On June 22, 2020, The Personal Property Security Amendment Act, 2019 (the “Amendments”) came into force in Saskatchewan.
The Amendments produce significant changes to The Personal Property Security Act, 1993 (the “PPSA”). This blog highlights and summarizes certain features of the Amendments as they relate to secured creditors
The Amendments implement many of the changes proposed in the Report to the Canadian Conference on Personal Property Security Law on Proposals for Changes to the Personal Property Security Acts (the “Report”), prepared by a Working Group of the Canadian Conference on Personal Property Security Law (“CCPPSL”) and ratified at the CCPPSL Annual Meeting in June, 2017.
This blog is part one of four insights detailing select Amendments that may affect the interests of secured creditors and debtors.
Highlights and Summaries:
Security Interests in Electronic Chattel Paper
Before the Amendments came into force, the PPSA contained rules for demonstrating control of hard copy chattel paper, but was silent on electronic chattel paper. Chattel paper are central to automobile and equipment transactions as they allow sellers and lessors to provide financing for sale or lease simultaneously. To establish a priority security interest in chattel paper, the ultimate question is one of control.
The Report recommends following the approach taken under United States law to respond to demand for facilitating electronic commerce. The Amendments introduce provisions that define electronic chattel paper and set out rules for establishing control of electronic chattel paper.
Purchase Money Security Interests
Before the Amendments came into force, there were certain inefficiencies and uncertainties regarding purchase money security interests (“PMSIs”). The Amendments affect PMSIs in three ways:
- First, the Amendments allow for limited cross-collateralization for related transactions to ensure priority of a PMSI. This change is relevant for suppliers who provide purchase money inventory financing under a series of transactions with the same debtor. The Amendments address the inefficiency of allocating a debtor’s payments to particular pieces of inventory.
- Second, the Amendments codify the common-law rule in Saskatchewan ensuring that PMSI status is not lost when a purchase money obligation is refinanced by either the original lender or by a third party lender.
- Third, the Amendments address a legislative void regarding allocation of payments. For instance, if a debtor owes a creditor under multiple financing mechanisms, such as an unsecured loan and PMSI financing, there was no legislative guidance on the allocation of payment. The PPSA now prescribes how payments from a debtor to a secured party should be allocated in these situations. Subject to an agreement by the parties, a PMSI debt is the last to be discharged after unsecured and secured obligations. The Report suggests that this method more closely aligns with the expectations of the parties.
Security Interests in Statutory and Contractual Licenses
Before the Amendments came into force, the PPSA explicitly recognized that a licence constituted personal property that could be the subject of a security interest. This was not the case in all provinces and as a result, there was uncertainty surrounding the classification of licences. The Report recommends that provinces amend their PPSAs to include licences. The Amendment in Saskatchewan further clarifies that a creditor realizing on their collateral will not affect the rights of a licensor.
Conflict of Laws and Location of the Debtor
Before the Amendments came into force, the location of a debtor’s “chief executive office” determined the applicable law and jurisdiction of registration for certain types of personal property. The Report discusses that these particular debtor location rules result in confusion, particularly for third party searchers and for determining where to properly register a security interest. The Amendments clarify these rules by largely following amendments enacted in Ontario to provide greater certainty and predictability for secured parties. Generally, the rules provide specific debtor location guidelines based on the type of business organization of the debtor (individual, partnership, corporation, etc.).
Time for Determining Priority of a Security Interest
Before the Amendments came into force, it was uncertain whether priorities were fixed as of the date that enforcement measures were initiated. The Report points to inconsistent jurisprudence for the need for a statutory rule, including case law holding that initiation of enforcement froze priority. The Amendments clarify that initiation of enforcement does not affect the priority of a security interest. Further, if a debtor becomes bankrupt or has a judgment registered against them after a security interest is discharged by error or lapse, the secured creditor may maintain priority if they re-register within 30 days of the discharge or lapse.
Notice of Enforcement
Before the Amendments came into force, a secured party who intended to dispose of collateral in enforcement proceedings was required to give notice to creditors with subordinate interests in the collateral because that subordinate interest was at risk of elimination. The Report notes that the sale of collateral could also affect the position of a creditor with a priority security interest in the collateral who may wish to seek a stay of proceedings or protect its interest in some other way. The Amendments require notice of disposition of collateral to all secured parties, including those with a security interest with priority over that of the enforcing secured party.
Serial Number Registration
Before the Amendments came into force, failure to register a security interest in consumer goods by serial number invalidated the registration. By contrast, registration of a security interest in equipment by serial number was optional, but failure to do so could cause the secured party to lose priority. The Report argues in favour of consistent treatment of consumer goods and equipment. The Amendments provide for essentially the same treatment of consumer goods and equipment. For both, registration of serial numbers is permissive rather than compulsory. However, if a secured party chooses not to register the serial number, its interest can be defeated by a buyer, lessor or other secured party that does register with a serial number.
Additionally, amendments were made with respect to dual-search requirements. If a search of the personal property registry by debtor name or serial number does not disclose the security interest, the registration may be invalid. However, disclosure in search results of an inexact match does not automatically make an erroneous registration valid. Ultimately, this particular amendment codifies that there is no dual-search requirement.
Before the Amendments came into force, a creditor with a security interest in future growing crops was required to enter into a new security agreement each year. The Report recognizes this limitation is time-consuming and cumbersome. Further, creditors falling under the Bank Act could circumvent this limitation by taking a Bank Act security, which contains no similar limitation. As a result, chartered banks had an administrative advantage over other creditors such as credit unions. The Amendments repeal the limitation regarding growing crops so that creditors no longer need to enter into a new security agreement each year.
Payment of Debts and Transfers of Negotiable Property
Before the Amendments came into force, the rules regarding priority to monetary transfers taken by the creditor in debtor-initiated payments were inconsistent. The Report recommends that a person who receives a transfer of funds from a debtor should be in the same position regardless of the means of transfer, including electronic transfer. The Amendments provide that the rules applicable to payment of funds are the same regardless of the mechanism used.
Knowledge of Buyers and Lessees of Collateral
Before the Amendments came into force, a buyer or lessee of collateral had to be without knowledge of an unperfected security interest in order to take the goods free of a security interest. The Report cites precedent and public policy reasons for eliminating the “without knowledge” requirement. The Amendments allow a buyer or lessee of personal property to take title clear of a security interest if they have knowledge of a prior unperfected security interest as long as the buyer or lessee gave value.
Effect of Future Advances on Buyers and Lessees
Before the Amendments came into force, the PPSA did not address how a priority competition would be resolved in a specific situation involving a secured party making a subsequent advance after the collateral is sold or leased outside the ordinary course of the debtor’s business. The Report recommends extending the policy applicable to competing security interests to this specific situation. The Amendments include language extending the policy, and a potential buyer or lessee is required to ensure that the prior secured party will not make additional advances.
Priority for Pension Beneficiaries
Before the Amendments came into force, The Pension Benefits Act, 1992 created a deemed trust regarding certain contributions owed to a pension plan fund by employees and employers. The Amendments provide that these deemed trusts receive priority status over non-PMSI security interests.
MLT Aikins has significant experience in personal property security law. Our corporate finance & securities lawyers would be happy to discuss how these Amendments may affect your organization.