kindersley District Credit Union Ltd.).

Bank would be in the same position if Buyer had paid by a cheque payable to Debtor and

deposited in Debtor's account with Bank. Bank is a purchaser of an instrument and has priority

over SP's security interest in the cheque under subsection 31(7).

Scenario C

Retailer is a widget dealership. Retailer sells a widget to Buyer, who pays by an

electronic transfer of funds from Buyer’s account with Credit Union to Retailer's account

with Bank. SP has a security interest in Buyer’s Credit Union account (i.e., the account

from which the funds were transferred).

In this scenario Buyer is the debtor under a security agreement with SP. SP has no claim against

Retailer's account with Bank. Two explanations may be advanced in support of this result:

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1. SP has no interest in Retailer's account with Bank because it is not proceeds of

Buyer’s account with Credit Union. Proceeds are defined in SPPSA s. 1(1)(hh) as

property derived from a dealing with collateral, in which the debtor acquires an

interest. Here, Buyer is the debtor. Buyer does not have an interest in Retailer's

account with Bank.

2. Notwithstanding the analysis advanced in point 1, SP might attempt to argue that

Retailer is guilty of conversion. While the argument may be weak, any

uncertainty is settled by subsection 31(3), under which Retailer takes free from a

security interest in the account from which the funds were transferred.

SP would be in the same position if Buyer had paid Retailer by cheque payable to Retailer.

Retailer would have priority over SP's security interest under subsection 31(4).

Scenario D

X gives Y a gift by means of an electronic transfer of funds from X’s account at Credit

Union to Y’s account at Bank. X’s account is subject to a security interest held by SP.

Y’s account at Bank is credited with the funds transferred from X’s account.

As in Scenario 2, two arguments might be advanced in favour of Y:

1. SP has no interest in Y’s account with Bank because it is not proceeds of X’s

account with Credit Union (see above).

2. Y takes free of SP’s security interest in X’s account under s. 31(3) if Y did not

have knowledge of the security interest.

Y would be in the same position if X had given the gift in cash. Y would take free of SP's

security interest in the money under subsection 31(2) if Y did not have knowledge of the security

interest.

(e) Transition These amendments are primarily designed to clarify the existing law and rationalize the statutory

provisions that apply to these types of collateral. The amended provisions are intended to take

effect as of the coming into force of the amendments and apply to interests acquired by a

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transferee or purchaser after that date in property subject to a security interest, whether the

security interest arose under an agreement made before or after the date the amendments come

into force.

(f) Application The proposed provisions are relevant to all jurisdictions.

(9) Knowledge of Buyers and Lessees of Collateral

(a) Background Most Acts provide as follows: 20(3). A security interest in goods, a document of title, an instrument, an intangible or money is

subordinate to the interest of a transferee who:

(a) acquires an interest under a transaction that is not a security agreement,

(b) gives value, and

(a) acquires the interest without knowledge of the security interest and before the security

interest is perfected.

There are precedent and public policy reasons for eliminating the requirement that the buyer or

lessee be without knowledge of an unperfected security interest in order to be protected. The

parallel priority provision (Article 29(3)(b)) in the Convention on International Interests in

Mobile Equipment (which has been ratified by Canada as it applies to interests in aircraft) does

not contain this additional requirement. Under section 52 of the New Zealand PPSA, knowledge

is not relevant in a priority competition between an unperfected security interest and the interest

of buyer or lessee. Knowledge of competing interests is not a factor in priority determinations

Article 2663 of the Civil Code of Quebec.

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Adoption of this approach would remove an inconsistency in the current priority structure of the

Act. A secured party can gain priority under section 35 by acquiring and perfecting a security

interest with full knowledge that a prior unperfected security interest exists and that the security

agreement creating that interest contains a provision designed to preclude the debtor from

granting competing security interests. The same is true of a judgment enforcement creditor who

is given priority over an unperfected security interest even though the creditor was aware of the

unperfected security interest when he or she registered his or her judgment.

Removal of the requirement in subsection 20(3) that a buyer or lessee be without knowledge of a

security interest would have the advantage of eliminating difficult problems of proof. This

approach would not induce fraudulent conduct. All Acts except that of Ontario contain the

following provision:

65(3) All rights, duties or obligations that arise pursuant to a security agreement, this Act or any

other applicable law are to be exercised or discharged in good faith and in a commercially

reasonable manner.

(4) A person does not act in bad faith merely because the person acts with knowledge of the

interest of some other person.

Consequently, fraudulent buyers and lessees cannot take advantage of this change in the

requirements for priority.

(b) Recommendation It is recommended that section 20(3) be amended to remove the requirement that the buyer or

lessee be without knowledge of a security interest in the property bought or leased. It is also

recommended that the words” a document of title, an instrument.” and “or money” be deleted

along with subsection (4). Priority with respect to these types of property is addressed in

amendments to section 31.

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(c) Proposed Changes (changes noted)

20(3). A security interest in goods or a document of title, an instrument, an intangible or money

is subordinate to the interest of a transferee who acquires an interest for value under a

transaction that is not a security agreement before the security interest is perfected.

(b)gives value, and

(c)acquires the interest without knowledge of the security interest and before

the security interest is perfected.

(4) For the purposes of subsection (3), a purchaser of an instrument or a security, or the

holder of negotiable document of title, who acquired the instrument, security or negotiable

document of title in a transaction that was in the ordinary course of the transferor’s business

has knowledge of the security interest only if the purchaser or holder acquired his or her

interest with knowledge of the existence of a prior security interest and with knowledge that

the transaction violates the terms of the security agreement creating or providing for that

interest.

(d) Transition The proposed provisions are intended to take effect as of the coming into force of the

amendments and to apply to interests acquired after the date of commencement.

(e) Application The proposed provisions are relevant to all jurisdictions.

(10) Account Debtor’s Rights

(a) Background

The Acts of Alberta (APPSA s. 41(2)), British Columbia (BCPPSA s. 41(2)), New Brunswick

(NBPPSA s. 41(2)), Newfoundland (NFPPSA s. 42(2)), Nova Scotia (NSPPSA s. 42(2)), Prince

Edward Island (PEIPPSA s. 41(2)), Saskatchewan (SPPSA s. 41(2)) and Yukon (YPPSA s. 39(1))

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each contain a nearly identical provision which recognizes an account debtor’s rights vis-à-vis the

assignor, and affords those rights superiority over the competing rights of an assignee. Simply put,

an assignee – whether absolute transferee or secured party – takes its interest in an intangible or

chattel paper subject to the contractual and equitable rights of the account debtor, unless the account

debtor explicitly agrees otherwise. Subsections 41(1) and (2) of the SPPSA are reproduced below.

(1) In this section,

(a) “account debtor” means a person who is obligated pursuant to an intangible

or chattel paper;

(b) “assignee” includes a secured party and a receiver.

(2) Unless the account debtor on an intangible or chattel paper has made an

enforceable agreement not to assert defences to claims arising out of a contract,

the rights of an assignee of the intangible or chattel paper are subject to:

(a) the terms of the contract between the account debtor and the assignor and

any defence or claim arising from the contract or a closely connected

contract; and

(b) any other defence or claim of the account debtor against the assignor that

accrues before the account debtor acquires knowledge of the assignment.

The term “set-off” does not appear in the above statutory language, but it is uncontroversial that an

account debtor’s set-off rights vis-à-vis the assignor are among those rights, defences and claims

that an assignee takes subject to. Indeed, statutory concordant provisions in four jurisdictions –

Manitoba (MPPSA s. 41(2)), Northwest Territories (NWTPPSA s. 41(2)), Nunavut (NPPSA s.

41(2)) and Ontario (OPPSA s. 40(1.1)) – include express language to this effect, at least insofar as

equitable set-off is concerned. See, for example, the operative language of MPPSA s. 41(2):

(2) Unless an account debtor makes an enforceable agreement not to assert any

defence or claim arising out of a contract, the rights of an assignee of an

intangible or chattel paper are subject to

(a) the terms of the contract between the account debtor and the assignor and any

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defence or claim arising from

(i) the contract, or

(ii) a contract closely connected to the contract, where the account debtor

meets the requirements for an equitable set-off; and

(b) any other defence or claim of the account debtor against the assignor that

accrues before the account debtor acquires knowledge of the assignment.

Both of the above specimens provide that an account debtor’s rights supersede those of an assignee.

Still, the provisions can be criticized for their opacity. They could be improved with the introduction

of language that expressly recognizes set-off as being among those rights that a competing assignee

takes its assignment subject to. Greater certainty would result from the adoption of statutory

language that explicitly identifies set-off by name including, in particular subsections, specific

reference to contractual set-off and account combination.

The introduction of language that more precisely defines the limits of, or exceptions to these judicial

doctrines, would also create greater commercial certainty. At common law and equity, an account

debtor’s knowledge of an assignment, and the timing of receipt of that knowledge, may impede his

ability to assert set-off against the assignee. The PPSA should set out specific procedural

requirements (modeled on the notice rules for purchase money security interests) that a proceeds

assignee must satisfy if she wishes to defeat an account debtor’s right of contractual set-off/account

combination on the basis of this notice exception.

(b) Recommendation

It is recommended that the provision be amended to more precisely delineate an account debtor’s

rights as against the assignee. The provision should explicitly reference the account debtor’s set-off

rights, with specific reference, in particular subsections, to contractual set-off and account

combination.

(c) Proposed Changes

Section 41

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(1) In this section:

(a) “account debtor” means a person who is obligated pursuant to an intangible

or chattel paper;

(b) “assignee” includes a secured party who has a security interest in an

intangible or chattel paper as original collateral or as proceeds, and a

receiver.

(2) Unless the account debtor has made an enforceable agreement not to assert

rights, defences or claims arising out of the contract or a closely connected

contract, the rights of an assignee of an intangible or chattel paper are subject

to:

(a) the terms of the contract between the account debtor and the assignor that

confer on the account debtor a right of contractual set-off or account

combination,

(b) any defence or claim arising out of the contract or a closely connected

contract where the account debtor meets the requirements for set-off or

abatement of price, and

(c) any other defence or claim of the account debtor against the assignor,

including set-off, that accrues before the account debtor has knowledge of the

assignment.

(2.1) Notwithstanding clause (2)(a), the rights of an assignee who acquires a security

interest in an account as proceeds of original collateral are not subject to an

account debtor’s right of contractual set-off or account combination if:

(a) the assignee gives a notice to the account debtor before the proceeds security

interest in the account arises that:

(i) states that the assignee expects to acquire an interest in the account as

proceeds of its original collateral, and

(ii) provides details of the instrument, money or transfer of funds that will

give rise to the account sufficient to permit the account debtor to

reasonably ascertain the account transaction to which it relates; and

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(b) the assignee’s proceeds security interest in the account is continuously

perfected.

(2.2) Subsection (2.1) does not operate in favour of the assignee if the account debtor

acquires, in addition to its rights, defences and claims as account debtor on the

account, a security interest in the account that, pursuant to this Part, has

priority over the security interest of the assignee.

(2.3) A notice referred to in subsection (2.1) may be given in accordance with section

68, provided however that, where notice is given to a deposit-taking institution

in respect of a deposit account, notice must be given at the branch of account.

(2.4) For purposes of subsection (2.3), the branch of account:

(a) is the branch of the deposit-taking institution the address or name of

which appears on the specimen signature card or other signing authority

signed by the assignor with respect to the deposit account or that is

designated by agreement between the deposit-taking institution and the

assignor at the time of opening of the deposit account,

(b) if no branch has been identified or agreed on as provided in paragraph

(a), is the branch that is designated as the branch of account with respect

thereto by the deposit-taking institution by notice in writing to the

assignor, or

(c) if neither paragraph (a) nor (b) apply, is located at the mailing address

identified in written communications between the deposit-taking

institution and the assignor relating to the deposit account.

…

(d) Comments

The proposed PPSA s. 41(2) applies to both intangibles and chattel paper, and thus has general

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import. For example, a commercial retailer might assert, under the provision, its contractual and

equitable set-off rights against an accounts financier (assignee) who presses for payment of an

unsecured account (on which the commercial retailer is account debtor) assigned to it by a

wholesale supplier as part of a factoring arrangement. Indeed, the provision bears materially on any

commercial relationship featuring reciprocal indebtedness. The provision’s importance is

pronounced for industries in which reciprocal indebtedness is probable or inherent. For example, in

the banking industry, where reciprocal debt obligations are endemic to the bank-customer

relationship, deposit accounts are highly susceptible to set-off claims by depository banks under

PPSA s. 41(2).

In contrast to the proposed s. 41(2), ss. 41(2.1), (2.2), (2.3) and (2.4), as drafted, apply only to

accounts because the factual circumstances contemplated in these subsections are implausible in the

chattel paper context. In fact, they are similarly implausible in the general accounts receivable

context. Without explicitly saying so, proposed PPSA ss. 41(2.1) and (2.2) are focused primarily –

though not squarely – on the deposit account as a unique form of intangible personal property. For

most businesses, the deposit account is a collecting ground of sorts. It performs a reservoir function,

gathering and disbursing the proceeds of other tangible and intangible personal property from a

variety of sources. As such, the deposit account is inherently susceptible to competing claims of

proceeds claimants, on one hand, and the depository bank as account debtor, on the other. The

proposed amendments in ss. 41(2.1) through (2.4) are principally aimed at furnishing greater

certainty for these competing claimants. The proposed legislative amendments represent, not so

much an alteration of the existing law of set-off, but rather statutory clarification thereof, albeit

imposing stricter notice requirements on proceeds assignees intent on defeating an account debtor’s

contractual set-off rights.

In Canada, there are three types of set-off (legal, equitable and contractual) that may be available to

an account debtor. Each type of set-off is subject to its own strictures. In Telford v. Holt, the

Supreme Court of Canada held that an account debtor cannot assert a right of legal set-off against an

assignee since mutuality, a requirement for legal set-off, is destroyed by virtue of assignment; where

there is assignment, an account debtor must instead resort to either of two forms of equitable set-off.

The first such form is equitable set-off under the general rule. Commentators have dubbed this the

“unconnected claims notification rule of equitable set-off”, and have found its substance statutorily

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embodied in the operative language of existing SPPSA s. 41(2)(b). However, there is judicial and

academic support for the competing view that this form of set-off, embodied in the language of

existing SPPSA s. 41(2)(b), is better characterized as “legal set-off” than “equitable set-off”.

According to this view, assignment poses an exception to the general mutuality requirement for

legal set-off, but does not alter its characterization as such. To avoid any interpretive difficulties that

may arise on account of this terminological inconsistency, the Working Group recommends

adoption of the more generic term “set-off” in proposed PPSA s. 41(2)(c), effectively leaving

characterization issues to be settled by the courts.

The Supreme Court of Canada identifies the second form of equitable set-off as the “exceptional

rule”. Commentators have attached a more descriptive label, namely, the “close connection rule of

equitable set-off”. The close connection rule is statutorily embodied in the operative language of

proposed PPSA s. 41(2)(b). To gain consistency with proposed PPSA s. 41(2)(c), the Working

Group recommends adoption of similarly generic “set-off” language in proposed PPSA s. 41(2)(b).

Meanwhile, the Working Group recommends adoption of the more specific terms “contractual set-

off” and “account combination”, in proposed PPSA ss. 41(2)(a) and (2.1), since these forms of set-

off are susceptible to being overridden by a proceeds notice issued under proposed PPSA s. 41(2.1).

The presumptive analytical starting point is that a depository bank’s rights – however those rights

may be defined or limited at common law and equity – supersede the rights of a competing assignee,

whether such assignee asserts his interest in the deposit account as original collateral or as proceeds.

For instance, an assignee takes his interest subject to the depository bank’s rights as account debtor,

including its rights of contractual and equitable set-off. In exceptional circumstances, however, a

proceeds assignee may defeat the depository bank’s contractual set-off rights. In order for the

proceeds assignee to succeed, the depository bank must be given advanced notice that particular

incoming funds are subject to the assignee’s proprietary interest. Meanwhile, no assignee who

acquires a security interest in a deposit account as original collateral may claim an interest that pre-

exists or supersedes the bank’s original rights as account debtor. With respect to the deposit account,

the depository bank is the original claimant, and any assignee who takes a first order assignment of

the deposit account is subject to the depository bank’s rights, including those of set-off.

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An assignee pursuing proceeds of its original collateral into a deposit account must give notice at the

branch of account of the deposit-taking institution. The operative language in proposed PPSA s.

41(2.4) largely tracks the statutory language of s. 461 of the Bank Act, but is cast in broader terms

which include deposit-taking institutions other than chartered banks (for example, credit unions).

The proposed language is also designed to capture online banking institutions that do not have

physical branches per se.

The effect of the proposed amendments is demonstrated in the following scenarios:

Scenario 1

A opens a deposit account at Bank on standard account terms furnishing Bank a right of contractual

set-off against the deposit account balance. No initial deposit is made. Instead, the deposit account

has a nil balance. Bank then grants A an unsecured revolving operating line of credit of $100, which

A draws down entirely. A subsequently grants C a security interest in the nil deposit account

balance to secure a $100 debt. C effects registration at the PPR and gives Bank notice of her security

interest. A later deposits $100 cash, from an unrelated source, into the deposit account. A defaults

vis-à-vis both Bank and C, and a priority dispute arises with respect to the deposit account balance.

Bank prevails; PPSA s. 41(2). When C acquires her security interest in A’s deposit account, she

understands that she takes subject to Bank’s rights as account debtor. In these circumstances, both

account combination and the unconnected claims notification rule of equitable set-off (recognized

by some as legal set-off), as those doctrines are recognized and embodied in PPSA ss. 41(2)(a) and

(c), are available to Bank. The close connection rule of equitable set-off may be additionally

available to Bank under s. 41(2)(b).

Scenario 2

To secure a $100 debt owing from A to C, A grants C a security interest in all present and after-

acquired personal property. C effects registration at the PPR, thus perfecting her security interest. A

then opens a deposit account at Bank on standard account terms furnishing Bank a right of

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contractual set-off against the deposit account balance (i.e. account combination). No initial deposit

is made. Simultaneously, Bank grants A an unsecured revolving operating line of credit of $100. C

discovers the existence of A’s deposit account and notifies Bank of her security interest. A later

draws down the operating line entirely, then deposits $100, from an unrelated source, into the

deposit account. A subsequently defaults vis-à-vis both Bank and C, and a priority dispute arises

with respect to the deposit account balance.

Bank prevails; PPSA s. 41(2). Bank was unaware of C’s security interest in the deposit account

balance at the time the credit line was made available to A (i.e. committed to the supply of future

operating credit). A and Bank expressly agreed, at that time, that Bank was entitled to a current

account set-off in the nature of account combination. C acquired its security interest in the deposit

account subject to that right. It does not matter that Bank made advances to A after learning of C’s

first registered security interest in the deposit account balance. Bank may set off the operating line

against the deposit account in priority to C’s security interest. In order to defeat Bank in these

circumstances, C requires a blocked account arrangement or something akin.

Scenario 3

A grants C a security interest in his car to secure repayment of a $100 loan. C effects registration at

the PPR, thereby perfecting his security interest. A opens a deposit account at Bank on standard

account terms furnishing Bank a right of contractual set-off. No initial deposit is made. Instead, the

deposit account has a nil balance. Simultaneously, Bank grants A a revolving operating line of credit

of $100. C discovers the existence of the deposit account and gives Bank notice, at the branch of

account, stating that he expects to acquire an interest in the deposit account as proceeds of his

original collateral (the car, which is being sold to D), and that the personal property whose

disposition will give rise to such proceeds will take the form of a certified cheque drawn by D in

favour of A. Subsequently, a certified cheque matching the description set out in the notice is in fact

deposited into A’s deposit account. A subsequently defaults vis-à-vis both Bank and C, and a

priority dispute arises with respect to the deposit account balance.

C prevails; PPSA s. 41(2.1). In this narrow circumstance, where Bank is furnished with advanced

notice of a proceeds deposit, C defeats Bank’s contractual set-off rights. Since a proceeds notice was

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served on Bank in advance of the deposit pursuant to s. 41(2.1), Bank is unable to assert contractual

set-off under s. 41(2)(a). Nor is Bank able to assert set-off against the proceeds deposit under s.

41(2)(c) (i.e., “unconnected claims notification rule” or “legal set-off”) because Bank’s receipt of

the s. 41(2.1) notice means that it acquired knowledge of the assignment before the deposit was

made. Finally, Bank is unable to assert set-off against the proceeds deposit pursuant to the “close

connection rule of equitable set-off”, embodied in s. 41(2)(b), since it fails to meet the requirements

of that judicially-developed test (i.e. close connection & manifest injustice).

