In recent years, cross-border transactions have increased in popularity and many of these transactions involve taking security over tangible and intangible personal property. As a result, it is now customary for financial services lawyers to be called upon by clients enquiring about taking and perfecting security in multiple jurisdictions and the applicable conflict of laws rules.

Several simple rules should be kept in mind when a commercial loan transaction requires a lender to take security over a corporation’s personal property[2]. This article provides a general overview of the several rules applicable to the perfection of security on personal property in Canada and the United States.

Introduction

In Canada, the regulatory scheme applicable to the perfection of security interests on personal property falls under provincial jurisdiction. Each Canadian province has enacted its own personal property security legislation, with some significant differences among the provinces, with the legislation of Quebec being the most unique. Similarly, in the United States, personal property security interests are a matter of State law. All of the States have adopted the 1999 revision of Article 9 of the Uniform Commercial Code (the “UCC”) and the 2010 amendments thereto, with only fairly minor variations from State to State.

In each of the Canadian provinces (other than Quebec), there is a statute commonly known as the Personal Property Security Act (“PPSA”). The corresponding personal property legislation in Quebec is set forth in the Civil Code of Quebec (the “CCQ”). A security agreement that creates or provides for an interest in personal property to secure the payment or the performance of an obligation typically falls within the scope of the applicable PPSA, CCQ or UCC.

Although similar, the different personal property security regimes contain important distinctions that, if not carefully taken into consideration when perfecting a security interest, may jeopardize both the validity and the perfection of such security interest.

1. PPSA Jurisdictions[3]

a) Definitions

Tangible property is described under the PPSA[4] as goods[5] and possessory security interests in an instrument[6], a negotiable document of title, money or chattel paper.

In contrast, intangible property includes account receivables, contractual rights, securities entitlements and intellectual property, and also mobile goods[7] and non-possessory security interests in an instrument, securities, a negotiable document of title, money and chattel paper.

b) Perfection

The validity and perfection of security interests in tangibles is governed by the law of the jurisdiction where the charged property is situated at the time that the security interest attaches, whereas, the validity and perfection of a security interest in intangibles is governed by the law of the jurisdiction where the debtor is located at the time the security interest attaches.

c) Domicile of the Debtor

Except in Ontario, where a new set of rules has come into force (as further detailed below), under each PPSA, a debtor is deemed to be domiciled at its place of business or, if it has more than one place of business, at its chief executive office.

The application of this test in determining a debtor’s location has been a source of confusion. Considering the fact that the term “chief executive office” is not defined in the PPSA, and the dearth of judicial consideration in this regard, it is often unclear where a secured party is to perfect its security interest in transactions involving intangible property.

Even if “chief executive office” has been generally understood as meaning the place from which the corporation manages the main part of its business operations or other affairs, many secured parties have preferred to register security in every jurisdiction where the chief executive office could possibly be located as a precautionary measure.

d) Recent Amendments to the Ontario PPSA

As of January 1, 2016, amendments to the Ontario PPSA have come into force which provide for a clearer test to determine the domicile of the debtor. Such amendments allow for an easier assessment of the jurisdiction where security interests in intangible property, mobile goods and non-possessory security interests over negotiable documents of title, securities, instruments, and chattel paper should be perfected, which will increase certainty and reduce costs associated with unnecessary searches and filings.

The rules governing tangible property remain the same, be it that the validity and perfection of security interests in tangibles is governed by the law of the jurisdiction of where the charged property is situated.

Under the amended rules, in Ontario a debtor’s domicile is determined as follows:

Type of Debtor

Jurisdiction for Registration

Individual

Principal residence of the individual

Partnership (other than a limited partnership)

Province or territory in which the partnership agreement states the agreement in governed

Corporation, Limited Partnership or Organization that is incorporated, continued, amalgamated or organized under provincial or territorial law

Province or territory where the debtor is incorporated, continued, amalgamated or otherwise organized

Corporation incorporated, continued or amalgamated under federal law

Jurisdiction where the debtor’s registered office or head office is located

Registered organization organized under the law of a U.S. State

U.S. State where debtor is organized

Registered organization organized under the law of the United States of America

In the U.S. State that the federal law of the United States of America designates

In the U.S. State that the registered organization designates

Otherwise, in the District of Columbia

Trustee(s) acting for a Trust

Province or territory by which the trust instrument is governed

If none of the above apply

Jurisdiction where its chief executive office is located

Existing security interests that may extend beyond December 31, 2020, must be reviewed to ensure that they are registered in the appropriate jurisdiction under the new rules applicable in Ontario, thus allowing secured parties to maintain their security and priority.[8]

Until the other common law provinces implement harmonizing provisions concerning debtors with property in multiple jurisdictions, it is advisable for secured parties to search and register their security in several jurisdictions when it remains uncertain as to which province’s law governs. Accordingly, even if this process is cumbersome it would be prudent to register both in the jurisdiction where the principal place of business or the chief executive office of a corporate debtor is located and where the debtor is incorporated or organized, in case those common law provinces do not recognize the validity of a registration based upon the new Ontario rules.

