On March 29, 2012, the Financial System Review Act (“FSRA”) received royal assent, with the provisions coming into force on a date to be fixed by order in council. The FSRA contains amendments to the Bank Act, clarifying the order of priorities in a situation where multiple security interests, including those under the Bank Act and under a provincial Personal Property Security Act (“PPSA”), are taken with respect to the same collateral. The amendments to the Bank Act in the FSRA expressly grant sections 426 and 427 Bank Act security priority over prior unperfected security interests in the same collateral.
These amendments effectively overrule the 2010 Supreme Court of Canada (“SCC”) decisions in the companion cases of Bank of Montreal v. Innovation Credit Union (“Innovation”) and Royal Bank of Canada v. Radius Credit Union Ltd. (“Radius”) relating to the priority of federal Bank Act security vis à vis provincial personal property security under the Saskatchewan PPSA. Both Innovation and Radius involved a priority dispute between the credit union’s prior unregistered security interest taken under that PPSA and the bank’s subsequent security interest taken and registered under the federal Bank Act. After analyzing the nature of the relationship between the Bank Act security regime, which is property-based, and the PPSA security regime, which is based on a statutory scheme of registration, the SCC held that the credit union’s first-in-time unperfected PPSA security interest took priority over the bank’s subsequently registered Bank Act security interest.
The SCC’s decision generated calls for legislative reform, since it exposed banks to unreasonable commercial risk. It left Bank Act security vulnerable to undisclosed and unregistered PPSA security interests (and similar interests under the Quebec Civil Code) whose existence the banks had no way of discovering. The amendments to the Bank Act contained in the FSRA respond to these concerns by expressly adding a priority rule that subordinates a prior unperfected security interest to subsequent sections 426 and 427 Bank Act interest.
An exception is provided where the bank acquires its security with “knowledge” of the other security interest, however, “knowledge” is not a defined term. This ambiguity means that banks may inadvertently obtain information that may be construed as “knowledge” of a prior unperfected security interest and lose their priority. To prevent this risk, banks would be well-advised to continue taking PPSA security and/or security under the Civil Code in Quebec, as applicable, in addition to sections 426 and 427 Bank Act security
While the amendments are a welcome relief from the untenable situation created by the SCC decisions, clarifying the narrow issue at question in Innovation and Radius, they do not address larger questions about the optimal relationship between the Bank Act and PPSA security regimes.