Scenario 4


set-off against the deposit account balance. No initial deposit is made. Simultaneously, Bank grants

A a revolving operating line of credit of $100; the terms confer on Bank an express right of

contractual set-off against A’s deposit account balance and any other credit balance A has or may

have with Bank. A additionally grants Bank a security interest in all present and after-acquired

personal property to secure repayment of the operating line. Bank effects registration at the PPR. A

then grants C a security interest in his table saw to secure repayment of a $100 loan. C effects

registration, thereby perfecting his security interest. C discovers the existence of the deposit account

and gives Bank notice, at the branch of account, stating that he expects to acquire an interest in the

deposit account as proceeds of his original collateral (the table saw), and that the proceeds whose

disposition will give immediate rise to such proceeds will take the form of a certified cheque drawn

by the buyer, D, in favour of A. Subsequently, a certified cheque matching the description in the

notice is in fact deposited into A’s deposit account. A subsequently defaults vis-à-vis both Bank and

C, and a priority dispute arises with respect to the deposit account balance.

Bank prevails; PPSA ss. 35(1)(a)(i) and 41(2). First, Bank’s security interest in the table saw has

priority over C’s security interest in the table saw. Similarly, Bank’s security interest in the deposit

account, whether conceptualized as original collateral or proceeds, has priority over C’s proceeds

security interest in the deposit account; PPSA s. 35(1)(a)(i). Moreover, Bank’s rights as account

debtor override C’s proceeds security interest pursuant to PPSA s. 41(2). PPSA s. 41(2.2) clarifies

that C cannot defeat Bank by virtue of PPSA s. 41(2.1) since Bank holds a prioritized security

interest to the security interest held by C. In other words, C cannot enhance its position vis-à-vis

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Bank (a party with a higher-ranking security interest) simply by giving a proceeds notice pursuant to

PPSA s. 41(2.1). PPSA s. 41(2) resolves the matter in favour of Bank on account of its superior

rights as account debtor.

Scenario 5


set-off against the deposit account balance. No initial deposit is made. Simultaneously, Bank grants

A a revolving operating line of credit of $100; the terms confer on Bank an express right of

contractual set-off against A’s deposit account balance and any other credit balance A has or may

have with Bank. A additionally grants Bank a security interest in all present and after-acquired

personal property to secure repayment of the operating line. Bank effects registration at the PPR. A

subsequently purchases a drill from C on secured credit terms, granting C a purchase money security

interest in the drill (as equipment) to secure repayment of its $100 purchase price. C effects

registration at the PPR prior to relinquishing possession of the drill to A, thereby conferring

superpriority status on C’s security interest in the drill and its proceeds pursuant to PPSA s. 34(2)(a).

C discovers that A has plans to sell the drill to D, and gives notice to Bank, at the branch of account,

stating (i) that she expects to acquire an interest in the deposit account as proceeds of her original

collateral (the drill), and (ii) that the proceeds whose disposition will give rise to such proceeds will

take the form of a cheque drawn by the buyer, D, in favour of A. Subsequently, a cheque matching

the description in the notice is in fact deposited into A’s deposit account. A subsequently defaults

vis-à-vis both Bank and C, and a priority dispute arises with respect to the deposit account balance.

C prevails; PPSA s. 41(2.1). In this instance, PPSA s. 41(2.2) does not apply to override the

application of PPSA s. 41(2.1) because C’s purchase money security interest in the deposit account,

as proceeds, has priority over Bank’s original collateral security interest in the deposit account;

PPSA s. 34(2)(a). Provided she gives adequate notice under PPSA s. 41(2.1), C will enjoy priority to

the deposit account balance as proceeds of her purchase money collateral.

(e) Transition

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These amendments are primarily designed to clarify the existing law and rationalize the statutory

provisions that apply to intangibles and chattel paper. The amended provisions are intended to take

effect as of the date of proclamation and apply to interests acquired after the date of proclamation

whether they arose under an agreement made before or after the date of proclamation.

(f) Application


(11) Effect of Future Advances on Buyers and Lessees

(a) Background A matter that is not addressed in any Act and that has yet to be settled in the case law arises in

the following context:

SP enters into a security agreement with a Debtor that provides for periodic advances to

the Debtor secured by a security interest in assets of the Debtor. The security interest is

perfected by registration. Debtor then sells an item of collateral to Buyer. At the date of

the sale, SP has advanced nothing or only a small amount to Debtor. After the sale, SP,

with knowledge of the sale, makes an advance to the full value of the item and claims

priority over Buyer for the full amount advanced to Debtor.

The PPSAs of several jurisdictions provide that where two or more security interests are in

competition, the priority that a security interest has pursuant to the general priority rule applies

to all advances, including future advances. (e.g., SPPSA s. 35(5). However, there is no

equivalent provision in the Acts dealing with a priority competition between a prior perfected

security interest and the interest of a non-ordinary course buyer or lessee acquired before

further advances are made pursuant to the security agreement with the seller-debtor. As a result,

there is uncertainty as to the relative priority of a secured party and a non-ordinary course

buyer with respect to future advances.

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If the policy applied in the context of competitions between security interests is applied where

the competing interests are a security interest and the interest of a buyer or lessee, a potential

buyer or lessee who wants to acquire or lease property that is subject to a security interest would

be required to ensure that a secured party who has prior perfected security interest in property

being purchased or leased will not make additional advances to the debtor after the property has

been acquired by the buyer or lessee. This can be accomplished through a subordination

agreement.

(b) Recommendation It is recommended that the policy applicable to competing security interests be extended to the

situation described above where the interest in competition with a security interest is that of a

non-ordinary course buyer or lessee.

(c) Proposed Provision 30.(8.1) The priority that a security interest has pursuant to another provision of this Act applies

to advances, including future advances, made after the interest of a buyer or lessee arises.

(d) Transition The proposed addition is intended to take effect as of the coming into force of the amendment

and to apply to interests taken before or after that date..

(e) Application The proposed provisions are relevant to all jurisdictions.

(12) Conflict of Laws

(a) Debtor Location Rules

(i) Background

Overview of PPSA Choice of Law Rules The PPSAs set out choice of law rules for determining the law applicable to the validity,

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perfection, and effects of perfection of a security interest. For security interests in ordinary

goods, the law of the location of the collateral generally applies. For security interests in

intangibles (for example, accounts receivable and intellectual property), the law of the

jurisdiction in which the debtor is located applies. That is also the applicable law for security

interests in mobile goods (goods such as road vehicles that by virtue of their normal function are

used in more than one jurisdiction) where they are held by the debtor as equipment or as

inventory for lease. For security interests in money, an instrument (for example, a cheque), a

negotiable document of title (for example, a bill of lading) and chattel paper (for example, rights

to payment under a lease of goods), the applicable law varies depending on whether the collateral

is in the possession of the secured creditor (law of the location of the collateral) or the debtor

(law of the location of the debtor). While the choice of law rules for security interests in

investment property depart from this general pattern in important respects, the law of the

debtor’s location also determines whether a security interest in investment property is perfected

by registration.18

The Non-Ontario PPSA Debtor Location Rules

The PPSAs contain “debtor location rules” for the purposes of determining the applicable law

where, under the choice of law rules summarized above, the location of the debtor is the relevant

connecting factor. The rules in the initial PPSAs – still in effect in all PPSA jurisdictions other

than Ontario – were derived from the 1972 version of Article 9 of the Uniform Commercial

Code. Under these rules:19

A debtor is located at the debtor’s place of business.

A debtor who has no place of business is located at the debtor’s principal residence.

A debtor that has a place of business in more than one jurisdiction is located in the

jurisdiction where it has its chief executive office.

The application of these rules can occasionally give rise to difficulty. It is not always easy to

determine, particularly for third party searchers, whether an individual debtor operates a place of

business, and if so whether it is located in a different jurisdiction than the one in which she

maintains her principal residence. Where an enterprise debtor has places of business in multiple 18 For a detailed analysis and statutory references, see Ronald C.C. Cuming, Catherine Walsh and Roderick J. Wood, Personal Property Security Law (2nd ed., Irwin Law, 2012), Chapter 3, “Conflict of Laws”. 19 See, e.g., Saskatchewan PPSA, s.7(1).

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jurisdictions, the determination of which of these places constitutes its “chief executive office”

can also be problematic. The term “chief executive office” is not defined in the PPSAs and there

is no PPSA case law on its interpretation. In practice, it is generally understood, in line with the

official comment in UCC Article 9 from which the term is derived, to refer to “the place from

which the debtor manages the main part of its business operations or other affairs. This is

the place where persons dealing with the debtor would normally look for credit

information.”20 In what is regarded as the leading U.S. decision on the issue, Mellon Bank, N.A.

v. Metro Communications Inc., the Third Circuit Court of Appeals emphasized the practical

nature of the test and the need to adopt the perspective of third party searchers: The Official Comment envisions a realistic test asking simply ‘where does the debtor manage the main part of its business’ because that is where creditors are likely to search for information. To artificially break down that question into rigidly applied tests violates the practical nature of the inquiry as envisioned by the Uniform Commercial Code.21

The Court went on to caution against “an irrelevant inquiry as to the internal balance of power

between corporate executives.”22 Rather, the emphasis should be on “evidence readily available

to creditors and of a more objective nature” such as the location of the principal office set out in

the company’s contracts with its creditors and customers and the location of third party dealings

with the debtor. Subsequent cases confirm this approach, also emphasizing that the chief

executive office is not commensurate with the location of the company’s principal assets: “the

question is not where the main part or main asset of the debtor’s business is located, but rather,

from where the main part of the debtor’s business is managed.”23

Nonetheless, where a debtor conducts the “main part” of its affairs may be difficult to ascertain

in exceptional scenarios. In the U.S. case law, the most troublesome cases have usually involved

situations where the company moves its chief executive office from one jurisdiction to another

and it then becomes necessary to ascertain precisely when that move occurred.24 If there is any

doubt, a prudent secured creditor can protect itself only by perfecting under the law of each

possible jurisdiction, and taking account of the legal risk posed by any substantive differences

between the potentially applicable laws. 20 See Official Comment to Uniform Commercial Code, s.9-307. 21 945 F2d 635 (3rd Cir. 1991), para. 47. 22 Ibid, para. 52. 23 See In re IT Group, Inc., Co., 307 B.R. 762 (2004) at 767. 24 In addition to the Mellon case above, see also Chase Manhattan Bank v. Nemko, Inc. (In re Nemko, Inc.), 209 B.R. 590, 602–603 (Bankr.E.D.N.Y.1997).

84

Reform of the Debtor Locations Rules in the Ontario PPSA

The transaction costs sometimes occasioned by the fact-based “place of business” and “chief executive office” tests prompted Ontario, in 2006, to enact legislation amending the debtor

location rules in its PPSA.25 Proclamation was delayed in the expectation (or hope) that the other

PPSA jurisdictions would enact parallel reforms. Saskatchewan and British Colombia did so.26

Both provinces, however, also delayed proclamation pending broader take-up. Under Ontario law, unproclaimed statutory provisions are repealed if they are not proclaimed 10 years after

being enacted.27 With that deadline looming, Ontario proclaimed the 2006 amendments in force effective 31 December 2015.

Summary of the New Ontario Rules Under the new Ontario rules set out in OPPSA section 7(3), the location of a debtor differs

depending on the type of debtor.

A debtor who is an “individual” is located, under section 7(3)(a), in the jurisdiction where she

has her “principal residence” regardless of whether or not she operates a business.

Section 7(3)(b) provides a special rule if the debtor is a partnership, other than a limited

partnership, and the partnership agreement states that the agreement is governed by the laws of a

province or territory of Canada. If this condition is met, the debtor is located in that province or

territory.

Section 7(3)(c) provides that a corporation, a limited partnership or an organization is located in

the Canadian province or territory under the laws of which it is incorporated, continued,

amalgamated or organized, provided that law requires its incorporation, continuance,

amalgamation or organization to be disclosed in a public record. 25 See Ministry of Government Services Consumer Protection and Service Modernization Act, 2006, S.O. 2006, c. 34. 26 See Finance Statutes Amendment Act, Bill 6, 2010, ss. 43 to 47 (BC); An Act to amend The Personal Property Security Act, 1993, Bill 102, 2009, ss. 5, 6 (SK.). 27 See Legislation Act, 2006, SO 2006, c 21, Sch F., s.10.1.

85

Section 7(3)(d) provides a similar rule for determining the location of a corporation incorporated,

continued or amalgamated under a law of Canada. Provided that law requires its incorporation,

continuance or amalgamation to be disclosed in a public record, the corporation is deemed to be

located in the province or territory where its “registered or head office” is located as set out in:

(i) the relevant constating instrument, or (ii) its by-laws if (i) does not apply. If the debtor is organized under a state or federal law of the United States, section 7(3) seeks to

replicate the debtor location rules applicable to “registered organizations” in UCC § 9-307

effective as of 2001. In line with UCC § 9-307(e), section 7(3)(e) deems a “registered

organization” organized under the law of a state of the United States to be located in the state

under which it is organized. In line with UCC § 9-307(f), section 7(3)(f) deem a “registered

organization” organized under federal law to be located in the state within the United States that

the relevant federal law designates, or the state designated by the organization if that law

authorizes the organization to designate a state of location, or if these two possibilities do not

apply, in the District of Columbia. Note that, as explained in the comments section below,

section 7(3)(f) does not include clarifying language added to UCC§ 9-307(f) in 2010 and the

definition of “registered organization” in section 7(4) uses the initial 2001 UCC definition as

opposed to the amended 2010 definition.

If the debtor is a trustee or trustees acting for a trust, section 7(3)(g) provides a similar rule to the

rule for non-limited-liability partnerships in section 7(3)(b) explained above. If the trust

instrument states that it is governed by the laws of a province or territory of Canada, the trustee

or trustees are deemed to be located in that province or territory. In the absence of a governing

law clause, the relevant location is the jurisdiction where the administration of the trust is

principally carried out.

Debtors not covered by the above rules are deemed to be located, under section 7(3)(h), in the

jurisdiction where they maintain their chief executive office.

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Comparison with Traditional PPSA, UCC Article 9 and Quebec Civil Code Rules The new Ontario rules are sometimes presented as harmonizing the PPSAs with the debtor

location rules in UCC Article 9 and the Civil Code of Quebec. This is true only to a very limited

extent.

The new Ontario rules replicate the approach in UCC § 9-307 only if the debtor is an

“individual” or a “registered organization” organized under the law of a U.S. state or under U.S.

federal law (and achieve this harmonization in the latter case only if sections 7(3)(f) and 7(4) are

updated to conform to the 2010 UCC amendments as explained below). In the case of a debtor

that is a trustee or a corporation or other organization incorporated or organized under non-U.S.

law (including Canadian provincial or federal law), § 9-307 retains the “chief executive office”

approach. As well, the place of perfection under § 9-301 is generally at the location of the debtor

regardless of the nature of the collateral whereas under the PPSAs, perfection of security

interests in ordinary goods and documentary collateral is governed by the law of the location of

the collateral as opposed to the law of location of the debtor (see summary of PPSA choice of

law rules, above). The Civil Code of Quebec uses domicile to locate a debtor for the purposes of the Code choice of law rules that refer to the location of the debtor to determine the law applicable to the validity

and publication (perfection) of movable securities.28 For natural persons, the Civil Code concept

of domicile29 typically will coincide with her “principal residence” in line with the new Ontario rules (though there may be exceptional cases at the margin). The domicile of a legal person

under the Code is the place where it has its registered head office.30 This approach is generally equivalent in the result to the new Ontario rules for corporations organized under a law of Canada or of a province or territory of Canada or under a law of the United States or of a state of

the United States. However, whereas the Ontario rules locate any other corporation or

organization in the place where it has its chief executive office, the Quebec “head office” rule

28 See article 3105. 29 See articles 76-83. 30 See article 307.

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applies to all legal persons and entities including those constituted under the law of a jurisdiction

outside the United States and Canada. Presumably the Ontario drafters were reluctant to wholly

adopt the Quebec approach for corporations and organizations constituted under a law other than

that of Canada or the United States because of the risk of prejudice to third parties in situations,

for example, where an entity is formed under foreign law for taxation, accounting or other

instrumental reasons but establishes its de facto headquarters in Canada or the United States and

conducts the main part of its business from that location. The Code location rule also differs

from the Ontario approach for trustees and partnerships since the domicile of an organization that is

not a legal person under the Code is at the place of its principal establishment.31

If a transaction has a factual connection to the United States or Quebec, a prudent secured

creditor will need to take account of these differences since a court in these jurisdictions will

apply its own debtor location rules, not those of the PPSA, for the purposes of determining the

applicable law. This limits the certainty and reduced transaction costs sought to be achieved by

the new rules.

For ease of reference, the following table sets out the differences between the old and new PPSA

debtor location rules and those of the Civil Code and UCC Article 9:

Debtor type Location under traditional PPSA rule

Location under new Ontario rule

Location under Civil Code of Quebec rule

Location under UCC Article 9 rule

individual place of business; if no place of business, principal residence; if places of business in multiple jurisdictions, chief executive office

principal residence domicile (generally equivalent to principal residence)

principal residence

corporation, limited partnership or organization incorporated, continued, amalgamated or organized under the law of a province or territory of Canada

place of business or chief executive office if there are places of business in more than one jurisdiction

province or territory under the law of which the debtor is incorporated, continued, amalgamated or organized

domicile (location of registered or head office if the debtor is a legal person; otherwise location of “principal establishment”)


31 See article 75.

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that requires the organization, continuation, amalgamation or organization to be disclosed in a public record

corporation incorporated, continued or amalgamated under a law of Canada that requires the incorporation, continuance or amalgamation to be disclosed in a public record


province or territory designated as the registered or head office in the corporation’s constating instrument or by- laws

domicile (registered or head office)


“registered organization” organized under a law of a state of the United States


state under which the organization is organized

domicile (registered or head office if the debtor is a legal person; otherwise “principal establishment”)

state under which the organization is organized

“registered organization” organized under a law of the United States


state that the relevant law of the United States designates, or the state designated by the organization if the relevant United States law authorizes the organization to designate a state of location, or the District of Columbia if the first two do not apply

domicile (registered head office if the debtor is a legal person; otherwise “principal establishment”)

state that the relevant United States law designates, or the state designated by the organization, if the relevant United States law authorizes the organization to designate a state of location, or the District of Columbia if the first two do not apply

partnership, other than a limited partnership


if the partnership agreement states that it is governed by the laws of a province or territory, that province or territory; otherwise, chief executive office

domicile (“principal establishment”)


one or more trustees acting for a trust


if the trust instrument states that it is governed by the law of a Canadian province or territory, that province or

domicile (“principal establishment”)


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territory; otherwise, the jurisdiction in which the administration of the trust is principally carried out.

any other debtor place of business or chief executive office if there are places of business in more than one jurisdiction

chief executive office

domicile (registered or head office if the debtor is a legal person; otherwise “principal establishment”)


exception if debtor is not located under the above rules in a jurisdiction whose law generally requires non- possessory-security interests to be disclosed in a public filing

no equivalent exception



District of Columbia in the United States

(ii) Comments

S. 7(3)(a): individual As noted above, the traditional PPSA rules locate a debtor in the first instance at its place of

business. For individual debtors, this requires a determination as to whether they have a place of

business, and if so whether it is located in a different jurisdiction from the one in which they

maintain their principal residence. In substituting a “principal residence” rule for all individual

debtors, regardless of whether or not they operate a business, section 7(3)(a) enables the

applicable law to be determined with greater certainty and at lower cost.

S. 7(3)(b): partnership if the partnership agreement states that it is governed by the laws of a

province or territory of Canada

As noted above, OPPSA section 7(3)(b) addresses the location of a debtor that is a partnership

(other than a limited partnership). If the partnership agreement designates the law of a province

or territory of Canada as the law governing the agreement, the debtor is deemed to be located in

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that province or territory. This rule is intended to reduce uncertainty for prospective secured

creditors in cases where the partners conduct business in different jurisdictions, thereby

sometimes making it difficult to determine the location of the partnership’s “chief executive

office” (i.e. the place from which the main part of the affairs of the partnership is carried out).

From the perspective of third parties, however, this rule has significant disadvantages. First, there is a lack of transparency. While a potential secured creditor or transferee usually will

be given access to the partnership agreement so as to be able to determine the governing law, this

is not the case for competing claimants who lack leverage over the debtor (for example, the

partnership’s creditors and trustee in bankruptcy).

Second, while a party autonomy approach may be appropriate for designating the law applicable

to the internal administration of a partnership, the PPSA debtor location rules are concerned with

determining the law applicable to the perfection and priority of security interests in partnership

assets. These are matters which are of prime concern to third parties and the new Ontario rule

gives rise to the potential for unfair surprise where the place of business of a partnership and the

partnership assets are located a different province or territory than the province or territory

whose law is designated as the law governing the partnership agreement. Indeed, the place of

business and assets of the partnership may even be located outside Canada altogether since the

scope of this rule is not limited to partnerships doing business in Canada.

