The Security is Defective and Unenforceable – Not So Fast!

This post was written prior to our January 2017 merger, under our previous firm name, MacPherson Leslie & Tyerman LLP.

Defects in security are not always fatal to the security holder’s ability to rely upon on it and enforce its rights. Depending upon the nature and terms of the security documents, the defect and the surrounding circumstances, the security can be deemed valid and enforceable in spite of the defect.

MLT lawyers have been involved in two relatively recent cases in which the court found seemingly defective security to be valid and enforceable. In Production Enhancement Group Inc. (Re), 2011 ABQB 350, the court found that a Convertible Secured Debenture secured by way of a General Security Agreement created a valid and enforceable security interest notwithstanding a defect in the charging language of the GSA. Madam Justice Kent found that the Debenture created a valid and enforceable equitable charge since:

  1. the debt created by the Debenture created payment obligations on the part of the debtor;
  2. there was an enforceable agreement between the creditor and the debtor (the Debenture) that the debtor would deliver collateral security (the GSA); and
  3. the collateral was identified (all the present and after acquired personal property of the debtor).

Since that equitable charge had been properly registered in Alberta’s personal property registry, it was valid and enforceable.

The second case is Shire International Real Estate Investments Ltd. (Re), 2012 ABQB 61, another decision of Justice Kent. That decision concerned the validity of a mortgage that had been registered against title to a property through a trust deed. Investors invested in the trust deed through an offering memorandum and were to have received mortgage units as security for their investment. No mortgage units certified by the trust company were issued to investors and no registry of mortgage units had been created as required by the terms of the trust deed. Interest payments had been made to investors. Justice Kent found that the mortgage unit holders’ interests were valid and enforceable in spite of the “irregularities”. She found that:

  1. since the offering memorandum specifically identified the mortgaged property as the land that was to be purchased with the invested funds; and
  2. the invested funds were linked to the mortgaged property through the trust deed(which in turn was secured by the mortgage)

there was sufficient evidence to find that the mortgage secured the investors’ money. The “defects” were “truly irregularities” that were found to be irrelevant to the fact that the money from investors was used to purchase the property and was secured by the mortgage. Leave to appeal Justice Kent’s decision was denied (see Rompsen Investment Corporation v. Arsenault, 2013 ABCA 198).

These cases illustrate that apparent defects with security documents or with fulfilling the terms of security documents are not necessarily fatal to the validity and enforceability of those documents.