2. Quebec[9]

a) Definitions

In Quebec, personal property (i.e. movable property) includes both tangible (i.e. corporeal) and intangible (i.e. incorporeal) property.

Personal property is defined as any property other than real property (i.e. immovable property)[10], whereas, real property is generally property that cannot be moved, such as buildings, land or any permanent constructions and works of a permanent nature forming an integral part thereof[11].

All personal property that is not intangible is deemed to be tangible. Intangible property is property having no physical existence. In Quebec, intangibles include rights of ownership of a claim, receivables and intellectual property rights.

b) Perfection

With respect to tangible personal property, similar to the PPSA, the CCQ states that the law of the jurisdiction in which the charged property is situated at the time of creation of the security agreement (i.e. movable hypothec) governs its validity and perfection (i.e. publication)[12]. The security interest is thus eligible for filing at the Quebec Register of Personal and Movable Real Rights (“RPMRR”) if such property is physically located in Quebec at the time the security interest is created.

As for intangible personal property and mobile goods[13] , the validity and perfection of the security is governed by the law of the jurisdiction of the domicile of the debtor (i.e. grantor) at the time of creation of the security[14].

c) Domicile of the Debtor

Under the CCQ, the domicile of a natural person is located at the place of his or her principal establishment[15] , whereas the domicile of a legal person is located at the place and address of its head office[16] . Such information concerning the address of a debtor’s head office is available on public record[17].

3. United States - UCC 9

As a result the revisions to Article 9 of the UCC, the law relating to personal property security interests in the United States is, for the most part, unified.[18]

The rule applicable to the perfection of all security interests, regardless of the type of personal property, is generally the location of the debtor[19]. This distilled rule reduces the number of fillings required, considering that only one filing at the debtor’s location is required, rather than in every state where property is situated.

Similar to the rules set forth above pursuant to the amended Ontario PPSA, the location of the debtor under the UCC is determined by type of debtors, and can by summarized as follows:

Type of Debtor

Jurisdiction for Registration

Individual

Principal residence

Registered organization (i.e. corporations, limited liability companies and limited partnerships)

State of registration

Non-registered organization

State in which their business is located, or if there is more than one place of business, the state where its chief executive office is located

Entities organized under federal law

Located according to the rules of the law under which the entity is organized. If no designation of location, located in the District of Columbia

Debtors located outside the United States

Located in the foreign jurisdiction if such jurisdiction has a public filing system meeting certain criteria set forth in the UCC. If not, the District of Columbia.

Conclusion

Inspired by the UCC, the amendments to the Ontario PPSA intend to simplify the rules applicable to taking and perfecting security interests. However, further uncertainty now arises from having inconsistent conflict of laws rules applicable throughout Canada. In fact, the Ontario amendments were legislated in 2006, but were then put on hold to allow for the other PPSA jurisdictions to similarly amend their own rules, with the intent of avoiding a situation where a debtor would be deemed domiciled in more than one PPSA jurisdiction.

Since Ontario has taken the lead in adopting simpler rules applicable in determining the location of a debtor’s domicile, despite the old rule still being applicable in the rest of Canada, it will be interesting to see if the other common law provinces will follow suit or otherwise maintain the status quo.

SUMMARY CHART

Common law Provinces PPSA

Ontario PPSA

Quebec

UCC

Perfection of security interest for tangible property

Laws of location of the collateral

Laws of location of the collateral (s. 5(1) PPSA)

Laws of location of the collateral (a. 3102 CCQ)

Laws of location of the debtor (UCC 9-301(1))

Perfection of security interest for intangible property

Laws of location of the debtor

Laws of location of the debtor
(s. 7(1) PPSA)

Laws of location of the debtor
(a. 3105 CCQ)

Laws of location of the debtor (UCC 9-301(1))

Debtor’s location (when debtor is a corporation)

Place of business or chief executive office (if more than one place of business)

Laws of incorporation
(s. 7(3) PPSA)

Head office (i.e. registered office) (a. 307 CCQ)

  • Registered corporation: Where formed or organized

(UCC 9-307(e))

  • Non-registered corporation: place of business or chief executive office if more than one place of business

(UCC 9-307(b)(2) and (3))

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