Third, a location test based on the law designated in the partnership agreement as governing that

agreement is potentially less stable since it can more easily be changed.

Finally, as explained above, the new Ontario location rules do not necessarily reduce uncertainty

in cases where the perfected or priority status of a PPSA security interest is litigated in Quebec

or in the United States or another foreign State. Since the courts in these jurisdictions will apply

their own choice of law rules, a prudent secured creditor will still need to perfect in accordance

with the law designated as applicable under those rules. While this is true in all cases where the

PPSA location rules point to a different governing law than the choice of law rules of the non-

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PPSA litigation forum, the risk of a ‘conflict’ between the PPSA ‘conflict-of-law’ rules and

those of a non-PPSA litigation forum is greater here since this location rule is predicated on party

autonomy.

Section 7(3)(b) does not apply to a partnership that is a limited partnership. This exclusion is

presumably based on the assumption that limited partnerships organized under the law of a

province or territory of Canada would instead fall within the location rule in section 7(3)(c), and

those organized under the law of a state of the United States within the location rule in section

7(3)(e). However, as explained in the comments on these sections below, this assumption is

correct only if the limited partnership is formed or organized under the relevant law by the filing

or issuance of a public record, as opposed to it merely being required to file a public record of its

organization. In addition, there may potentially exist forms of partnerships other than limited

partnerships that are likewise formed by the filing or issuance of a public record and that could

therefore potentially also fall within the scope of these other rules. For these reasons, it would

have been clearer if section 7(3)(c) had instead simply excluded from its scope partnerships

within the scope of these other rules. (This comment is somewhat superfluous since it will be

seen that it is recommended not to adopt section 7(3)(b) in any event.)

S. 7(3)(c): Corporation or organization organized under Canadian provincial or territorial law As noted above, section 7(3)(c) of the Ontario Act provides that that “a corporation, a limited

partnership or an organization” that is incorporated, continued, amalgamated or otherwise

organized under the law of a Canadian province or territory is deemed to be located in that

province or territory, if that law requires the incorporation, continuance, amalgamation or

organization to be disclosed in a public record. Compared to the traditional PPSA ‘place of

business’ and ‘chief executive office’ approach, this rule is thought to offer a more objective,

stable and certain connecting factor.

That said, the scope of the location rule in section 7(3)(c) is unclear. It applies only if the

provincial or territorial law under which an organization is incorporated, continued, amalgamated

or otherwise organized “requires the incorporation, continuance, amalgamation or organization to

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be disclosed in a public record.” The meaning of the italicized words is ambiguous. Is the scope

of the rule meant to be limited to organizations whose formation emanates from the filing or

issuance of a record with or by the province or territory that is required to be disclosed in a

public record? Or is it sufficient that the formation of the organization is required be disclosed in

a public record? And is the wording sufficiently clear to capture corporations created by

legislation, for example, Crown corporations or a corporation created by a special Act granting

or confirming letters patent that has not been continued under general corporate legislation?

The italicized wording appears to have been transplanted from the initial 2001 definition of

“registered organization” in UCC Article 9. As explained in the comments on section 7(3)(e) and

(f) below, UCC Article 9 was amended in 2010 to confirm that this term is generally limited to

organizations whose “birth” emanates from the enactment of legislation or the filing or issuance

of a record with or by a public official that is then made available to the public for inspection.

Given that the Ontario drafters derived the italicized wording from the 2001 version of UCC

article 9, they presumably intended the scope of section 7(3)(c) to be similarly understood and

the balance of the comments on this rule are based on that assumption.

Under Canadian provincial and territorial legislation, a business corporation is incorporated, continued or amalgamated only upon the filing or issuance of a record with or by a public

official32 who must make that record available to the public for inspection.33 The same applies to the constitution, continuance or amalgamation of other types of corporations or legal persons,

namely, cooperatives, credit unions and condominium associations.34 Consequently, all

32 See, e.g.: (ON) Business Corporations Act, RSO 1990, c B.16, ss. 4-7, 178-180; (BC) Business Corporations Act, SBC 2002, c 57, ss. 10-13, 275-281, 302-305; (QC) Business Corporations Act, CQLR c S-31.1, ss. 3-10, 283-286, 288-291. 33 See, e.g.: (ON) Business Corporations Act, RSO 1990, c B.16, s. 270; (BC) Business Corporations Act, SBC 2002, c 57, s. 416; (QC) Business Corporations Act, CQLR c S-31.1, ss. 9, 285, 292, and see also An Act Respecting the Legal Publicity of Enterprises, CQLR c P-44.1, ss. 3(3), 21(4), 21(6), 30, 31, 99. 34 See, e.g.: (ON) Co-operative Corporations Act, RSO 1990, c C.35, ss. 4-6, 156-160; Credit Unions and Caisses Populaires Act, 1994, SO 1994, c 11, ss. 12-23, 309, 316; Condominium Act, 1998, SO 1998, c 19, ss. 2-6, 120-121; (BC) Cooperative Association Act, SBC 1999, c 28, ss. 10-19, 183-185, 191-192; Credit Union Incorporation Act, RSBC 1996, c 82 ss 6-11, 15.1, 20; Strata Property Act, SBC 1998, c 43, ss. 2, 269-70; (QC) Cooperatives Act, CQLR c C-67.2, ss. 3, 7-14, 152.1 - 176.2; An Act Respecting financial Services Cooperatives, CQLR c C-67.3 ss. 7-16, 271-284; Civil Code of Quebec, arts. 1038-1039, 1059-1060. Note that while cooperatives, credit unions and

93

corporations or other legal persons organized under provincial or territorial law come within this

location rule.

The position with respect to partnerships is more complex. Although partnerships are not legal persons, the legislation in effect in the common law provinces and territories treats limited partnerships in a similar manner to corporations and other legal persons insofar as a limited partnership is formed by the filing or issuance of a record with or by a public official in the

province or territory35 that is available to the public for inspection.36 Presumably this is why limited partnerships were expressly included in this rule. General partnerships (including limited

liability partnerships) are also typically subject to a public filing obligation.37 However, it is the anterior association of the partners that forms the partnership, not the record required to be

publicly filed with the State, thereby excluding them from this rule.38

The applicability of section 7(3)(c) to partnerships formed under Quebec law is more uncertain. The Civil Code recognizes three categories of partnerships: general partnerships (including

limited liability partnerships), limited partnerships and undeclared partnerships.39 Both general and

limited partnerships are required to file a “registration declaration,”40 failing which the

partnership is deemed to be an undeclared partnership “subject to the rights of third parties in

good faith.”41 Under this approach, public registration is arguably a pre-condition to the formation of both general and limited partnerships since otherwise they fall into the distinct

condominium associations are characterized as specific types of corporations under the legislation in the common law provinces and territories, Quebec law characterizes them as separate types of legal person. 35 See, e.g.: (ON) Limited Partnerships Act, R.S.O. 1990, c. L.16, s. 3; (BC) Partnership Act, RSBC 1996, c 348, ss. 51, 90.3. 36 See, e.g.: (ON) General, RRO 1990, Reg 713, s. 3. The British Columbia Partnership Act, RSBC 1996, c 348 is somewhat ambiguous on this point; while the wording of section 90.3 is sufficiently broad to ensure public access to the record of a limited partnership filed with the registrar pursuant to s. 51, section 90.3 appears in Part 4 of the Act entitled “Registration of General Partnerships and Sole Proprietorships.” 37 See, e.g.: (ON) Partnerships Act, R.S.O. 1990, c. P.5, ss. 2, 3, 44.1, 44.3(1), Business Names Act, RSO 1990, c B.17, ss. 2, 3; (BC) Partnership Act, RSBC 1996, c 348, ss. 2, 4, 80.1, 81,82, 90.3. Note that under the BC Act, registration is required only in respect of “persons associated in partnership for trading, manufacturing or mining purposes.” 38 It is for this reason that the official comments to UCC Art. 9 regard limited liability partnerships formed under U.S. state legislation modelled on the Uniform Partnerships Act not to be “registered organizations.” See: Permanent Editorial Board for the Uniform Commercial Code, PEB Commentary No. 17, Limited Liability Partnerships under the Choice of Law Rules of Article 9 (June 29, 2012). 39 Civil Code, arts. 2186, 2188. 40 An Act Respecting the Legal Publicity of Enterprises, CQLR c P-44.1, s.21(2), 30, 32, 33. 41 Civil Code, art. 2189.

94

category of “undeclared partnerships.” On the other hand, the Civil Code provides that a

partnership is created upon the conclusion of the contract of partnership if no other date is

indicated in that contract,42 thereby arguably excluding all forms of partnership from the scope

of section 7(3)(c). To ensure that the wording of section 7(3)(c) does not pre-empt this

interpretive issue, it would have been preferable to have omitted the express reference to “limited

partnerships” and to instead simply have referred to corporations or other organizations.

S. 7(3)(d): corporation incorporated under a law of Canada As noted above, the location rule in section 7(3)(d) of the Ontario Act applies to a corporation

incorporated, continued or amalgamated under a law of Canada if that law requires the

corporation’s “incorporation, continuance or amalgamation to be disclosed in a public record.”

The italicized wording does not create quite the same level of ambiguity in the context of this

section as it does in section 7(3)(c) discussed above since its scope is limited to corporations.

Nonetheless, it does not precisely capture the intended meaning of the provision as it relates to

corporations formed under general federal corporation legislation.

Corporations within the scope of the Canada Business Corporations Act,43 the Canada

Cooperatives Act,44 and the Canada Not-for-Profit Corporations Act,45 are incorporated, continued or amalgamated by the issuance of a certificate by the Director appointed under these

Acts upon receipt of the relevant articles with effect from the date set out in the certificate.46

Under all these acts, certificates and related articles must be filed by the Director in a publicly

accessible record along with any other document required to be sent to the Director.47

Corporations within the scope of the Bank Act,48 the Trust and Loan Companies Act,49 the

Insurance Companies Act,50 and the Cooperative Credit Associations Act, 51 are incorporated,

42 Civil Code, art. 2187. 43 RSC 1985, c C-44. 44 SC 1998, c 1. 45 SC 2009, c 23. 46 See, e.g., Canada Business Corporations Act, ss. 8-9, 185-187. 47 See, e.g., Canada Business Corporations Act, s. 266. 48 SC 1991, c 46a. 49 SC 1991, c 45. 50 SC 1991, c 47. 51 SC 1991, c 48.

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continued or amalgamated by the issuance of letters patent by the Minister of Finance or the Superintendent of Financial Institutions upon receipt of an application with effect from the date

set out in the letters patent.52 These Acts require the Superintendent to maintain a register containing a copy of the incorporating instrument to which any person is entitled to reasonable

access to make copies or take extracts.53

To more accurately capture the application of this section to corporations covered by these

federal Acts, it would have been preferable (as noted above for corporations incorporated under

provincial law) for section 7(3)(d) to have instead referred to corporations incorporated,

continued or amalgamated by the filing or issuance of a record with a public official that is

available to the public for inspection.

The wording of section 7(3)(d) is also inapposite to cover federal corporations created by

legislation, notably federal Crown corporations, a significant number of which are authorized to

borrow money for the purposes of their activities. Accordingly, it would have been preferable if

this rule had expressly stated that it also applies to corporations incorporated by legislation

Although this intent is implicit in the reference to a “special Act” in section 7(3)(d)(i), it is not

reflected in the wording of the principal clause of the section. Moreover, the term “special Act” is

itself somewhat ambiguous as it is often used to refer to companies historically formed by the

statutory grant of special letters patent and may not be considered sufficiently generic to cover

contemporary Crown corporations created by legislation.

Section 7(3)(d) deems a federal corporation to which it applies to be located in the jurisdiction

where its “registered office or head office” is located:

52 Bank Act, ss. 22, 35, 229, 671, 809; Trust and Loan Companies Act, ss. 21, 24, 30-34, 228-235 ; Insurance Companies Act, ss 22, 31, 251-252, 708, 718; Cooperative Credit Associations Act, ss. 23, 31, 31, 31.1-31.4. 53 Bank Act, s. 634; Trust and Loan Companies Act, s. 501; Insurance Companies Act, s. 670; Cooperative Credit Associations Act, s. 434. Note that the Superintendent is also required to publish in the Canada Gazette a notice of the issuance of letters patent (Bank Act, ss. 30, 229, 679, 686, 809; Insurance Companies Act, s. 29, 36, 251, 716;) as well as an annual notice showing the name of every entity incorporated under these Acts and the province in which their head office is situated (Bank Act, s. 699. Insurance Companies Act, s. 738). In addition, section 14 of the Bank Act requires an up to date list of the names of all banks incorporated under the Act and the province in which their head office is located to be set out in Schedules I and II of the Act. That section also requires the Superintendent to publish a notice in the Canada Gazette showing the amended form of Schedule I or II as of the end of any year in which the Schedules are amended.

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“(i) as set out in the special Act, letters patent, articles or other constating instrument

under which the debtor was incorporated, continued or amalgamated, or

(ii) as set out in the debtor’s by-laws, if subclause (i) does not apply”. The term “registered office” reflects the terminology used in the Canada Business Corporations

Act, the Canada Cooperatives Act, and the Canada Not-for-Profit Corporations Act. The term

“head office” reflects the terminology used in the Bank Act, the Trust and Loan Companies Act,

the Insurance Companies Act, and the Cooperative Credit Associations Act. The term “head

office” is also typically used in federal legislation incorporating Crown corporations.

Sub-paragraph (i) of section 7(3)(d) appears to be directed at corporations governed by the Canada Business Corporations Act, the Canada Cooperatives Act, and the Canada Not-for- Profit Corporations Act. Under these Acts, the province in which the “registered office” of the

corporation is located must be set out in its articles54 and the corporation is required at all times

to have a registered office in the province specified in its articles.55 The corporation’s articles may be amended by special resolution to change the province in which the registered office is

situated.56 Public disclosure is assured by the requirement for a notice of registered office to be sent to the Director together with any articles that designate or change the province where the

registered office of the corporation is located.57

Sub-paragraph (ii) of section 7(3)(d) appears to be directed at corporations governed by the Bank Act, the Trust and Loan Companies Act, the Insurance Companies Act, and the Cooperative Credit Associations Act. While these Acts require the province in which the corporation’s “head

office” is located to be set out in its letters patent,58 the directors of the corporation may change the province in which its head office is located by by-law. The Superintendent may issue letters

patent of amendment accordingly with effect from the day stated in the letters patent59 but this is not a pre-condition to the effective date of the by-law. This presumably explains why these Acts

54 See, e.g., Canada Business Corporations Act, s. 6, 55 See, e.g., Canada Business Corporations Act, s. 19(1). 56

See e.g., Canada Business Corporations Act, s. 173. 57

See, e.g., Canada Business Corporations Act, s. 19(2). 58 See, e.g., Bank Act ss. 28, 35, 229, 676, 809; Insurance Companies Act, ss. 28, 251. 59 See, e.g., Bank Act, ss. 217, 190.03.

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require the corporation at all times to have a head office in the province specified in its

incorporating instrument or by-laws.60 In any event, for the purposes of section 7(3)(d), it would

seem that the intention is that the location of the head office designated in the corporation’s by-

laws controls in cases where it has been changed via by-law from the location initially set out in its letters patent.

The wording of clause 7(3)(i) is unclear for the purposes of determining the location of the head

office of a Crown corporation incorporated by federal legislation. This category of federal

corporations was presumably meant to be covered by the reference to the jurisdiction in which

the corporation’s head office is situated as set out in “the special Act or other constating

instrument under which the debtor was incorporated, continued or amalgamated.” This wording

covers federal Crown corporations, such as the Canada Mortgage and Housing Corporation,

whose head office is set out in the Act under which it is constituted.61 But it does not cover

corporations, such as the Business Development Bank of Canada, whose constituting Act

provides for the head office of the corporation to be designated by the Governor-in-Council.62 To

cover the latter situation, it would have been clearer if the rule had referred instead to the head

office set out in or under the Act under which it was incorporated.

Ss. 7(3)(e)-(f)):“registered organization” organized under U.S. state or federal law For the purposes of the location rules applicable to “registered organizations” organized under

U.S. state or federal law, OPPSA section 7(4) replicates the definition of “registered

organization” in the 2001 version of UCC § 9-102:

“Registered organization” means an organization organized under a law of a U.S. State or of the United States of America that requires the organization of the organization to be disclosed in a public record. (Italics added).

60 See, e.g., Bank Act, ss. 237 (1), 814 (1); Insurance Companies Act ss. 260, 544, 868. 61 Section 4 of the Canada Mortgage and Housing Corporation Act, R.S.C., 1985, c. C-7 provides that the head office of the Corporation “shall be at the city of Ottawa.” 62 Section 3(2) of the Business Development Bank of Canada Act, SC 1995, c 28 provides that the “head office of the Bank must be at a place in Canada that the Governor in Council may designate.”

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Due to uncertainty regarding the meaning of the italicized words, the UCC definition of

“registered organization” was amended in 2010 (with effect in most states as of July 2013) in

renumbered § 9-102(a)(71) as follows:

"Registered organization" means an organization organized solely under the law of a single State or the United States by the filing of a public organic record with, the issuance of a public organic record by, or the enactment of legislation by the State or the United States. The term includes a business trust that is formed or organized under the law of a single State if a statute of the State governing business trusts requires that the business trust’s organic record be filed with the State.

The term "public record" was used, undefined, in the 2001 definition of "registered

organization.” The 2010 modified definition of “registered organization” substituted a new term

“public organic record” defined in new § 9-102(a)(68) as follows:

“Public organic record" means a record that is available to the public for inspection and is: (A) a record consisting of the record initially filed with or issued by a State or the United States to form or organize an organization and any record filed with or issued by the State or the United States which amends or restates the initial record; (B) an organic record of a business trust consisting of the record initially filed with a State and any record filed with the State which amends or restates the initial record, if a statute of the State governing business trusts requires that the record be filed with the State; or (C) a record consisting of legislation enacted by the legislature of a State or the Congress of the United States which forms or organizes an organization, any record amending the legislation, and any record filed with or issued by the State or the United States which amends or restates the name of the organization.

The 2010 amendments confirm that an organization is a “registered organization” only if it is

formed or organized by the filing or issuance of a record by or with the U.S. state or the U.S. that is

available to the public for inspection, or by the enactment of legislation by a U.S. state or the

U.S., as opposed to the law of the U.S. state or the U.S. merely requiring that the existence of the

organization be disclosed in a public record.63 They also extend the term “registered

63See first sentence of the definition of registered organization in § 9-102(a)(71) and paragraphs (A) and (C) of the definition of “public organic record” in § 9-102(a)(68).

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organization” for the first time to include a trust formed under the common law of a U.S. state

for a business purpose if a statute of that state governing business trusts requires the filing of a

public record of the trust (this aspect of the amendments is directed at so-called Massachusetts

business trusts).64

Prior to being proclaimed in force in 2016, section 7(4) of the Ontario Act was not updated to

reflect the modifications made in 2010 to the definition of “registered organization” in the UCC

and the addition of the associated definition of “public organic record.” Section 7(4) also omits

the definition of “organization” in UCC § 1-201, defining an “organization” to mean, unless the

context otherwise requires, “a person other than an individual.” Also omitted is the related

definition in UCC § 1-201 of a “person”, which defines the term in an expansive manner to

include various entities as “persons” even though they are not “legal persons”:

"Person" means an individual, corporation, business trust, estate, trust, partnership, limited liability company, association, joint venture, government, governmental subdivision, agency, or instrumentality, public corporation, or any other legal or commercial entity.

These omissions are unfortunate. In the absence of commensurate modifications to section 7(4)

of the Ontario Act, it is questionable whether sections 7(3)(e) and 7(3)(f) can achieve their

presumed goal of uniformity with U.S. law with respect to the location of U.S. “registered

organizations.”

S. 7(3)(f)(ii): “Registered organization” organized under a law of the United States that

authorizes the organization “to designate its U.S. State of location” .

As noted earlier, section 7(3)(f)(i) of the Ontario Act deems a “registered organization”

organized under a law of the United States to be located in the first instance in the U.S. state that

the federal law designates. If that law is silent, section 7(3)(f)(ii) provides that the organization is

located in the U.S. state designated by the organization if the law of the United States under

which it is organized “authorizes the registered organization to designate its U.S. State of

64 See second sentence of the definition of registered organization in § 9-102(a)(71) and paragraph (B) of the definition of “public organic record” in § 9-102(a)(68). This change means that a Massachusetts business trust, for example, will be considered to be a registered organization.

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location.” These sections replicate the 2001 version of UCC § 9-307(f)(1) and (2). However, the

2001 iteration of § 9-307(f) (2) created some uncertainty since U.S. federal laws, notably with

respect to banks, do not typically authorize the organization to designate its “state of location” as

such but rather its head office or the like. Accordingly, § 9-307(f) (2) was amended in 2010 to

add the words, “including by designating its main office, home office, or other comparable

office” so as to confirm that that this constitutes designation of a location. Prior to being

proclaimed in force in 2016, OPPSA section 7(3)(f)(ii) was not updated to add this clarification.

S. 7(3)(g): location of one or more trustees if the trust instrument designates the law of a

province or territory of Canada as the law governing the instrument

As noted above, OPPSA section 7(3)(g) addresses the location of a debtor that is one or more

trustees acting for a trust. If the trust instrument designates the law of a province or territory of

Canada as the law governing the instrument, the debtor is deemed to be located in that province

or territory. Like the equivalent rule for partnerships in section 7(3)(b) discussed above, this rule

is intended to reduce uncertainty for prospective secured creditors, especially in cases where

there are multiple trustees located in different jurisdictions, making it difficult to determine the

location of the trustees’ “chief executive office” ( i.e., the place where the main part of the affairs

of the trust is carried out). However, section 7(3)(g) suffers from the same significant

shortcomings as the equivalent rule for partnerships in section 7(3)(b) noted above – lack of

transparency, instability, potential prejudice to third parties who acquire rights in the debtor’s

assets, and the increased risk of a conflict with the conflict-of-law rules of non-PPSA

jurisdictions. Because of these and similar concerns, the Hague Convention on the Law

Applicable to Trusts and on their Recognition (1985) provides in article 6 that a “trust shall

be governed by the law chosen by the settlor,” but alsocautions in article 15 that the

Convention does not “prevent the application of provisions of the law designated by the conflicts

rules of the forum” relating, among other matters, to: “d) the transfer of title to property and

security interests in property; e) the protection of creditors in matters of insolvency; f) the

protection, in other respects, of third parties acting in good faith.”65

65 The Convention is in force in most Canadian provinces and territories with implementation pending in Ontario. There is also the ULCC’s Conflict of Laws in Trusts Act, in force in a number of Canadian jurisdictions, applicable where the law governing the trust is that of a province of Canada provided that the Hague Convention is inapplicable. Although that Act also provides for party autonomy by the settlor in selecting the applicable law, the issues subject to that law are confined to the existence and validity of a trust, its construction and administration,

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If the trust instrument does not designate a governing law or does not designate the law of a

province or territory of Canada, section 7(3)(g) deems the trustee or trustees to be located in the

jurisdiction where the administration of the trust by the trustees is principally carried out. It is

unclear whether this connecting factor is meant to denote something different from the residual

chief executive office rule, or whether it provides any greater certainty given that the chief

executive office test, as noted earlier, is already understood to refer to the place “where the

debtor manages the main part of its business operations or other affairs.”

S. 7(3)(h): default “chief executive office rule A debtor that is not covered by the location rules in sections 7(3)(a) to (g) is deemed to be

located in the jurisdiction where its chief executive office is located. It is not clear why the

Ontario drafters did not retain the traditional formulation, still used as the residual general rule in

UCC § 9-307, locating a debtor that has only one place of business at that place of business,

reserving the chief executive office test for a debtor that has multiple places of business in

different jurisdictions. Perhaps it was thought that a separate reference to the location of a debtor

that has only one place of business was unnecessary since that place would then be its chief

executive office. That said, the adjective “chief” implies that the rule is indeed concerned only

with a debtor that has more than one place of business so it perhaps would have been less

confusing if the traditional formulation had indeed been retained.

UCC § 9-307(a) defines a "place of business" to mean “a place where a debtor conducts its

affairs” while the official comments, as noted above, consider the debtor’s chief executive office

to be the place from which the debtor conducts the main part of its affairs. For greater clarity, it

would perhaps have been helpful if the Ontario rules had also incorporated both definitions.

relations among the beneficiary, trustee and settlor and the assets subject to the trust. It does not purport to recognize the autonomy of the settlor to choose the law governing the rights of third parties who acquire rights in trust assets).

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(iii) Recommendation In a number of respects, the new debtor location rules in the Ontario PPSA provide enhanced

certainty and reduced costs for both secured creditors and third parties. While it is recommended

that they be adopted by all PPSA jurisdictions, this is subject to the following five qualifications

which follow from the detailed comments set out above.

The first qualification relates to the location rules in sections 7(3)(c)-(e). As noted above, the

application of these rules to corporations constituted under Canadian law and to corporations and

organizations incorporated under provincial or territorial law depends on whether the law under

which they are organized requires the “organization” of the organization to be “disclosed in a

public record.” As discussed in detail in the comments above, this wording gives rise to a

number of ambiguities as to the intended scope of these rules as it did in the UCC provision from

which the wording was adapted. It is therefore recommended that the wording be similarly

modified to address this concern. It is further recommended, for the reasons set out in the

comments above, that the reference to “limited partnership” in section 7(3)(c) be deleted, and

that the reference to the head office of a corporation as set out in the “special Act” under which it is

incorporated in section 7(3)(e)(i) be replaced by a reference to the head office as set out “in or

under the legislation” under which it was incorporated.

The second qualification relates to the location rules for United States “registered organizations”

in sections 7(3)(e)-(f) of the Ontario Act. If the apparent intent of replicating the UCC location

rules is to be realized, section 7(4) should be updated to reflect the 2010 amendments to the

definition of registered organization and the addition of the related definition of “public organic

record.” For greater certainty, a definition of “organization” adapted from the UCC definitions of

“organization” and “person” should also be added. It may be noted parenthetically that some

consideration was given to also adding a definition of “organization” to section 7(4) for the

purposes of the reference to “organizations” formed under Canadian provincial or territorial law

in section 7(3)(c). It was ultimately decided that this was unnecessary since the revised wording

of the latter section sufficiently clarifies that it refers to any “organization” (whether or not it is a

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legal person) that is formed by legislation or by the filing or issuance of a record with or by the

relevant province or territory.

The third qualification relates to the rules in OPPSA sections 7(3)(b) and (g) for determining the

location of a debtor that is a partnership (other than a limited partnership) or one or more trustees

acting for a trust. For the reasons outlined in the comments above, there are concerns that the

lack of transparency, potential prejudice to third parties and other costs potentially occasioned by

these rules are insufficient to justify the purported benefits, particularly in the case of security

interests granted by trustees in trust assets. It is recognized that the retention of the traditional

“chief executive office” location rule for these types of debtors means that potential secured

creditors in cases of doubt (notably, where the management of the debtor’s affairs is dispersed

among trustees or partners located in different jurisdictions) will continue to have to perfect

under and take account of the laws of all jurisdictions that might qualify as the location of the

chief executive office. This burden, however, is a practical consequence of the nature of these

forms of business organization. Subject to the qualification for trustees noted in the next

paragraph, there is no simple way to reduce that burden. Attempting to do so by reference to

an internal governing law clause in the partnership agreement or trust instrument undermines the

publicity and other policy objectives of requiring perfection and priority to be governed by the

law of the location of the debtor’s chief executive office. After all, as noted earlier, the

chief executive office rule is understood to refer to the “place from which the debtor manages

the main part of its business operations or other affairs” because this is “the place where

persons dealing with the debtor would normally look for credit information.”

The fourth qualification relates to the possibility of reducing uncertainty in the location rules for

trustees (while still maintaining objectivity and transparency in determining the applicable law)

by: (1) extending the principal residence location rule in section 7(3)(a) for individual debtors to

a debtor that is a trustee if the trust has a single trustee who is an individual; and (2) extending

the location rules in sections 7(3)(c) and (e) for corporations organized under Canadian

provincial/territorial or federal law to a debtor that is a trustee if the trust has a single trustee that

is a corporation.

The fifth qualification relates to the residual “chief executive office” rule in section 7(3)(h). As

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noted earlier, the word “chief” may be confusing where a debtor organization has only one place

of business. In addition, the meaning of the term “chief executive office” is rather ambiguous on

its face in its application to all debtors and especially trustees. It is therefore suggested that

section 7(3)(h) be modified by: (1) adding a “place of business” location rule for a debtor that

has only one place of business and reserving the “chief executive office” location rule for a

debtor that has more than one place of business; and (2) defining the term “place of business” to

mean “a place from which a debtor conducts or manages its affairs” and “chief executive office”

to mean “the place from which the debtor conducts or manages the main part of its affairs.”

(iv) Proposed Provisions Note: The provisions set out below replicate the OPPSA provisions, with the modifications recommended above reflected in the case of deletions by strike-out and in the case of additions or other changes by underlining. 7 (3) For the purpose of this section, a debtor is located,

(a) if the debtor is an individual, in the jurisdiction in which the debtor’s principal residence is located; (b) if the debtor is a partnership, other than a limited partnership, and the

partnership agreement governing the partnership states that the agreement is governed by

the laws of a province or territory of Canada, in that province or territory;

(c) if the debtor is a corporation, a limited partnership or an organization and is incorporated,

continued, amalgamated or otherwise organized under a law of a province or territory of

Canada that requires the incorporation, continuance, amalgamation or organization to be

disclosed in a public record by:

(i) the filing of a record with or the issuance of a record by the province or territory

that is available to the public for inspection, or

(ii) the enactment of legislation

in that province or territory.

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(d) if the debtor is a corporation incorporated, continued or amalgamated under a law of

Canada that requires the incorporation, continuance or amalgamation to be disclosed in a

public record, by:

(i) the filing of a record with or the issuance of a record by Canada that

is available to the public for inspection, or

(ii) the enactment of legislation,

in the jurisdiction where the registered office or head office of the debtor is located

(i) (iii) as set out in the special Act , letters patent, articles or other constating

instrument, or in or under the legislation, under which the debtor was

incorporated, continued or amalgamated, or

(ii)(iv) as set out in the debtor’s by-laws, if clause (iii) does not apply;

(e) if the debtor is a registered organization that is organized under the law of a U.S. State, in

that U.S. State;

(f) if the debtor is a registered organization that is organized under a law of the United States

of America,

(i) in the state that the law of the United States of America designates, if the

law designates a state of location,

(ii) in the state that the registered organization designates, if the law of the United

States of America authorizes the registered organization to designate its state of

location, including by designating its main office, home office, or

other comparable office, or

(iii) in the District of Columbia in the United States of America, if clauses (i) and (ii)

do not apply;

(g) if the debtor is a trustees acting for a trust that has only one trustee,

(i)if the trust instrument governing the trust states that the instrument is

governed by the laws of a province or territory of Canada, in that province or

territory, or (ii) in the jurisdiction in which the administration of the trust by

the trustees is principally carried out, if subclause (i) does not apply;

(i)if the trustee is an individual who has a principal residence in a province

or territory of Canada, in that province or territory;

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(ii)if the trustee is a corporation to which clauses (c) or (d) would

otherwise apply, in the jurisdiction determined by those clauses;

(h) if none of paragraphs (a) to (g) apply, in the jurisdiction where the chief executive

office of the debtor is located,

(i)if the debtor has only one place of business, at that place of business;

(ii)if the debtor has more than one place of business, at its chief executive office. 7(4) (a) In this clauses section(3) (e) and 3 (f):

"organization" means a corporation, business trust, estate, trust, partnership,

limited liability company, association, joint venture, government, governmental

subdivision, agency, or instrumentality, public corporation, or any other legal or

commercial entity. "public organic record" means a record that is available to the

public for inspection and is:

(A) a record consisting of the record initially filed with or issued by a State

or the United States to form or organize an organization and any record filed

with or issued by the State or the United States which amends or restates

the initial record;

(B) an organic record of a business trust consisting of the record initially

filed with a State and any record filed with the State which amends or

restates the initial record, if a statute of the State governing business trusts

requires that the record be filed with the State; or

(C)a record consisting of legislation enacted by the legislature of a State or

the Congress of the United States which forms or organizes an organization,

any record amending the legislation, and any record filed with or issued by the

State or the United States which amends or restates the name of the organization.

"registered organization" means an organization organized solely under the law of

the United States of America or solely under the law of a single state of the United

States of America by the filing of a public organic record with, the issuance of a

public organic record by, or the enactment of legislation by the State or the United

States. The term includes a business trust that is formed or organized under the law of

a single State if a statute of the State governing business trusts requires that the

business trust’s organic record be filed with the State under a law of a U.S. State

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or of the United States of America that requires the organization of the organization to be disclosed in a public record;

"state" means a state of the United States of America, the District of Columbia, Puerto

Rico, the United States Virgin Islands or a territory or insular possession subject to the

jurisdiction of the United States of America.

(b) In clause 3(h),

"place of business" means “a place from which a debtor conducts or manages its

affairs; “chief executive office” means the place from which the debtor conducts or

manages the main part of its affairs.

7(5) For the purposes of this section, a debtor continues to be located in the jurisdiction

specified in subsection (1.1) despite,

(a) in the case of a debtor who is an individual, the death or incapacity of the individual;

and

(b) in the case of any other debtor, the suspension, revocation, forfeiture or lapse of

the debtor’s status in its jurisdiction of incorporation, continuation, amalgamation or

organization, or the dissolution, winding-up or cancellation of the debtor.

7.1(3) For the purposes of this section:

(a) the location of a debtor is determined by subsection 7(1.1).

(v) Transition As a result of the new debtor location rules, the location of some existing debtors may change.

For example, a debtor incorporated in New Brunswick with a chief executive office in Ontario

will now be deemed to be located in New Brunswick with the result that the perfection and

priority of the security interest would also now be governed by New Brunswick rather than

Ontario law. The Ontario PPSA sets out a complex set of transition provisions to address

these transition challenges. While the new debtor location rules generally apply to security

interests arising under both pre-reform and post-reform new security agreements, a security

interest perfected prior to December 31, 2015 in accordance with the law of the jurisdiction

determined in accordance with the old rules remains perfected in the eyes of Ontario law for

a five year period (until December 31, 2020) unless perfection lapses under the prior applicable

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law before that deadline. To preserve continuity of perfection after the expiry of the transition

period, the security interest must be perfected in accordance with the law of the jurisdiction of

the debtor determined in accordance with the new rules.

While it is recommended that all jurisdictions enact similar transition provisions, the current

wording of the Ontario version is problematic insofar as it appears to require re-perfection before

December 31, 2020 to prevent a lapse of perfection even if the location of the relevant debtor is

the same under the old and the new rules (for example, the debtor is an Ontario corporation with

a chief executive office in Toronto). The Ontario Business Law Advisory Group has

recommended amendments to make it clear that a security interest perfected prior to the

effective date of the new debtor location rules remains perfected without the need for any

further act on and after the effective date if it was perfected in accordance with the prior

applicable law on the effective date and the applicable law has not changed notwithstanding the

enactment of the new rules.66 This correction is reflected in the proposed transition provisions set

out below. Note that the proposed provisions also include transition provisions for s. 7.1 dealing

with security in investment property to the extent that the applicable law is also determined by

reference to the law of the location of the debtor.

In those cases where the location of a prior debtor changes under the new rules, PPSA

jurisdictions should consider requiring re-perfection before December 31, 2020 in line with the

Ontario Act so as to simplify the transition complexities, as opposed to each providing a five

year transition period after the coming into force of the new rules. Otherwise, the perfected or

unperfected status of a particular security interest will continue to vary for a considerable further

time after the new rules have been implemented uniformly depending on which jurisdiction the

matter is litigated in. This recommendation assumes that the amending legislation is proclaimed

in force in sufficient time to allow for at least a one year transition period for re-perfection. If

that turns out not to be possible, then enacting jurisdictions should instead stipulate a date that is

at least one year after the new location rules come into force.

66 See Business Law Advisory Council, Report to Minister of Government and Consumer Services (Fall 2016, at 2, 12-13.

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PPSA jurisdictions may also wish to consider whether it would be advisable for their Personal

Property Registries to develop special financing statement forms providing particulars of a prior

registration in another jurisdiction which is being continued by a registration in the enacting

jurisdiction so as to alert third party searchers that this is not a “new” registration.

(vi) Proposed Section 7 Transitional Provisions67

7.2 (1) In this section, (v) Proposed Sect

“effective date” means the date that this section comes into force.

“prior law” means this Act as it read immediately before the effective date including the

applicable law as determined under this Act as it read immediately before the effective date.

“prior security interest” means a security interest referred to in subsection 7 (2.1) that arises

under a prior security agreement.

“prior security agreement” means

(a) a security agreement entered into before the effective date; and

(b) a security agreement referred to in paragraph (a) that is amended, renewed or

extended by an agreement entered into on or after the effective date except to the extent

that the amendment renewal or extension adds collateral that was not described in that

security agreement.

7.2 (2) For the purpose of ascertaining the location of the debtor in order to determine the law

governing the validity of a prior security interest, prior law continues to apply and subsections 7

(1), (1.1) and (1.2) do not apply.

7.2 (3) Subject to subsections (6) and (7), subsections 7 (1), (1.1) and (1.2) apply for the purpose

of ascertaining the location of the debtor in order to determine the law applicable to the

perfection of a security interest referred to in subsection 7 (2.1), whether attachment occurs

before, on or after the effective date.

7.2 (4) A prior security interest that is a perfected security interest under prior law immediately

before the effective date continues perfected without any further act if it is a perfected security

interest under the applicable law as determined by this Act on or after the effective date.

67 These transitional provisions are adapted from the transitional provisions in sections 7.2 and 7.3 of the Ontario PPSA.

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7.2 (5) A prior security interest that is a perfected security interest under prior law immediately

before the effective date but is not a perfected security interest under the applicable law as

determined by this Act on or after the effective date continues perfected until the beginning of the

earlier of the following days:

1. The day perfection ceases under prior law.

2. December 31, 2020.

7.2 (6) If a prior security interest referred to in subsection (5) is perfected in accordance with

the applicable law as determined under this Act, on or after the effective date but before the

earlier of the days referred to in paragraphs 1 and 2 of subsection (5), the security interest shall

be deemed to be continuously perfected from the day of its perfection under prior law.

7.2(7) Subject to subsections (8), (9), and (10), subsections 7 (1), (1.1) and (1.2) apply for the

purpose of ascertaining the location of the debtor in order to determine the law governing the

effect of perfection or non-perfection, and the priority, of a security interest referred to in

paragraph (a) of subsection 7 (2.1) and the perfection of a security interest referred to in

paragraph (b) of subsection 7(2.1), whether attachment occurs before, on or after the effective

date.

7. 2(8) Subject to subsection (11), for the purpose of ascertaining the location of the debtor in

order to determine the law governing the effect of perfection or of non-perfection, and the

priority, of a prior security interest, in relation to an interest, other than a security interest, in

the same collateral arising before the effective date, prior law continues to apply and

subsections 7 (1), (1.1) and (1.2) do not apply, regardless of whether the prior security interest

is perfected on or after the effective date in accordance with the applicable law as determined

under this Act.

7.2(9) Subject to subsections (10) and (11), for the purpose of ascertaining the location of the

debtor in order to determine the law governing the priority of a prior security interest in relation

to any other prior security interest in the same collateral, prior law continues to apply and

subsections 7 (1), (1.1) and (1.2) do not apply.

7.2(10)Subject to subsection (11), if a prior security interest is not a perfected security interest

under prior law immediately before the effective date but is subsequently perfected in

accordance with the applicable law as determined under this Act, subsections 7 (1), (1.1) and

(1.2) apply for the purpose of ascertaining the location of the debtor in order to determine the

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law governing the priority of the prior security interest in relation to any other security interest

in the same collateral.

7.2(11)Subsections (8), (9) and (10) do not apply to a prior security interest that is a non-

possessory security interest in an instrument, a negotiable document of title, money or tangible

chattel paper. 7.3(1) In this section,

(vii) Proposed Section 7.1 Transitional Provisions

“effective date” means the date that this section comes into force.

“prior law” means this Act as it read immediately before the effective date including the

applicable law as determined under this Act as it read immediately before the effective date.

“prior security interest” means a security interest in investment property that arises under a

prior security agreement.

“prior security agreement” means, for the purposes of this section,

(a) a security agreement entered into before the effective date; and

(b) a security agreement referred to in paragraph (a) that is amended, renewed or

extended by an agreement entered into on or after the effective date.

7.3(2) Subject to subsections (3), (4) and (5) and [insert reference to the equivalent of section

74.1 of the Saskatchewan PPSA, section 84 of the Ontario PPSA], section 7.1 applies for the

purpose of determining the law governing the validity, the perfection, the effect of perfection or

of non-perfection and the priority of all security interests in investment property, whether

attachment occurs before, on or after the day [insert cross-reference to the equivalent of section

126 of the Ontario Securities Transfer Act, 2006 (transitional provisions)] comes into force.

7.3(3) For the purpose of determining the law governing the validity of a prior security interest,

prior law continues to apply.

7.3 (4) A prior security interest that was perfected by registration and that is a perfected security

interest under prior law immediately before the effective date continues perfected without any

further act if it is a perfected security interest under the applicable law as determined by this Act

on or after the effective date.

7.3 (5) A prior security interest that was perfected by registration and that is a perfected security

interest under prior law immediately before the effective date but that is not a perfected security

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interest under the applicable law as determined by this Act on or after the effective date

continues perfected until the beginning of the earlier of the following days:

1. The day perfection ceases under prior law.

2. December 31, 2020.

7.3 (6) If a prior security interest referred to in subsection (5) is perfected in accordance with the

applicable law as determined under this Act on or after the effective date but before the earlier

of the days referred to in paragraphs 1 and 2 of subsection (5), the security interest shall be

deemed to be continuously perfected from the day of its perfection under prior law.

(viii) Application The proposed provisions are relevant to all jurisdictions. This includes Ontario given that Ontario

legislators may wish to consider that further amendments are needed in light of the above

comments on the current Ontario provisions. The same applies to British Columbia and

Saskatchewan since the legislation enacted in these provinces (not yet proclaimed in force) is

based on the current Ontario provisions.

(b) Law Applicable to Validity, Perfection and Priority

(i) Law Applicable to “Priority”

Background The initial formulation of the general PPSA choice of law rules in sections 5 and 768 addressed

the law applicable to the “validity, perfection, and the effects of perfection or non-perfection” of

security interests. Strictly speaking, the words “effects of perfection or non-perfection” only

cover priority issues that turn directly on the perfected or unperfected status of a security interest.

They do not cover priority in the sense of rules ranking competing security interests or providing

for purchasers to take free of security interests in specified circumstances (for example, the

special priority given by the PPSAs to purchase-money financiers as against a prior perfected

security interest, ordinary course purchasers of negotiable collateral who take possession

68 See, e.g., Saskatchewan PPSA, ss 5-7.

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and ordinary course buyers and lessees of goods).69

As part of the overall revision of UCC Article 9 in 2001, the general choice of law rules in § 9-

301(1)-(3) were revised to add an express reference to the law applicable to “priority.” As

Official Comment 2 to § 9-301 notes:

This article follows the broader and more precise formulation in former section 9-103(6) (b) [relating to the law applicable to investment property], which was revised in connection with the promulgation of revised article 8 in 1994: "Perfection, the effect of perfection or nonperfection, and the priority of" security interests. Priority, in this context, subsumes all of the rules in part 3, including "cut off" or "take free" rules such as sections 9-317(b), (c), and (d), 9-320(a), (b), and (d), and 9-332.

When the PPSAs were amended to implement a new regime for security interests in investment

property derived from UCC Articles 8 and 9, the new choice of law rules for that category of

collateral, also derived from article 9, included an express reference to priority.70 Unfortunately,

the choice of law rules in sections 5 and 7 were not amended at that time to add a similar

reference, with the partial exception of subsection 5(1.1) of the Saskatchewan Act. And while the

2006 amendments to section 7 of the Ontario Act to change the debtor location rules added

priority to the list of issues governed by the law of the debtor’s location under section 7(1), the

same change was not made to the list of issues in section 5(1) governed by the law of the

location of the collateral.

Recommendation

To ensure consistency within and among the various PPSAs, and to provide greater certainty and

precision, it is recommended that the general choice of law rules in sections 5 and 7 of the PPSA

be amended to add an express reference to the law applicable to “priority.”

Proposed Provisions

See proposed subsections 5(1.1) and 7(2.1) below.

69 See Cuming, Walsh and Wood, supra note 18 at 192-193. 70 See, e.g., Saskatchewan PPSA, s.7.1.

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Transition The proposed provisions are primarily intended to clarify rather than change the existing law.

They are therefore intended to take effect as of the coming into force of the amendments and to

apply to all security interests whether they arise under an agreement made before or after the date

of commencement.

Application The proposed provisions are relevant to all PPSA jurisdictions with the partial exceptions of

Saskatchewan and Ontario. In particular, while subsection 5(1.1) of the Saskatchewan Act

already refers to the law applicable to priority, that subsection will require further revision to

reflect the recommendation made in part (3) below.. The same applies to subsection 7(1) of the

Ontario Act which will require further revision to reflect the recommendation immediately,

below.

(ii) Effect of Post-Attachment Relocation of the Collateral or Debtor on Applicable

Law

Background Under article 3102 of the Civil Code of Quebec, the validity of a security covering tangible

movable assets is governed by the law of the jurisdiction where the collateral is situated when the

security is created, whereas publication (perfection) and its effects are governed by the law of the

jurisdiction where the collateral is currently situated. Where the location of the grantor is the

relevant connecting factor (i.e., where the security charges an intangible movable or a tangible

movable ordinarily used in more than one State), article 3105 makes the same temporal

distinction. Under this formulation, a post-attachment change in the location of the collateral or

the grantor does not affect the law applicable to validity — thus avoiding the risk of retroactive

invalidation of the security interest — but it does bring about a change in the law applicable to

publication (perfection).

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The choice of law rules in UCC, Article 9 do not address the law applicable to validity and

creation issues. However, issues of perfection, the effects of perfection or non-perfection, and

priority are similarly governed by the law of the jurisdiction in which the collateral or the debtor,

as the case may be, is located “while [the debtor or collateral] is located in a jurisdiction.”71

Thus, if the debtor or collateral is relocated to a new jurisdiction, the applicable law also changes

to that jurisdiction.

The PPSA choice of law rules for security interests in investment property draw a like temporal

distinction.72 However, with the partial exception of subsections 5(1)-(1.1) of the Saskatchewan

Act, the general choice of law rules in sections 5 and 7 of the PPSAs provide that validity,

perfection, and the effects of perfection or non-perfection are governed by the law of the

jurisdiction where the collateral is situated at the time of attachment of the security interest.

The type of problem to which this formulation potentially gives rise is

illustrated by the following scenario:

[C]onsider a priority conflict between the original secured party and the holder of a security interest granted in the goods following their relocation. If the effects of perfection of the first security interest are governed by the original lex rei sitae, and the effects of perfection of the second security interest are governed by the new lex rei sitate, which lex rei sitae goberns a priority dispute between them? 73

At common law, the law of the jurisdiction in which the goods were situated when the security

interest was created applied to priority contests involving interests acquired prior to the

relocation of the goods but would be displaced in favour of the law of the new location of the

goods in a priority competition with a rights acquired after the goods were relocated. Under this

approach, priority between the competing security interests in the above scenario would be

governed by the law of the jurisdiction to which the goods were relocated, consistent with the

Article 9 and Civil Code approaches (and the PPSA approach in the context of investment

property pursuant to section 7.1). In the few cases in which the issue has arisen, the results,

though not necessarily the reasoning, are consistent with this approach.74

71 § 9-301(1)-(3), § 9-305(a)(i). 72 See, e.g., Saskatchewan PPSA, ss.7.1(1)-(2). 73 See Cuming, Walsh and Wood, supra note 18, at 198. 74 Ibid. at 198-199.

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Recommendation In light of the earlier recommendation to add an explicit reference to “priority” in sections 5 and

7 of the PPSA, it becomes all the more pressing to also amend the Acts to expressly and

comprehensively address the effect of a post-location change in the relevant connecting factor on

the law applicable to perfection and priority.

In principle, a third party acquiring a right in collateral would reasonably expect the law

applicable to perfection and priority to be the law designated by the relevant connecting time at

the time its right arises. Accordingly, it is recommended that sections 5 and 7 be revised to

confirm that while the validity of a security interest is governed by the designated law at the time

the security interest attaches, issues relating to perfection and priority are determined by the law

of the current location of the collateral or the debtor, as the case may be. Under this formulation,

a post-attachment change in the relevant connecting factor brings about a change in the law

applicable to the perfection and priority of the security interest with respect to competing rights

that arise after the change but not with respect to rights that arose before the change in the

applicable law. In other words, consistent with the common law approach, the previously

applicable law continues to apply unless and until it is displaced by a right acquired after a

change in the relevant connecting factor. (It is noted that this qualification appears in article

91(2) of the UNCITRAL Model Law on Secured Transactions:

1. Except as provided in paragraph 2, references to the location of the encumbered asset or of the grantor in the provisions of this chapter refer: (a) For creation issues, to the location at the time of the putative creation of the security right; and (b) For third-party effectiveness and priority issues, to the location at the time when the issue arises. 2. If the right of a secured creditor in an encumbered asset is created and made effective against third parties and the rights of all competing claimants are established before a change in the location of the asset or the grantor, references in the provisions of this chapter to the location of the asset or of the grantor refer, with respect to third-party effectiveness and priority issues, to the location prior to the change.

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Proposed Provisions See proposed subsections 5(1), 5(1.1), 7(2), 7(2.1) and 8.2 below.

Transition The proposed provisions are intended to clarify rather than change the existing law. They are

therefore intended to take effect as of the coming into force of the amendments and to apply to

all security interests whether they arise under an agreement made before or after the date of

c o m m e n c e m e n t.

Application The proposed provisions are relevant to all PPSA jurisdictions with the partial exception of

Saskatchewan. While subsections 5 and 5(1.1) of the Saskatchewan Act already incorporate the

proposed provisions, it still remains to revise section 7 in a like manner and to add the

qualification set out in proposed section 8.2 below.

(ii) Law Applicable to Priority between Possessory and Non-Possessory Security Interests

in an Instrument, a Negotiable Document of Title, Money or Chattel Paper;

Distinction between Tangible and Electronic Chattel Paper

Background The PPSA choice of law rules governing the validity, perfection, effect of perfection and priority

of security interests in an instrument, a negotiable document of title, money or chattel paper

differ depending on whether the security interest is possessory or non-possessory (i.e., whether

the collateral is in the possession of the secured creditor or the debtor). For possessory security

interests, the law of the location of the collateral applies pursuant to section 5. For non-

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possessory security interests, the law of the location of the debtor applies pursuant to section 7.

This bifurcated approach is problematic in the event of a priority conflict between the holder of a

non-possessory security interest and a competing secured creditor who has taken possession of

the collateral. If the priority rules of the law applicable to the competing rights are not the same,

which should prevail?

Recommendation Commentators take the view that the law of the location of the collateral should apply on the basis that this reflects the reasonable expectations of a party taking possession of an instrument, a negotiable document of title, money or chattel paper in view of the negotiable or quasi- negotiable

character of these types of collateral.75 This approach would be consistent with the approach in UCC Article 9, § 9-301(3) and with the existing PPSA approach to security interests in certificated

securities.76

In light of the recommendation above to add an explicit reference to “priority” in sections 5 and 7

of the PPSA, it becomes all the more pressing to set out an explicit rule to this effect in those

sections. The most straightforward approach would be to adapt the existing PPSA approach in

the case of certificated securities. Under this approach, only the validity and perfection of a non-

possessory security interest in an instrument, a negotiable document of title, money or chattel

paper would be governed by the law of the location of the debtor under section 7; the effect of

perfection or non-perfection and priority would be governed by the law of the location of the

collateral under section 5.

If the recommendation to amend the internal law provisions of the PPSAs to address electronic

chattel paper is accepted, it would then also become necessary to distinguish between the law

applicable to tangible and electronic chattel paper. Since it is not possible to take physical

possession of electronic chattel paper, the approach suggested in the preceding paragraph should

be expressly limited to “tangible chattel paper” and section 7 should be revised to refer the

75 See Cuming, Walsh and Wood, supra note 18 at 295. 76 See, e.g., Saskatchewan PPSA, s.7.1(2)(a) and (5)(a).

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perfection and the priority of security interests in “electronic chattel paper” to the law of the

location of the debtor.

Proposed Provisions See subsections 5(1)(b) (“tangible chattel paper”), 5(1.1)(b), 7(2) (“electronic chattel paper” and

“tangible chattel paper”) and 7(2.1) (b) below.

Transition The proposed provisions are intended to clarify rather than change the existing law. They are

therefore intended to take effect as of the coming into force of the amendments and to apply to

all security interests whether they arise under an agreement made before or after the date of c

o m m e n c e m e n t .

(iv) Renvoi

Background Under the renvoi doctrine, a choice of law rule referring to the law of X jurisdiction does not

refer only to the internal rules that the courts in X jurisdiction apply in domestic cases. The

forum court also takes account of the choice of law rule that the courts in jurisdiction X apply to

cases having the same connections to other jurisdictions that are presented by the relevant

scenario. If the choice of law rule of X jurisdiction points to the application of a law other than X

law, the forum court applies that other law.

The renvoi doctrine has attracted criticism. First, the applicable law ultimately depends not on

the forum’s own choice of law rules but on those of a foreign jurisdiction. From a policy

perspective, this amounts to an abdication by the forum of the policy underpinning its own

choice of law rule. Second, if the forum court employs total renvoi – which is the only logically

defensible approach — the analysis does not yield an applicable internal law if the other legal

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system also employs total renvoi. For these reasons, renvoi is generally rejected in modern

choice of law regimes, including those applicable to secured transactions.77

The non-Ontario PPSAs contain an exception to the modern trend. Where the law of the

jurisdiction in which the debtor is located applies, these Acts state that this includes the choice

of law rules of that jurisdiction. The reason goes back to the early days of PPSA reform in

Canada. At its inception, the PPSA debtor location rule for mobile goods and accounts was

somewhat novel, and there was a perceived need to respect the fact that other jurisdictions

might continue to apply a different choice of law rule based on assigning an artificial situs

to these types of collateral.78

Recommendation

The Uniform Law Conference of Canada has adopted recommendations calling for the abolition

of the renvoi rule in the non-Ontario Acts.79 It is unfortunate that this reform was not

implemented when the new choice of law rules for investment property were adopted,

particularly since these new rules expressly confirmed the inapplicability of the renvoi doctrine

to the choice of law rules for that category of collateral. Indeed, the limited scope of this new

provision introduced a new potential source of confusion insofar as it could be taken to imply

that the doctrine of renvoi remained applicable even in relation to the choice of law rules in the

non-Ontario PPSAs for which the location of the collateral is the relevant connecting factor.

Accordingly, it is recommended that the non-Ontario PPSAs be amended i n s e c t i on 7 by

striking out the words “including the conflict of laws rules" and in section 8.1 by striking out

"section 7.1" and substituting "sections 5 to 8."

77 See, e.g.: article 3080 of the Civil Code of Quebec; §9-301–§ 9-306 of UCC Article 9, all of which expressly refer to the ‘local law’ of the jurisdiction whose law is designated as applicable; article 98 of the UNCITRAL Model Law on Secured Transactions. 78 See Cuming, Walsh and Wood, supra note 18 at 214. 79 See Reform of the Law of Secured Transactions — Report of the Working Group 2002–2003, available at www.ulcc.ca.

http://www.ulcc.ca/

http://www.ulcc.ca/

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Proposed Provisions

See proposed section 7(2) below (striking out the reference to “conflict of laws”) and proposed

section 8.2 below (extending the abolition of the renvoi doctrine to sections 5-8).

Transition In practice no real interests are apt to be prejudiced by the abolition of the renvoi doctrine given

the long-standing substantial harmony in the choice of law rules of all of the Canadian provinces

and territories. The proposed provisions are therefore intended to take effect as of the coming

into force of the amendments and to apply to all security interests whether they arise under an

agreement made before or after the date of commencement.

Application The proposed provisions are relevant to all PPSA jurisdictions, other than Ontario, subject to the

following qualifications:

(i) While section 8.1 of the Saskatchewan Act has alreadybeen revised in line with

proposed section 8.1 below, it remains necessary to strike out “, including the conflict of laws

rules,” in subsection 7(2);

(ii) the proposed provisions are already anticipated in the case of the British Columbia PPSA

by the amendments set out in subsections 43(b) and section 47 of the British Columbia

Finance Statutes Amendment Act, 2010, Bill 6, 2010, not yet proclaimed in force.

(v) Proposed Provisions 5(1) Subject to sections 6 to 8, the validity of

(a) a security interest in goods, and (b) a possessory security interest in a negotiable document of title, tangible chattel

paper, an instrument and money, is governed by the law of the jurisdiction where

the collateral is situated when the security interest attaches.

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5(1.1) Except as otherwise provided in sections 6 and 7, while the collateral is situated in a

jurisdiction, the law of that jurisdiction governs

(a) perfection, the effect of perfection or non-perfection, and the priority of a

security interest referred to in subsection (1);

(b) the effect of perfection or non-perfection and the priority of a non-possessory

security interest in a negotiable document of title, tangible chattel paper, an

instrument and money.

7(2) The validity of

(a) a security interest in

(i) an intangible,

(ii) goods that are of a type that are normally used in more than one

jurisdiction, if the goods are equipment or are inventory leased or held for lease

by the debtor to others, and

(iii) electronic chattel paper

(b) a non-possessory security interest in an instrument, a negotiable document of

title, money and tangible chattel paper,

are is governed by the law of the jurisdiction where the debtor is located when

the security interest attaches.

7(2.1) While the debtor is located in a jurisdiction, the law of that jurisdiction governs:

(a) perfection, the effect of perfection or non-perfection, and the priority of a

security interest referred to in paragraph (2)(a);

(b) perfection of a security interest referred to in paragraph 2(b). 8.1 For the purposes of sections 5 to 8, a reference to the law of a jurisdiction means

the internal law of that jurisdiction excluding its conflict of law rules.

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8.2 If a security interest is perfected and the rights of a competing claimant arose before a

change in the applicable law in accordance with sections 5(1.1), 7(2.1) or 7.1(2), perfection, the

effects of perfection or non-perfection, and priority continue to be governed by the previously

applicable law.

(c) Preserving Continuity of Perfection after a Change in the Applicable Law

(i) Background As explained above, a post-attachment change in the location of the collateral or the debtor, as

the case may be, may bring about a change in the law applicable to the perfection and priority of

a security interest. However, this does not necessarily mean that a security interest perfected

under the previously applicable law becomes unperfected. Provided the security interest is “re-

perfected” in accordance with the new applicable law before the expiry of the “grace period”

specified in the relevant PPSA, continuity of perfection is preserved.80 However, there is a

difference in the formulation of the rule depending on whether the relevant connecting factor is

the location of the goods or the location of the debtor.

In respect of security interests in goods governed by the law of the location of the goods, the

grace period for re-perfection applies only where the goods are relocated to the enacting province

or territory. In respect of security interests in collateral governed by the law of the location of the

debtor, the security interest must be re-perfected before the expiry of the grace periods specified

in the enacting jurisdiction’s PPSA, even if the debtor relocates to some other jurisdiction and

even if that other jurisdiction is not a PPSA jurisdiction and has a different grace period (or no

grace period). As explained by commentators, this latter formulation may give rise to complexity

and produce inconsistent outcomes depending on where the perfected status of the security

interest is litigated:

Where the debtor relocates to another PPSA jurisdiction, the difference [in the formulation] is inconsequential since the grace periods will be identical under both the law of the forum and the law of the new location. However, the debtor may relocate to a province or country where the grace periods for preserving perfected status are different. Consider the following scenario.

80 See, e.g., Saskatchewan PPSA, ss 5(3) and 7(3).

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SP grants a security interest in mobile goods and intangibles while located in Saskatchewan. D later relocates to the state of New York. Three months later, SP finds out about the relocation and perfects its security interest in accordance with the New York version of UCC Article 9.

Article 9 of the UCC gives the secured party a grace period of four months to reperfect upon a change in the location of the debtor. Consequently, continuity of perfection is preserved in the above scenario as a matter of New York law. However, in litigation in Saskatchewan, the Saskatchewan court will apply the shorter time periods prescribed by the Saskatchewan PPSA with the result that the security interest loses continuity of perfection.

The converse situation can also arise. Suppose that instead of changing location to New York, the debtor moves to Quebec and the secured party reperfects in Quebec within forty-five days of the relocation. So far as Quebec law is concerned, perfected status is lost since the Civil Code provides a maximum grace period of only thirty days for reperfection where a debtor relocates to that province. However, in litigation in Saskatchewan, perfected status would be preserved by virtue of the lengthier sixty-day grace period recognized by the Saskatchewan PPSA.81

The location of the debtor can change indirectly as a result of a transfer of the collateral to a

transferee located in a different jurisdiction. The following scenario illustrates this possibility:

D, located in Province X, grants a security interest in mobile goods and intangibles to

SP1 who registers in Province X’s registry. In breach of the security agreement between

D and SP1, D transfers an interest in the assets to T, located in Province Y. T then grants

a security interest in the same assets to SP2 who registers in Province Y’s registry

because this is where T is located.

In this scenario, section 7 of the non-Ontario PPSAs obliges SP1 to reperfect in accordance with

the law of the jurisdiction where T is located (Province Y) naming T as a new debtor in order to

preserve the perfected status of its security interest under D’s home law (province X). The

applicable grace periods are the same ones that apply in the case of a change in the location of

the debtor. If the security interest is perfected in the new jurisdiction before the expiry of the

grace period, it is deemed to be continuously perfected. If it is not, the security interest becomes

unperfected. This reperfection requirement is intended to protect persons in the position of SP 2

in the above scenario who would reasonably expect that a search of the registry in the

jurisdiction where T is located would disclose any security interests granted by T. It is not

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intended for the benefit of T who ought to have verified the status of D’s ownership by searching

the registry in Province X in advance of her purchase. Consequently, failure to reperfect before the expiry of the relevant grace period does not cause the security interest to become unperfected

as against T but only as against a party taking from T such as SP2 in this scenario.82 In addition, a transfer of ownership or title is necessary to trigger the reperfection obligation. Thus, for example, delivery of possession of mobile goods to a consignee in another jurisdiction under a

consignment for sale does not prejudice the perfected status of the security interest.83

Saskatchewan has proposed deleting the requirement for a secured creditor to reperfect following a

transfer of the collateral to a transferee located in a different jurisdiction in order to maintain

continuity of perfection. Two justifications may be given for this proposal. First, under the

substantive provisions of the PPSA, a secured creditor is obligated to amend a registration to

disclose the name of a transferee of the collateral as a new debtor only after it finds out about the

transfer and the name of the transferee.84 It is incongruous to impose a more onerous reperfection

obligation on a secured creditor in the cross-border scenario compared to the domestic context.

Second, under the substantive provisions of the non-Ontario PPSAs, failure to register the name

of the transferee as a new debtor before the expiry of the grace period does not cause the security

interest to become wholly unperfected but only subordinates it against interests arising after the

transfer: see again section 51 of the Saskatchewan PPSA. Adoption of this proposal would have

the additional benefit of harmonizing the other PPSAs with the Ontario Act on this point.

Finally, it should be noted that the formulation of the rule governing continuity of perfection in

section 7(6) of the Ontario Act differs from the formulation in section 5(2). Whereas continuity

of perfection is preserved under section 7(6) for the duration of the grace period even if the

secured creditor does not re-perfect before the grace period expires, continuity of perfection

under section 5(2) is conditional on reperfection before the grace period expires. It is

recommended that section 7(6) of the Ontario Act be revised to conform to the approach taken in

82 Northwest Equipment Inc. v. Daewoo Heavy Industries America Corp., [2002] 6 W.W.R. 444 (Alta. CA). 83 Canadian Imperial Bank of Commerce v. A.K. Construction (1988) Ltd. (1996), 186 A.R. 1 at 6 (Q.B.), aff’d (1998), 223 A.R. 115 (C.A.) 84 See, e.g., Saskatchewan PPSA, s.51. .

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section 5(2). This reform would have the added advantage of also conforming the Ontario Act to

the other PPSAs.

(ii) Recommendation In principle, an enacting jurisdiction should determine the appropriate grace period and any other

conditions governing continuity of perfection only where the change in the relevant connecting

factor results in the law of that jurisdiction becoming the applicable law. Otherwise, this would

defeat the general rule under which perfection, the effects of perfection or non-perfection and

priority are governed by the law of the jurisdiction where the collateral or debtor as the case may

be is located at the relevant time (since the law governing perfection surely includes the law

governing continuity of perfection in that jurisdiction).

Accordingly, it is recommended that the PPSA rules governing continuity of perfection in

section 7 be aligned with those in section 5 to ensure that they apply only where the application

of the law of the enacting jurisdiction is triggered by the change in the location of the relevant

connecting factor. A similar change is recommended for the conflicts provisions governing

continuity of perfection for security interests in investment property following a change in the

relevant connecting factor.85

It is further recommended that the wording of the PPSA rule governing continuity of perfection in

section 5(3) be revised to refer to a security interest in goods “perfected under the law of the

jurisdiction designated in subsection 5(1)” as opposed to the “law of the jurisdiction in which the

goods are situated when the security interest attaches.” This additional change is necessary to

align the wording of subsection 5(3) with the recommendation above that section 5 be amended

to confirm that the law of the location of the goods applies to perfection, the effect of

perfection or non-perfection and priority only while the goods are located in that jurisdiction

(as opposed to from the time of initial attachment).

85 See, e.g., Saskatchewan PPSA, s.7.1(6).

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Finally, for the reasons given above, we recommend deleting the words “or transfers an interest

in the collateral to a person located in another jurisdiction” from section 7(3), a change that will

bring the other PPSAs in line with the Ontario Act.

(iii) Proposed Provisions 5 (3) If goods are relocated to the [enacting Province or Territory], a security interest in the

goods perfected in accordance with the applicable law as provided in subsection (1) continues

perfected in [the enacting Province or Territory] if it is perfected under this Act

(a) not later than 60 days after the day on which the goods are brought into [the enacting

Province or Territory];

(b) not later than 15 days after the day on which the secured party has knowledge that

the goods have been brought into [the enacting Province or Territory]; or

(c) before perfection ceases under the previously applicable law

whichever is earliest, . . .

7(3) If a debtor relocates to [the enacting Province or Territory] a security interest perfected in

accordance with the applicable law as provided in subsection (2), continues perfected in [the

enacting Province or Territory] if it is perfected under this Act:

(a) not later than 60 days after the after the day on which the debtor relocates or

transfers an interest in the collateral to a person located in [the enacting Province or

Territory];

(b) not later than 15 days after the day on which the secured party has knowledge that

the debtor has relocated or transferred an interest in the collateral to a person located in

the [the enacting Province or Territory]; or

(c) prior to the day that perfection ceases pursuant to the previously applicable law;

whichever is the earliest.

7.1(6) A security interest perfected in accordance with the applicable law as provided in

subsection (5) remains perfected [in the enacting Province or Territory] until the earliest of

(a) 60 days after the day the debtor relocates to [the enacting Province or Territory]

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(b) 15 days after the day the secured party knows the debtor has relocated to [the

enacting Province or Territory], and

(c) the day that perfection ceases under the previously applicable law. 7.1(7) A security interest in investment property that is perfected under the law of the issuer's

jurisdiction, the securities intermediary's jurisdiction or the futures intermediary's jurisdiction,

as applicable, remains perfected [in the enacting Province or Territory]until the earliest of

(a) 60 days after a change of the applicable jurisdiction to [the enacting Province or

Territory],

(b) 15 days after the day the secured party knows of the change of the applicable

jurisdiction to [the enacting Province or Territory] and

(c) the day that perfection ceases under the previously applicable law.

(iv) Transition The proposed changes to subsections 5(3) and 7.1(6) and (7) are intended to clarify rather than

change the current law. The proposed change to subsection 7(3) does change existing law.

However, in practice, the change only affects continuity of perfection for security interests with a

connection to a jurisdiction with a different grace period than the PPSAs (for example, as noted

above, Quebec or a state in the United States) and prudent secured creditors are likely to have

already taken account of this risk. Accordingly, all the proposed provision are intended to take

effect as of the date of coming into force of the amendments and to apply to all security interests

whether they arise under an agreement made before or after the date of commencement.

(v) Application The proposed provisions are relevant to all PPSA jurisdictions with the exception of the deletion

in section 7(3) of the words “or transfers an interest in the collateral to a person located in

another jurisdiction” which are applicable only to the non-Ontario PPSAs.

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(d) Security Interests in Goods Intended to be Relocated within Thirty Days

(i) Background The PPSAs contain a special choice of law rule for goods intended to be removed from the

jurisdiction within thirty days after the security interest attaches.86 The law of the jurisdiction

where the goods are intended to be kept applies to validity, perfection, and the effects of

perfection or non-perfection if the goods are actually relocated to that jurisdiction within thirty

days. The aim of this exception is to relieve the secured party from the cost and expense of

having to comply with the perfection rules of both jurisdictions.

The current formulation of section 6 is problematic at two levels. First, the current wording of

subsection 6(1) implies that a security interest is valid and perfected only if the validity and

perfection requirements of the law of the intended location of the goods are satisfied. In principle a

secured creditor should have the option of either complying with that law or complying with the

validity and perfection rules of the law of the location of the collateral at the time of

attachment and then taking whatever steps are needed under the law of the intended location of

the collateral to preserve the continuity of its perfected status.

Second, the current wording of subsection 6(2) does not fit easily with the distinction, reflected

in proposed subsections 5(1)-(1.1) and 7(2)-(2.1) in section (b) above, that while validity is

governed by the law of the jurisdiction where the goods are located when the security interest

attaches, perfection, the effects of perfection or non-perfection, and priority is governed by the

law of the current location of the goods. That is, as currently formulated, subsection 6(2) may be

taken to imply that even if the goods are later removed from the jurisdiction to which they were

initially removed, the law of the first jurisdiction continues to apply except where the goods were

located in the enacting jurisdiction at the time of attachment and are subsequently brought back

into the enacting jurisdiction.

86 See, e.g., Saskatchewan PPSA, s.6.

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(ii) Recommendation To address the problems noted above, it is recommended that section 6 be reformulated along the

lines set out below.

(iii) Proposed Provision 6(1) Subject to section 7, if the parties to a security agreement that creates a security interest in

goods in one jurisdiction understand at the time the security interest attaches that the goods will

be kept in another jurisdiction, and the goods are removed to the other jurisdiction for

purposes other than transportation through the other jurisdiction not later than 30 days after the

security interest attaches, the security interest

(a) is valid if it is valid under either the law of the jurisdiction where the goods are

located when the security interest attaches or the law of the other jurisdiction; and

(b) may be perfected under the law of either jurisdiction. 6(2) If a security interest referred to in subsection (1) is perfected in accordance with the law of

the jurisdiction to which the goods are removed, the effects of perfection and the priority of the

security interest are governed by that law:

(a) before the goods are removed to that jurisdiction; and

(b) while the goods are located in that jurisdiction.

(iv) Transition The proposed provision is intended to clarify the wording of section 6 to bring it into line with

the wording of proposed subsections 5(1)-(1.1) which likewise are intended to clarify rather than

change the current law. Accordingly, the proposed provision is intended to take effect as of the

coming into effect of the amendments and to apply to all security interests whether they arise

under an agreement made before or after the date of commencement.

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(v) Application The proposed provision is relevant to all PPSA jurisdictions.

(e) Effect on Applicable Law of Absence of Public Registry in Jurisdiction Where

Debtor is Located

(i) Background The non-Ontario PPSAs set out an exception to the application of the law of the jurisdiction

where the debtor is located to issues otherwise governed by that law if it does “not provide for

public registration or recording of the security interest or a notice relating to it.”87 The exception

applies where the transaction involves collateral in the form of an account payable in the

enacting jurisdiction or a non-possessory security interest in chattel paper, a negotiable document of

title, an instrument or money acquired when the collateral was located in the enacting

jurisdiction. In this scenario, the security interest also must be perfected in accordance with the

perfection requirements of the enacting jurisdiction. Otherwise, the security interest is

subordinated to any competing third party interests acquired in the collateral.

All jurisdictions in Canada and the United States now have public registration systems for

security interests in the types of collateral covered by the exception. Thus, the ‘mischief’ sought

to be addressed by the exception is no longer a practical problem in the vast majority of

transactions to which the PPSA choice of law rules apply. Moreover, in the case of security

interests in accounts, there is not much practical scope for the exception to apply. After all, the

potential application of the exception is triggered only if the account is payable in the enacting

jurisdiction. Assuming that an account is normally payable in the jurisdiction where the creditor

on the account - the grantor of the security interest - is located, it follows that the applicable law

under section 7 will normally be that of the enacting PPSA jurisdiction in any event, and since

that jurisdiction’s PPSA clearly will have a public registry system, the exception will be

87 See, e.g., Saskatchewan PPSA, s.7(4).

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inapplicable. In the case of non-possessory security interests in chattel paper, documents of title,

instruments or money located in the enacting jurisdiction, while the enacting jurisdiction may

not always coincide with the jurisdiction of the location of the grantor, the super-priority generally

accorded to possessory security interests in these forms of collateral means that third parties

generally cannot place full reliance on the ability to search the registry in the grantor’s

location in any event. Furthermore, given the universal establishment of public registries

throughout Canada and the United States noted above, the likelihood of the exception being

triggered is virtually non-existent.

(ii) Recommendation In view of the very limited practical relevance of the exception set out in subsection 7(4) of the

Saskatchewan PPSA and its equivalent in other PPSAs, its repeal is recommended. Repeal would

have the additional virtue of bringing the non-Ontario PPSAs into line with the Ontario PPSA

and the choice of law rules for movable security in the Civil Code of Quebec, neither of which

contains any equivalent exception.

(iii) Proposed Provision

7(4) [Delete]

(iv) Transition

The scenario contemplated by subsection 7(4) is unlikely to pose a practical problem in practice.

Accordingly, the proposed repeal of this provision is intended to take effect as of the coming into

force of the amendments and to apply to all security interests whether they arise under an agreement

made before or after the date of commencement.

(v) Application

The proposed repeal is relevant to all PPSA jurisdictions other than Ontario.

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III. PROVISIONS RELEVANT TO ALL JURISDICTIONS EXCEPT ONTARIO

(1) Mandatory Serial Number Registration

(a) Background Except for Ontario, the concept of serial numbered goods under the regulations to the PPSA

includes a motor vehicle, trailer, mobile home (a manufactured home in British Columbia),

aircraft, boat, or an outboard motor for a boat. In Ontario, the term “serial numbered goods” is

not used. However, entry of an alphanumeric identifier on a financing statement is contemplated

in Ontario for “motor vehicles.”

Registration of the serial number in the designated field is a precondition to an effective

registration for serial numbered goods that constitute “consumer goods” in the hands of the

debtor. If the serial number is not entered, registration will not perfect the security interest, with

the result that it will be ineffective against, or subordinated to competing claimants generally.

Where serial numbered goods are held by the debtor as “equipment,” entry of the serial number

in the financing statement is optional in the sense that the security interest will still be considered

perfected by registration provided the goods are properly described in the general collateral

description field. However, failure to also enter the serial number creates a priority risk for the

secured creditor. Except in the case of the OPPSA, the security i n t er es t will be: (1)

ineffective against a buyer or lessee of the collateral; and (2) subordinate to a competing secured

creditor who enters the serial number in its registration. The security interest will still be

treated as perfected against other categories of competing claimants, notably the debtor’s trustee

in bankruptcy and a judgment creditor of the debtor who has taken the necessary steps to obtain

rights in relation to the goods.88 Omission of the serial number gives rise to a more attenuated

priority risk under the Ontario Act. Entry of the serial number is required for perfection only

as against buyers and not as against a competing secured creditor.89

88 SPPSA, ss 30(6)-(7), 35(4). 89 OPPSA, s 28(5).

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It is very difficult to justify from either a commercial or public policy perspective the distinction

between registration requirements and priority status of a trustee in bankruptcy (and unsecured

creditors) where, on the one hand, serial numbered consumer goods are involved and, on the

other, where serial numbered equipment is involved. Several arguments may be put forward in

favour of elimination of the distinction with the result that failure to enter the serial number of

serial numbered goods that are consumer goods would no longer entirely invalidate the

registration; it would only give rise to the more limited priority risks now available to secured

creditors who take security interests in serial number equipment.

First, the principal categories of third parties sought to be protected by serial number registration

are buyers and secured creditors. The ability to search by serial number protects them against the

risk that they may buy or extend credit in reliance on a clean search of the registry against the

name of the grantor only to discover that the secured creditor of a prior owner of the collateral

had registered a security interest. Since that security interest would have been registered against

the name of the prior owner, it would not be disclosed by a search using the name of the current

owner. Having the serial number available as an alternative search criterion ensures that security

interests granted by any owner in the chain of title will be disclosed on a search using that

criterion. Other categories of third party claimants – notably, the debtor’s trustee in bankruptcy

and judgment creditors – are not “reliance creditors” in the sense that, unlike buyers and secured

creditors, they are not at risk of extending new value in reliance on a clean search result. Hence, it

is not clear why the omission of the serial number in an otherwise correct and complete

registration should cause the security interest to be unperfected against the debtor’s trustee in

bankruptcy and judgment creditors. It is true that unsecured creditors often rely on a search of

the registry for the purposes of deciding whether it is worth the time and expense to obtain a

judgment and take the steps necessary to perfect their judgment by registration or seizure. But

they would not normally have access to the serial number of the relevant asset from the debtor

(who is unlikely to be cooperative), meaning that they would ordinarily have to conduct a search

by debtor name in any event. Consequently, this change has little effect on the position unsecured

creditors currently occupy.

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Second, there is a certain anomaly in treating the effects of an omission to enter the serial

number differently depending on whether the serial numbered goods are held by the debtor as

equipment or as consumer goods. In principle, it is difficult to see why the consequences for a

secured creditor of an omission to enter the serial number should be more drastic simply because

the debtor is holding the serial numbered goods for personal as opposed to business purposes.

After all, the serial number requirement is designed for the protection of third parties, not the

debtor.

Third, elimination of the distinction would reduce complexity. The effect of failure to include the

serial number would be subject to a single uniform rule regardless of whether the goods are held

as equipment or consumer goods. Fourth, it produces greater transparency by eliminating a

requirement found in the regulations that invalidates a registration.

(b) Recommendation

It is recommended that:

(a) the Act be amended to make registration of the serial number with respect to serial

numbered consumer goods permissive as opposed to compulsory as is the rule

currently for serial numbered equipment;

(b) provisions of the Act that give priority to buyers (all PPSAs) and secured creditors

(all PPSAs except for the OPPSA) against a secured creditor who omits the serial

number in the case of serial numbered equipment be amended to include consumer

goods; and

(c) the provision of the Act dealing with the effect of invalidating errors in relation to

serial numbers be amended since a failure to record serial numbers would no longer

lead to invalidation against a trustee in bankruptcy.

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(c) Proposed Provisions (changes underlined)

30(6) Where goods are sold or leased, the buyer or lessee takes free from any

security interest in the goods that is perfected pursuant to section 25 if the goods were

not described by serial number entered into the field labelled for the receipt of

serial numbers.

(a) the buyer or lessee bought or leased the goods without knowledge of the

security interest; and

(b)the goods were not described by serial number in the registration relating to

the security interest in the registration relating to the security interest .

(b)the goods were not described by serial number entered into the field labelled for the

receipt of serial numbers.

(7) Subsection (6) applies only to goods that are consumer goods or equipment and are

of a kind prescribed as serial numbered goods.

35(4) A security interest in goods that are consumer goods or equipment and are of a

kind prescribed as serial numbered goods is not registered or perfected by registration

for the purposes of subsection (1), (7) or (8) or subsection 34(2) unless a financing

statement relating to the security interest and containing a description of the goods

by serial number is registered unless a financing statement relating to the security

interest that includes a description of the goods by serial number is registered with

the serial number entered into the field labelled for the receipt of serial numbers.

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(d) Transition The proposed provision is intended to take effect as of the coming into force of the amendments

and to apply to all security interests whether they arise under an agreement made before or after

the coming into force of the amendments.

(e) Application

The proposed provisions are relevant to all jurisdictions except Ontario.

(2) Dual Search Criteria

(a) Background The dual search criteria issue comes into play when serial number registration is required to

obtain priority. The debtor name or the serial number may contain an error such that a search

using the correct name or the correct serial number will not disclose the registration. Two

questions arise. The first is whether an error in the debtor name may be cured by a correct

recording of the serial number. The second is whether an error in a serial number may be cured

by a correct recording of the debtor name.

The Ontario Court of Appeal in Re Lambert 90 held that an error in the debtor name can be cured

by the correct recording of the serial number, but that an error in a serial number cannot be cured

by the correct recording of the debtor name. The reason for this asymmetrical result is that it is

assumed that a reasonable searching party will conduct the search using the serial number, as this is

typically the superior method of searching. It is superior because a serial number search will

disclose registrations against the current owner as well as previous owners of the collateral

whereas a search by debtor name will only disclose registrations against the current owner.

The Ontario PPSL Committee examined the issue and concluded that Re Lambert reflects the

correct policy decision on the basis that most searching parties use the VIN to conduct their

searches of the Personal Property Registry. The Committee proposed that the Ontario PPSA be

90 (1994) 28 CBR (3d) 1.

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amended to expressly set out this rule, but recommended that this rule be restricted to motor

vehicles that are held as consumer goods.

The Acts other than the OPPSA do not adopt this approach. They proceed from the view that a

searching party should be entitled to conduct a search using either the debtor name or the serial

number where serial numbers are required, and that the searcher should be entitled to rely upon

the search result. The reason is that there may be a number of legitimate reasons why a searching

party may wish to do so. Cuming, Walsh and Wood state:91

Serial number searching is intended to be a supplementary mode of searching, not an

alternative to debtor-name searching. The ability of a third party to place full confidence

in either a debtor name or a serial number search is essential to the integrity of the

registry system. Not all searchers — for example, judgment creditors — will necessarily

be in a position to easily verify the serial numbers of particular assets of the debtor in

order to conduct an alternative serial number search. Even if this information is readily

available, not all searchers are sophisticated enough to appreciate the necessity to search

by serial number. There are situations where the imposition of serial number searching

would impose excessive costs on searchers, for example, where the debtor holds many

pieces of equipment that qualify as serial numbered goods.

This difference in approach between the Ontario Act and the other Acts as to the underlying

policy is also connected to differences in the respective registry systems. The range of goods

that are brought within the definition of serial number goods under the other Acts is much

wider than in Ontario and encompasses such things as combines, tractors, boats and boat engines.

There is therefore much less assurance that buyers will search by serial number. In Ontario,

serial number registration in respect of equipment is optional. Outside of Ontario, registration

of serial numbers is needed in order to be effective against buyers without knowledge and

secured parties who register by serial number (but not as against a trustee in bankruptcy or

judgment enforcement creditor), and the recommendat ion in Part III( 1), above

proposes to apply this approach to consumer goods as well. Outside of Ontario, the

disclosure in a registry search of an inexact match is taken into account in determining if an

91 Supra note 18 at 368.

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error in the debtor name invalidates the registration. This feature reduces the instances in

which an error in recording the debtor name invalidates a registration. In light of these

differences, we do not recommend adoption of the Ontario PPSL Committee’s approach.

(b) The Original CCPPSL Approach The original approach adopted by the CCPPSL model and that remains in the majority of these

jurisdictions is set out in the following provision:

43(7) Subject to subsection (9), where one or more debtors are required to be disclosed

in a financing statement or where collateral is consumer goods of a kind that is

prescribed by the regulations as serial number goods, and there is a seriously misleading

defect, irregularity, omission or error in

(a) the disclosure of any debtor, other than a debtor who does not own or have

rights in the collateral, or

(b) the serial number of the collateral,

the registration is invalid.

Courts of Appeal of Alberta,92 Saskatchewan93 and New Brunswick 94(Re Moncton Motor

Homes & Sales Inc, (2004) 227 DLR (4th) 154); and trial courts of Newfoundland ,95 Nova

Scotia96 (Robie Financial Inc v PricewaterhouseCoopers Inc, 2009 NSSC 397) and Manitoba 97

have held that this provision is effective in invalidating a registration if a search of the correct

debtor name does not disclose a registration (even if a search of a serial number would have

disclosed it). In each of these cases, the debtor name was incorrect and the serial number was

correctly recorded. Decisions in the British Columbia and Ontario Courts of Appeal depart from

92 Case Power & Equipment v 366551 Alberta Inc (Receiver of) (1994), 118 DLR (4th) 637. 93 Re Kelln (Trustee of) v Strasbourg Credit Union Ltd, [1992] 3 WWR 310. 94 Re Moncton Motor Homes & Sales Inc, (2004) 227 DLR (4th) 154. 95 Hoskins (Re), 2014 CanLII 2318 (NL SCTD) 96 Robie Financial Inc v PricewaterhouseCoopers Inc, 2009 NSSC 397. 97 Bankruptcy of Ramon Presbitero Arnuco, 2015 MBQB 36.

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this uniformity. The British Columbia Court of Appeal in Gold Key98 followed the Ontario Court of Appeal in Re Lambert. A surprising aspect of the British Columbia Court’s decision is that it did not consider the effect of BCPPSA s. 43(7) in coming to its conclusion.

An Alberta Queen’s Bench decision in Harder (Bankrupt) v Alberta Treasury Branches,99

concerned a security interest in a motor vehicle held as consumer goods. There was an error in

the serial number such that a search using the correct serial number did not disclose the

registration. The debtor name was correctly recorded. The court held that the registration was not

seriously misleading. The court arrived at this result through its interpretation of the test set out

by the Alberta Court of Appeal in Case Power, above. Pursuant to this test an error in recording a

serial number makes a registration “seriously misleading” in either of two situations:

(i) it would likely prevent a reasonable search from disclosing the existence of the

registration, or

(ii) it would make a person who did somehow become aware of the registration think that

it was likely not the same chattel.

The court held that the second situation will cover cases where the registration is disclosed as an

inexact match and a reasonable searching party would think that it pertained to the same chattel.

However, the court held that this branch is not limited to this case and can include other instances

in which the party acquires knowledge of the registration. The court held that the fact that the

trustee in bankruptcy was made aware of the security interest by the debtor before the

occurrence of the bankruptcy satisfied this requirement. The court’s conclusion is inconsistent

with both the reasoning in Case Power as it was applied to the facts in that case and with the

language of the Act, which explicitly provides that a registration may be seriously misleading

without evidence that anyone was actually misled. As several courts have confirmed, the test is

objective; the question is whether anyone could have been misled by the error, not whether a

particular claimant was or was not misled.

98 Gold Key Pontiac Buick (1984) Ltd v 464750 BC Ltd (Trustee of), 2000 BCCA 435. 99 2004 ABQB 285.

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(c) Other Legislative Approaches Legislative amendments in some Acts have addressed the issue in very specific terms. The Acts

of New Brunswick, Nova Scotia, PEI and Yukon (ss. 42.01(1)-(4))) provide as follows:

43(8) A registration is invalid if a search of the records of the Registry using the name, as

prescribed, of any of the debtors required to be included in the financing statement other

than a debtor who does not own or have rights in the collateral does not disclose the

registration.

43(8.1) Subject to subsections (10) and (10.1), a registration is invalid if a search of the

records of the Registry by serial number, as prescribed, for collateral that is consumer

goods of a kind that are prescribed as serial numbered goods does not disclose the

registration.

43(8.2) A registration disclosed other than as an exact match as a result of a search of

the records of the Registry using the name of a debtor or serial number as prescribed

does not mean that the registration is, by that fact alone, valid.

(d) Recommendation The wording used in the NBPPSA, NSPPSA, PEIPPSA and YPPSA provisions is preferable

because it removes any doubt that a failure of a search to disclose a debtor name expressly

results in invalidity of the registration. The language that is used in the other jurisdictions is less

definitive as it refers to a seriously misleading error, and this gives greater latitude for courts to

arrive at anomalous results as occurred in Gold Key and Harder. The more precise language of

the New Brunswick, Nova Scotia, Prince Edward Island and Yukon provisions should therefore

be uniformly employed.

A new provision is required to deal specifically with a competition in respect of serial number

goods held as equipment or consumer goods between a secured party who does not register by

serial number and: (1) a buyer or lessee without knowledge of the security interest; and (2)

another secured party who registers by serial number. Proposed sub-section 43(7.1), below, read

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in conjunction with the amendments to subsection 30(6) and 35(4) proposed in Part III(1)

addresses both cases.

The language that invalidates a registration where there is a seriously misleading error in

recording the serial number would need to be removed if, as is recommended in Part III (1),

above, a failure to record serial numbers would no longer invalidate the registration against a

trustee in bankruptcy.

In order to align the proposed new provisions with the recommendations in Part III(1), they should

be made applicable to both consumer and goods and equipment, not limited to consumer goods as

is presently the case in all jurisdictions. This will require amendments in all jurisdictions,

including New Brunswick, Nova Scotia, Prince Edward Island and Yukon.

(e) Proposed Provisions In all jurisdictions, subsection 43(7) (YPPSA, subsections 42.01(1)-(4) should be replaced with the

following:

43(7) A registration is invalid if a search of the records of the Registry using the

name, as prescribed, of any of the debtors required to be included in the financing

statement does not disclose the registration.

(7.1) For the purposes of subsections 30(6) and 35(4) a registration is invalid if a

search of the records of the Registry by serial number does not disclose the

registration.

(7.2) A registration disclosed other than as an exact match as a result of a search

of the records of the Registry using the name of a debtor or serial number as

prescribed does not mean that the registration is, by that fact alone, valid.

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(f) Transition The proposed provisions are intended to take effect as of the coming into force of the



(g) Application The proposed provisions are relevant to all jurisdictions except Ontario, but require only minor

amendments to the provisions already in force in New Brunswick, Nova Scotia, Prince Edward

Island and Yukon.

(3) Discharge of Unauthorized Registrations

(a) Background The PPSA provides a great deal of flexibility with respect to effecting registrations in the

personal property registry. There is no requirement that consent to the registration be obtained

from the person named as debtor in a registration. However, there is potential for abuse of this

flexibility. In order to address this, all Acts, other than the OPPSA, provide a person named

as debtor in a registration with an out-of-court mechanism to require the discharge of a

registration on the ground that the registration does not reflect the relationship between

that person and the person named as secured party in the registration. This mechanism is

described in the following passage:100

An existing registration may not reflect, or may no longer reflect, a security

agreement between the persons named as secured party and debtor in the

registration. The negotiations between the parties may have broken down after the

secured party effected a registration in anticipation of entering into a security

agreement with the person named as debtor in the registration. Or all the obligations

secured under the security agreement to which a registration relates may have been

fully performed by the debtor. Or the collateral description in a registration may be

100 Cuming, Walsh and Wood, supra note 18 at 337-339 (footnotes omitted).

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overly broad, including items or kinds of collateral that are not, or are not longer,

covered by an extant or contemplated security agreement.

Ordinarily, the person named as the secured party will be willing to discharge a

registration, or amend the registered collateral description, as the case may be, at the

request of the named debtor. In the event the secured party neglects or refuses to do

so, the PPSA empowers the person named as debtor in a registration [to require change or

discharge of the registration].

The right to demand discharge of the registration is triggered if: (1) all the obligations

under the security agreement to which the registration relates have been performed; or (2)

no security agreement exists between the parties. Except under the Ontario Act, once a written demand has been made, the secured party is

required to either discharge or amend the registration (as the case may be) within the specified

time period, or provide an order of the Court confirming that the registration need not be

discharged or amended. A court order preserving the registration will be denied if there is no

existing security agreement between the parties, even if the parties have entered into an

agreement that contemplates the possibility of a future security agreement contingent on the

satisfaction of a number of preliminary conditions. In other words, while advance registration is

permitted, the PPSA does not authorize a registrant to preserve a speculative registration based

on the possibility that a security interest might arise at some point in the future. Otherwise, the

registration would have the effect of making the debtor appear more encumbered currently than

she actually is, dissuading other secured parties and buyers from entering into transactions in

relation to the assets described in the registration.

If the secured party fails to obtain a court order preserving the registration, the person making

the demand is entitled (in some jurisdictions) to apply to the PPR Registrar to register the discharge

or amendment, on proof to the Registrar that the demand was made and not met, and after notice to

the secured party. Under the Acts (of other jurisdictions), the debtor is entitled to register the

discharge or amendment herself if these conditions are met without having to go through the

Registrar. This is subject to one exception. If the security agreement to which a registration

relates is a trust indenture, the person making the demand must obtain a court order authorizing

the registration of the discharge or amendment. The reason for this exception is the need to

protect the secured parties of the issuer of the trust indenture against the risk of an inadvertent,

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negligent, or fraudulent discharge by the trustee.

Under the Ontario Act, non-compliance by a secured party does not entitle the person making

the demand to register the amendment or discharge or require the PPR Registrar to do so. A court

order must be obtained in all cases.

There is strong evidence that some people are using the registry systems for purposes other than

those for which they were designed. This involves effecting registrations naming as debtors

persons against whom they have grudges or other complaints even though they have no

commercial relationship with the persons. The usual targets of this abuse are estranged spouses

or partners and politicians, civil servants, judges, police, lawyers and other persons in

authority.

The malefactors have learned that they can block the discharge mechanism described above by

claiming without justification that a registration relates to a “trust indenture.” As noted above,

this requires the person named as debtor in a registration claimed to relate to trust indenture to

obtain a court order discharging the registration.

Experience since the enactment of the first PPSAs containing the trust indenture feature

demonstrates that there is no longer a need to provide protection for trustees under trust

indentures. Trustees are sophisticated organizations that have the capacity to ensure that

registrations relating to trust indentures they administer are addressed appropriately. This,

combined with the increased abuse of this aspect of the discharge system, leads to the

conclusion that it be deleted from the Act.

(b) Recommendation It is recommended that the special rule applicable to discharge of registrations relating to trust

indentures be deleted from the Act.

(c) Proposed Change 50(8) Subsection (5) does not apply to a registration of a security interest provided for in:

(a) a security agreement registered pursuant to The Corporation

Securities Registration Act and continued pursuant to The Personal Property

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Security Act and this Act; or

(b)a trust indenture, if the financing statement through which the security

interest was registered indicates that the security agreement providing for the

security interest is a trust indenture.

(9) Where registration relates to a security interest mentioned in subsection (8) and the

secured party fails to register a financing change statement as required by subsection (4),

the person making the demand may apply to the court for an order directing that the

registration be amended or discharged.

(d) Transition The proposed provision would take effect as of the date of the coming into force of the

amendment and to apply to interests acquired both before and after the date of commencement in

property subject to a security interest, whether the security interest arose under an agreement

made before or after the date of commencement.

(e) Application The proposed provisions are relevant to all jurisdictions except Ontario.

(4) Effect of Discharge of Registration

(a) Background Most Acts address the priority position of a registered security interest (SI 1) in relation to a

subsequent registered security interest (SI 2) in a case where the registration of SI 1 lapses or is

discharged in error or through fraud. The policy adopted in the Acts is that SI 2 should not be

automatically elevated to a superior priority status in relation to SI 1 except with respect to

advances by the holder of SI 2 made or contracted for after the lapse or discharge, and prior to

the re-registration of SI 1. This can be particularly important where SI 1 was discharged

fraudulently.

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The following is the SPPSA version of this provision: 35(7) Where

(a) registration of a security interest:

(i) lapses as a result of a failure to renew the registration; or

(ii) is discharged without authorization or in error; and

(b) the secured party registers the security interest not later than 30 days after the lapse or

discharge;

the lapse or discharge does not affect the priority status of the security interest in

relation to a competing perfected security interest that, immediately prior to the lapse

or discharge, had a subordinate priority position, except to the extent that the

competing security interest secures advances made or contracted for after the lapse or

discharge and prior to the re-registration.

This provision does not address the two following situations:

(1) Immediately after the lapse or discharge of SI 1, the debtor becomes a bankrupt. Under

the current Acts, the holder of SI 1 cannot escape the effect of subsection 20(2) that

makes ineffective a security interest that is not perfected at the date (time) of bankruptcy.

This is so even though the holder of SI 1 effects a registration within 30 days of the lapse

or discharge. There is no concept of “reinstatement” where the competing interest is that

of the trustee in bankruptcy.

(2) Prior to the lapse or discharge, SI 1 had priority over an enforcement charge (writ of

execution or writ of enforcement) that, under judgment enforcement law, acquires

through registration priority status in relation to security interests. Under existing law in

some jurisdictions, the lapse or discharge of the registration relating to SI 1 results in the

enforcement charge being elevated to a priority position superior to that of SI 1.

There is no policy reason why reinstatement should not be available to the holder of SI 1 so as to

allow it to maintain its pre-lapse or discharge priority status after the invocation of bankruptcy by

effecting a registration relating to SI 1 within a short period of time following the lapse or

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discharge. Furthermore, the right of reinstatement should be available when a registration that

gave priority to S I 1 over an enforcement charge (writ of execution or writ of

enforcement) judgment creditor lapses or is discharged.

In Saskatchewan, this is not a problem since the priority status of an enforcement charge is

directly equated with that of a security interest. SPPSA subsection 35(7) would apply. Whatever

applies to a security interest applies to an enforcement charge. Subsection 35(8) of the APPSA

addresses the issue but its effect is cast in doubt by the language of subsection 35(2) of the Civil

Enforcement Act, which determines the priority of a security interest as against a registered writ.

Read literally, the effect of the Civil Enforcement Act rule is that a security interest will have

priority if it is registered before the writ is registered, regardless of whether registration of the

security interest subsequently lapses. On that view, a PPSA rule that preserves the priority of the

security interest as against the writ is redundant, because the security interest does not lose its

priority as a result of the lapse in registration. Equivalent legislation in other jurisdictions may

have the same effect.

(b) Recommendation

It is recommended that where the registration relating to a security interest lapses or is

discharged, an enforcement charge (registered writ of execution or enforcement) have the same

priority status as a competing, subordinate security interest.

It is recommended that a new subsection be added to section 20. The first version of the

subsection set out below has been designed to function in the context of a priority system, such

as that of Saskatchewan, under which the priority structure of the PPSA applies to both security

interests and enforcement charges. The second version has been designed to function in the

context of systems, such as that of Alberta, under which discharge or lapse of registration does

not affect the priority of the security interest in relation to a writ registered after the security

interest was registered.

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(c) Proposed Provisions Version 1

20(2.1) Where registration of a security interest lapses as a result of a failure to renew

the registration or is discharged without authorization or in error and the secured party

registers the security interest not later than 30 days after the lapse or discharge, the lapse or

discharge does not affect the priority status of the security interest that existed prior to

the lapse or discharge in relation to:

(a) a trustee in bankruptcy where the bankruptcy of the debtor occurred after the

lapse or discharge and prior to the re-registration; or

(b)an enforcement charge that, immediately prior to the lapse or discharge, had

a subordinate priority position.

Version 2 20(2.1) Where registration of a security interest lapses as a result of a failure to renew

the registration or is discharged without authorization or in error:

(a) the lapse or discharge does not affect the priority status of the security interest

that existed prior to the lapse or discharge in relation to a trustee in bankruptcy

where the bankruptcy of the debtor occurred after the lapse or discharge and prior

to the re- registration, if the secured party registers the security interest not later

than 30 days after the lapse or discharge; and

(b)the security interest is subordinate to a writ of execution (writ of enforcement) that

at the date of lapse or discharge was registered unless the secured party re-registers

the security interest not later than 30 days after the lapse or discharge.

(d) Transition The proposed provisions are intended to take effect from the coming into force of the

amendments and to apply to interests acquired both before and after the date of commencement

in property subject to a security interest, whether the security interest arose under an

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(5) Attachment and After-Acquired Crops

(a) Background The PPSAs in Canada include a limitation on the use of after-acquired property clauses in

relation to crops. The provision in the APPSA is representative of the provision that is found in

most provinces and territories:

13(2) A security interest does not attach to after‑acquired property that is

(a) a crop that becomes a growing crop more than one year after the

security agreement has been entered into, except that a security interest in

crops that is given in conjunction with a lease, agreement for sale or mortgage

of land may, if so agreed, attach to crops to be grown on the land concerned

during the term of the lease, agreement for sale or mortgage,

Section 13 of the SPPSA has a somewhat more elaborate version:

13(2) Subject to subsection (3), a security interest in after-acquired property that is

the crop of a grower, or grains, fruits, vegetables or other produce resulting from or

that may result from harvesting the crop of a grower, does not attach if the crop is

planted more than one year after the security agreement has been entered into.

(3) Notwithstanding subsection (2), a security interest in a crop, or grains, fruits,

vegetables or other produce resulting from or that may result from harvesting the

crop, given in conjunction with a lease, agreement for sale or mortgage of land on

which the crop is to be grown may, if the parties so agree, attach to the crop to be

grown on that land and grains, fruits, vegetables or other produce resulting from or

that may result from harvesting the crop during the term of the lease, agreement for sale

or mortgage.

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(4) Subsection (2) does not apply to a crop that consists of trees.

Article 9-204(4)(a) of the original Uniform Commercial Code contained a similar provision that

was copied in the Canadian Acts. Grant Gilmore indicates that the provision followed provisions

found in many pre-Code statutes that were passed during the Great Depression in the United

States at the instance of the federal government.101 The provision was removed in the 1972

revision of Article 9 on the basis that it was overly paternalistic and unworkable.

(b) Recommendation It is recommended that the provision be removed from the PPSAs as it does not provide farmers

with much protection. A secured party can obtain an undertaking from a debtor to enter into

new security agreements covering the crops in future years and the secured party can specify

that the failure to do so is an event of default. The statutory limitation on the effectiveness of

an after-acquired property clause simply makes it more time-consuming and cumbersome to

take security interests in future crops, since a new security agreement must be entered into

each year. As well, banks are able to easily circumvent this restriction by taking Bank Act

security on the crops, as the Bank Act does not contain a similar limitation on the operation

of an after-acquired property clause.

(c) Proposed Provision 13(2) A security interest does not attach to after-acquired property that is

(a) a crop that becomes a growing crop more than one year after the

security agreement has been entered into, except that a security interest in crops that

is given in conjunction with a lease, agreement for sale or mortgage of land may,

if so agreed, attach to crops to be grown on the land concerned during the term of

the lease, agreement for sale or mortgage, or

SPPSA 13(1) Subject to section 12, where a security agreement provides for a security

interest in after-acquired property, the security interest attaches in accordance with

section 12 without specific appropriation by the debtor.

101 Security Interests in Personal Property (Vol. II) (Little Brown, 1965) at 864.

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13(2) Subject to subsection (3), a security interest in after-acquired property that is

the crop of a grower, or grains, fruits, vegetables or other produce resulting from or

that may result from harvesting the crop of a grower, does not attach if the crop is

planted more than one year after the security agreement has been entered into.

(3) Notwithstanding subsection (2), a security interest in a crop, or grains,

fruits, vegetables or other produce resulting from or that may result from harvesting

the crop, given in conjunction with a lease, agreement for sale or mortgage of land on

which the crop is to be grown may, if the parties so agree, attach to the crop to be

grown on that

land and grains, fruits, vegetables or other produce resulting from or that may

result from harvesting the crop during the term of the lease, agreement for sale or

mortgage.

(4) Subsection (2) does not apply to a crop that consists of trees.


amendments and to apply to interests acquired both before and after the date of commencement

in property subject to a security interest, whether the security interest arose under an



(6) Serial Number Descriptions in the General Collateral Field

(a) Background A problem arises because of recent trial court judgments in Alberta, Nova Scotia and New

Brunswick.102 In Commcrop, the serial number of serial numbered collateral was recorded only

in the general collateral field. It was held that this nevertheless qualified as a serial number

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registration for the purposes of subsection 35(4), with the result that a registered interest has

priority over subsequently registered security interests. The difficulty is that a search of the

registry by serial number would not disclose this registration. A searching party may therefore

take an interest in the goods only to find that their interest is subordinate to an interest that was

not disclosed by a serial number search. The decision was subsequently followed by courts in

Nova Scotia and PEI. However, in response, the Acts of New Brunswick, Nova Scotia and

Prince Edward Island were amended to reverse this outcome. They did so by using language

making it clear that the information must be recorded in the serial number field. The New

Brunswick PPSA provides:

35(4) A security interest in goods that are equipment and are of a kind that

are prescribed as serial numbered goods is not registered or perfected by

registration for the purposes of subsection (1), (7) or (8) or 34(1) unless a

financing statement relating to the security interest that includes a description of

the goods by serial number is registered with the serial number entered into the

field labelled for the receipt of serial numbers.

(b) Recommendation

It is recommended that this approach be adopted in other jurisdictions in order to prevent courts

from misconstruing the intent of the provision. Subsection 30(6) should be similarly reworded to

achieve this result in respect of competitions with buyers.

(c) Proposed Provision (changes underlined)

30(6) Where goods are sold or leased, the buyer or lessee takes free from any security interest in

the goods that is perfected pursuant to section 25 if the goods were not described by serial

number in the registration relating to the security interest with the serial number entered into the

field labelled for serial numbers.

102 Commcorp Financial Services Inc v R & R Investments Corp. (1995), 31 Alta LR (3d) 393 (QB), WBLI Inc v Maxium Financial Services Inc, 2003 NSSC 97; Business Development Bank of Canada v ABN Amro Leasing, 2003 PESCAD 5

154

(a) the buyer or lessee bought or leased the goods without knowledge of the security interest; and

(a) (b) the goods were not described by serial number in the registration relating

to the security interest in the registration relating to the security interest.

35(4) A security interest in goods that are consumer goods or equipment and are of a kind

prescribed as serial numbered goods is not registered or perfected by registration for the

purposes of subsection (1), (7) or (8) or subsection 34(2) unless a financing statement relating to

the security interest and containing a description of the goods by serial number

is registered that includes a description of the goods by serial number is registered with the

serial number entered into the field labelled for the receipt of serial numbers.





(7) Sales or Leases of Low Value Consumer Goods

(a) Background

All of the Acts except those of Ontario and Yukon contain the following provision:

30(3) A buyer or lessee of goods that are acquired as consumer goods takes free of a

perfected or unperfected security interest in the goods if the buyer or lessee:

(a) gave value for the interest acquired; and

(b) bought or leased the goods without knowledge of the security interest.

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(4) Subsection (3) does not apply to a security interest in:

(a) a fixture; or

(b) goods the purchase price of which exceeds $1,000 or, in the case of a lease, the market

value of which exceeds $1,000.

The policy basis of this special priority rule is that a person who buys or leases low value

consumer goods in a private sale or lease cannot be expected to go to the cost and trouble of

checking the registry to determine whether the goods are subject to a security interest. Secured

credit grantors are not negatively affected because the cost of enforcing a security interest against

low value consumer goods is likely to be greater than the value of the goods.

The $1000 value provided in the provision is outdated and does not reflect the devaluation of

money since the provision was last examined.

(b) Recommendation

It is recommended that the provision be amended to reflect the current value of money and to

provide for changes in the value of goods to which the priority rule applies without having to

amend the Act. This is accomplished by providing for change in the value through regulation. For

the immediate future, the value should be $1500.

(c) Proposed Changes

30(3) A buyer or lessee of goods that are acquired as consumer goods takes free of a perfected or unperfected security interest in the goods if the buyer or lessee gave value for the interest acquired. (a) gave value for the interest acquired; and

(b) bought or leased the goods without knowledge of the security interest. (4) Subsection (3) does not apply to a security interest in: (a) a fixture; or (b) goods the purchase price of which exceeds $1500 or the amount prescribed or, in the

case of a lease, the market value of which exceeds $1500 or the amount prescribed.

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(d) Transition

The proposed changes can be implemented so as to apply to security interests taken both before and after the provisions come into effect.

(e) Application

The proposed provisions are relevant to all jurisdictions except Ontario.

IV. PROPOSALS RELEVANT TO SPECIFIC JURISDICTIONS

(1) Time of Perfection and Bankruptcy

(a) Background Several Acts, including the Saskatchewan PPSA provide:

20(2) A security interest in collateral is not effective against:

(a)a trustee in bankruptcy if the security interest is unperfected at the date of bankruptcy; or

(b)a liquidator appointed pursuant to the Winding-up Act (Canada) if the security interest is unperfected on the day that the winding-up order is made.

There has been some judicial uncertainty as to how to apply the provision where a security

interest is perfected on the same day as the assignment in bankruptcy or bankruptcy order but

after bankruptcy proceedings have been started.

Other Acts provide:

20(2) An unperfected security interest in collateral is not effective against:

(a) a trustee in bankruptcy if the security interest is unperfected at the time

of the bankruptcy,

(b) a liquidator appointed under the Winding-up and Restructuring Act (Canada)

if the security interest is unperfected when the winding-up order is made.

The uncertainty associated with the formulation first set out above does not arise in the second

formulation.

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(b) Recommendation

It is recommended that subsection 20(2) of the Acts containing the first formulation be amended

to adopt the approach contained in the second formulation above.

(c) Proposed Provision (changes underlined)

20(2) An unperfected security interest in collateral is not effective against

(a) a trustee in bankruptcy if the security interest is unperfected at the time

of the bankruptcy,

(b) a liquidator appointed under the Winding-up and Restructuring Act (Canada)

if the security interest is unperfected at the time the winding-up order is made.

(d) Transition The proposal is intended to take effect from the coming into force of the amendments and to

apply to interests acquired both before and after the date of commencement in property subject

to a security interest, whether the security interest arose under an agreement made before or

after the date of commencement.

(e) Application The proposed provisions are relevant to all jurisdictions except New Brunswick, Nova Scotia and

Prince Edward Island.

(2) Priority to Accounts

(a) Background The Acts’ special priority rules governing accounts exhibit significant non-uniformity. At

present, there are two general models employed for resolution of priority disputes between

purchase-money inventory proceeds claimants (e.g. manufacturers, inventory suppliers, etc.), on

one hand, and accounts financiers, on the other.

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Model A: Ontario and Atlantic Canada In Ontario (OPPSA s. 33(1)(b)(iii)) and the Atlantic provinces (NBPPSA s. 34(2)(b), NFPPSA s.

35(2)(b), NSPPSA s. 35(2)(b), PEIPPSA s. 34(2)(b)), an inventory supplier enjoys priority to an

account as proceeds of its original collateral if it furnishes advance notice, to a previously

registered accounts financier, of its intention to take a purchase-money security interest in the

inventory and proceeds in the form of accounts. Failing provision of this notice, the inventory

supplier is not entitled to the purchase-money super-priority, and a first registered accounts

financier (whether secured party or absolute transferee) prevails over the inventory supplier. The

Acts of these jurisdictions aim to give maximal protection to diligent purchase-money

financiers, enabling them to claim super-priority against proceeds in the form of accounts. This

protection, however, is not absolute. For example, a purchase-money financier’s proceeds

interest remains subject to the account debtor’s contractual and equitable rights to the extent those rights are not affected by the notice given. Model B: Western Canada & Territories In Western Canada (APPSA s. 34(6), BCPPSA s. 34(5), MPPSA s. 34(6), SPPSA s. 34(6)) and

the Territories (NWTPPSA s. 34(6), NPPSA s. 34(6), YPPSA s. 33(4)), the rules are quite

different. These jurisdictions’ Acts create new financing opportunities for debtors by giving them

the ability to liquidate their accounts for immediate cash flow. Instead of waiting for a 60-day

account to mature into payment, a debtor may sell the account (or, alternatively, use the account

as collateral in support of its general operating line with the bank). These Acts facilitate this

type of financing activity by giving a first registered accounts financier, who gives new value

for an account, priority over a purchase-money inventory supplier’s proceeds claim to that

account.

Model B1: Saskatchewan, Northwest Territories & Nunavut The Model B1 Acts (NWTPPSA s. 34(6.1), NPPSA s. 34(6.1), SPPSA s. 34(7)) contain an

additional provision which excepts deposit accounts from the special priority rule described in

the preceding paragraph. This provision, enacted post-Transamerica (a case discussed below),

clarifies that the special accounts financing priority rule does not apply to deposit accounts. This

is sensible since deposit accounts are liquid in the purest sense, and are thus never in need of

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d i s c o u n t i n g .

Model B2: Alberta, British Columbia, Manitoba & Yukon Meanwhile, the Model B2 Acts – those of Alberta, British Columbia, Manitoba and Yukon – do

not contain a concordant provision setting out the deposit account exception. It is arguable that

this discrepancy is inconsequential in light of the decision of the Saskatchewan Court of Appeal

in Transamerica Commercial Finance Corp. Canada v. Royal Bank,103 where it was held that a

depository institution was not entitled to benefit from the accounts financing priority rule (as it

then was, consonant with the language of present-day APPSA s. 34(6)) with respect to a deposit

account on which it was liable. On the one hand, no court has rejected Transamerica, and if the

decision is followed, this will bring about, to a certain degree, substantive harmony across the

Model B jurisdictions despite the formal non-uniformity between the B1 and B2 models. On the

other hand, the express language of the accounts financing priority rule is inconsistent with the

decision in Transamerica, and it is plausible that future courts could decline to follow the

decision. Even if Transamerica is followed in Model B2 jurisdictions, the decision, interpreted

narrowly, does not appear to preclude a party other than the depository institution from asserting

the accounts financing priority rule in respect of a deposit account balance. Meanwhile, this

possibility is expressly precluded under the Model B1 Acts.

(b) Illustrative Scenarios The following scenarios illustrate the similarities and difference exhibited by the various models. Scenario 1 Day 1 – Accounts Financier (AF) effects registration against Debtor’s “intangibles and accounts”. Day 2 – Supplier acquires PMSI in Debtor’s inventory, gives the proper notices, and prior to

Debtor acquiring possession of the inventory, effects registration against Debtor’s “inventory”.

Day 3 – Debtor sells the inventory to Buyers on 60-day credit terms, generating accounts. Day 4 – AF purchases the accounts for new value.

• In Model A jurisdictions, Supplier has priority over AF with respect to the

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accounts; OPPSA s. 33(1).

• In both Model B1 and B2 jurisdictions, AF has priority over Supplier with respect to

the accounts; SPPSA s. 34(6), APPSA s. 34(6).

Scenario 2 Day 1 – Bank effects registration against Debtor’s “intangibles and accounts”. Day 2 – Supplier acquires PMSI in Debtor’s inventory, gives the proper notices, and prior to


Day 3 – Debtor sells inventory to Buyers for cash. The cash (first generation proceeds) is

deposited into Debtor’s deposit account at Bank (second generation proceeds).

Day 4 – Bank takes a security interest in Debtor’s deposit account in exchange for new value.

• In Model A jurisdictions, Supplier has priority over Bank by virtue of its purchase-

money super-priority; OPPSA s. 33(1). Note, however, that Bank may be able to assert

superior contractual and equitable rights to the deposit account, as account debtor,

pursuant to OPPSA s. 40(1.1).

• In Model B1 jurisdictions, Supplier has priority over Bank by virtue of its

purchase- money super-priority; SPPSA s. 34(3). SPPSA s. 34(7) clarifies that the

special accounts financing priority rule in s. 34(6) does not apply to deposit accounts.

Note, however, that Bank may be able to assert superior contractual and equitable

rights to the deposit account, as account debtor, pursuant to SPPSA s. 41(2).

• In Model B2 jurisdictions, it is not entirely clear who has priority as a matter of

pure secured transactions law. On one hand, the express language of APPSA s. 34(6)

appears to give Bank priority over Supplier. On the other hand, Transamerica, if

followed, gives Supplier priority over Bank. In any event, even if Bank is precluded

from asserting APPSA s. 34(6) against Supplier according to the Transamerica

principle, Bank may nonetheless be able to assert superior contractual and equitable

rights to the deposit account, as account debtor, pursuant to APPSA s. 41(2).

103 [1990] 4 WWR 673.

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Scenario 3 Day 1 – AF effects registration against Debtor’s “intangibles and accounts”. Day 2 – Supplier acquires PMSI in Debtor’s inventory, gives the proper notices, and prior to


Day 3 – Debtor sells inventory to Buyers for cash. The cash (first generation proceeds) is

deposited into Debtor’s deposit account at Bank (second generation proceeds).

Day 4 – AF acquires a security interest in Debtor’s deposit account, and gives new value.

• In Model A jurisdictions, Supplier has priority over AF with respect to the deposit

account balance by virtue of its purchase-money super-priority; OPPSA s. 33(1).

• In Model B1 jurisdictions, Supplier has priority over AF with respect to the

deposit account by virtue of its purchase-money super-priority; SPPSA s. 34(3).

SPPSA s. 34(7) clarifies that the special accounts financing priority rule in s. 34(6)

does not apply to deposit accounts.

• In Model B2 jurisdictions, it is not entirely clear who, as between AF and Supplier,

has priority to the deposit account balance. According to the express statutory

language of APPSA s. 34(6), AF has priority over Supplier with respect to the deposit

account. But if a court were to interpret Transamerica broadly (in a manner consistent

with SPPSA s. 34(7), essentially), then Supplier could conceivably prevail in these

circumstances.

Scenario 4 Day 1 – AF effects registration against Debtor’s “intangibles and accounts”. Day 2 – Supplier acquires PMSI in Debtor’s inventory, gives the proper notices, and prior to


Day 3 – Debtor sells inventory to Buyers on 60-day credit terms, generating accounts. Day 4 – AF purchases the accounts for new value. Notice of the assignment is not given to

Buyers.

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Day 5 – Buyers make payment to Debtor in respect of the accounts. The funds are deposited

into Debtor’s deposit account.

• In Model A jurisdictions, Supplier has priority over AF with respect to the deposit

account balance by virtue of its purchase-money super-priority; OPPSA s. 33(1).

• In both Model B1 and B2 jurisdictions, Supplier has priority over AF with respect to

the deposit account; SPPSA s. 34(3), APPSA s. 34(3). AF’s special priority under s.

34(6) does not extend to proceeds of the accounts, whereas Supplier’s s. 34(3) super-

priority does extend to such proceeds. In this instance, AF could have protected itself

by serving the Buyers with notice of the assignment, and thus requiring that account

payments be made directly to AF.

(c) Recommendation SPPSA s. 34(7), a Model B1 representative, excludes the deposit account from the special

accounts financing priority rule on the basis of the deposit account’s liquidity, and the absence of

any need to facilitate its sale for immediate cash flow. A deposit account is a cash equivalent.

The identity of the financer is immaterial. Neither the depository bank nor any other accounts

financier ought to be able to assign a deposit account, and gain priority over a purchase-

money inventory financier’s proceeds claim on that basis. Accordingly, it is recommended

that Model B2 jurisdictions – Alberta, British Columbia, Manitoba and Yukon – adopt

explicit statutory language to this effect.

(d) Proposed Change

34(6.1) Subsection (6) does not apply to an account in the form of a deposit

with a deposit-taking institution.


amendments and to apply to a security interest acquired after the date of commencement

163

whether the security interest arose under an agreement made before or after the date of

commencement.

(f) Application The proposed amendment is relevant to Alberta, British Columbia, Manitoba and Yukon. In Model A jurisdictions, no similar recommendation is made because none of these jurisdictions

has enacted a special accounts financing priority rule akin to SPPSA s. 34(6). In these

jurisdictions, a purchase-money inventory financier’s interest in an account – including a deposit

account – as proceeds of its original collateral has priority over the competing interest of an

accounts financier provided the proper notices are served.

Pan-Canadian uniformity, while certainly a worthwhile objective, will be difficult to achieve on

this point because it will require a major reversal of the law for the amending jurisdictions,

whether Model A or Model B. This could prove quite controversial. Consider the opposing

positions. An argument in favour of the Ontario approach is advanced by Ziegel and

Denomme:104:

Saskatchewan, Alberta and British Columbia have followed the 1972 Code

precedent. Ontario has not. It is believed Ontario’s position is the sounder

one. Canadian financing patterns are significantly different from those in the

United States and accounts receivable financing for manufacturers and

retailers, as discrete forms of financing, is less important in Canada. The

western provinces’ version puts manufacturers and other purchase money

financiers at the mercy of a bank which has registered a prior financing

statement covering accounts (and usually other collateral as well) and

therefore defeats much of the value of the purchase money priority.

A counterpoint to this argument is that, even in Ontario, a manufacturer (or other purchase money inventory financier) remains vulnerable to the bank, perhaps not by virtue of the bank’s prior registered security interest, but by virtue of the bank’s rights as account debtor. Professor Cuming explains the general rationale in support of the Model B approach as

follows:105

104 The Ontario Personal Property Security Act: Commentary and Analysis 2nd ed., Toronto: Butterworths, 2000) at 264. 105 Ronald C.C. Cuming, “Second Generation Personal Property Security Legislation in Canada (1981-1982) 46 Sask.L.Rev. 5 at 38-39.

164

If a secured party is approached by a potential customer seeking inventory financing,

he or she will conduct a search of the registry to determine whether or not any

priority

claims to the potential customer's accounts have been registered. If the search reveals

a prior claim, the inventory financer must decide whether or not he or she would

be adequately secured without having as collateral the accounts that are proceeds of

the inventory. The priority to other types of proceeds collateral such as trade-ins,

money, negotiable instruments or chattel paper, may be sufficient. The decision that

the accounts are necessary may, but need not, lead to the conclusion that the

potential customer must be turned away. The above arguments aptly demonstrate that lawmakers with differing perspectives can

undertake the same balancing exercise and arrive at divergent conclusions. Both approaches

are supported by compelling policy rationales, and both can be commended for enabling

inventory financiers and accounts financiers to engage in meaningful ex ante risk assessment.

The debate is arguably intractable, and the group is of the view that it is unrealistic to expect

a multitude of Canadian jurisdictions, whether Model A or Model B, to reverse course and

disrupt entrenched regional business practices.

(3) Subordination

(a) Background Under some circumstances, a subordination agreement may have the result of giving to the

benefiting party a security interest in the interest of the subordinating party. Generally, this is

not the intention of parties to a subordination agreement. Consequently, the Act should require

clear demonstration of the intention of the parties to create a security interest through a

subordination agreement. Several Acts contain provisions designed to have this effect.

(b) Recommendation It is recommended that the following provision, contained in the British Columbia,

Saskatchewan, Northwest Territories and Nunavut Acts, designed to provide clarification as to

whether a subordination agreement creates a security interest be included in all other Acts.

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40(2) An agreement or undertaking to postpone or subordinate:

(a) the right of a person to performance of all or any part of an obligation

to the right of another person to the performance of all or any part of

another obligation of the same debtor; or

(b)all or any part of the rights of a secured party pursuant to a

security agreement to all or any part of the rights of another secured party pursuant to another security agreement with the same debtor; does not, by virtue of the postponement or subordination alone, create a security interest.

(d) Transition The proposed provision is intended to take effect from the coming into force of the amendments

and to apply to interests acquired both before and after that date in property subject to a security

interest, whether the security interest arose under an agreement made before or after that date.

(e) Application The proposed provision is relevant to all Acts except those of British Columbia, Saskatchewan

Northwest Territories and Nunavut.

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