The Ontario Personal Property Security Act1 (“PPSA”) regulates the creation and registration of security interests in personal property in Ontario. Amendments to the PPSA, having important practice implications, are underway. First, on December 31, 2015, Sections 7(3), 7(4), 7(5), 7.2 and 7.3 of the PPSA will come into force to establish a simplified method for ascertaining the location of a debtor for determining the jurisdiction governing the validity, perfection and priority of security interests in specific types of collateral. Second, as of November 16, 2015, subsections 51(5), 51(6), and 54(2) of the PPSA were repealed, eliminating the five-year maximum registration period pertaining to collateral that is or includes consumer goods.

Part 1 - Amendments to the PPSA debtor location rules effective December 31, 2015

Under the PPSA, ascertaining a debtor’s location is critical for identifying what law governs the validity, perfection and priority of security interests in intangibles and mobile goods, and non-possessory security interests in instruments and chattel paper (referred to in this article collectively as "intangible collateral"). The location of the debtor also determines the law governing the perfection by registration of a security interest in investment property. In short, the location of a debtor dictates where a secured party should conduct PPSA searches and register PPSA financing statements relating to security interests in that debtor’s intangible collateral.

Under the current version of subsection 7(3) of the PPSA (the “existing rules”), generally, a debtor is deemed to be located at the debtor’s place of business if there is one, at its chief executive office if it has more than one place of business, and, at the debtor’s principal place of residence if the debtor is an individual.

While this may seem like a straightforward and instructive regime, in practice it necessitates a subjective analysis and is, at times, impractical. As a starting point, neither the term “place of business” nor “chief executive office” are defined under the PPSA, nor are these locations generally identified in public records. Consider, for example, a corporate debtor that conducts administrative, management and executive functions from offices located in British Columbia, Saskatchewan and Ontario. In practice, under the existing rules and in these types of scenarios, a secured party would have to use its judgment (or rely on information provided by the debtor) to determine which location is the debtor’s chief executive office and register a PPSA financing statement in that jurisdiction. In an enforcement scenario, the secured party is counting on the court arriving at the same conclusion based on an equally unstructured analysis. Failing to file in the correct jurisdiction is a real risk for secured parties and could result in an unperfected security interest. Under the existing rules, secured parties typically take a cautious approach and register PPSA financing statements in each jurisdiction where any of a debtor’s places of business could reasonably be construed to be its chief executive office. This is costly, time consuming and administratively burdensome.

Effective December 31, 2015, subsection 7(3) of the PPSA will be repealed and new subsections 7(4), and 7(5), along with new sections 7.2 and 7.3 (collectively, the “new rules”) will be added. Pursuant to the new rules, the location of a debtor is dependent on the organizational form of the debtor and information available in public records or the debtor’s constating documents, as follows:

Click here to view table.

Fortunately, these new rules, which will be effective December 31, 2015, include some transitional directions as to whether the existing rules or the new rules will govern the validity, perfection and priority of existing and new security interests in intangible collateral.

Validity: In the case of a security agreement entered into before December 31, 2015 (or entered into before that date and subsequently amended without including additional collateral), the existing rules will be applied to determine whether a valid security interest was created. For instance, if a British Columbia corporation having a chief executive office in Ontario grants a security interest in its intangible collateral before December 31, 2015, the validity of that security interest will be governed by the existing rules under the Ontario PPSA based on the location of the corporation’s chief executive office. If that same corporation granted a security interest in its intangible collateral after December 31, 2015, validity under Ontario law would be governed by the British Columbia PPSA based on the corporation’s jurisdiction of incorporation.

Perfection: After December 31, 2015, the new rules will determine the law that governs the perfection of a security interest in intangible collateral, regardless of when the security interest comes into existence (i.e. when attachment occurs). The transitional rules provide that a security interest that was perfected under the existing rules prior to December 31, 2015 will cease to be perfected on December 31, 2020, or earlier if perfection ceases under the existing rules (when a registration expires or is discharged, for example) and even if the term of the corresponding registration extends beyond December 31, 2020. In short, with respect to perfection, secured parties have a five year grace period to conform to the new rules.

With respect to perfection, the transitional rules are somewhat ambiguous, presenting some potential pitfalls for secured parties. First, even if a debtor’s location will be the same under the existing rules and the new rules (for example, an Ontario corporation, having a chief executive office in Ottawa), it is possible that a security interest granted by that debtor on December 15, 2015 and for a period of 10 years will lapse on December 31, 2020. To avoid this and to be deemed continuously perfected and to preserve its priority, the secured party may be required to re-register under section 7.2(8) of the PPSA before December 31, 2020. While having to re-register in such a scenario is unlikely to be the legislative intent, the wording of the new rules leaves this open to such an interpretation.

Second, if in the above example the debtor was a Saskatchewan corporation, having a chief executive office in Ontario, and that corporation granted a security interest on December 15, 2015 for a period of 10 years, perfection, under the existing rules, would be effected under the laws of Ontario (i.e. the location of debtor’s chief executive office). To prevent that registration from lapsing, the secured party would, on or before December 31, 2020, re-register under section 7.2(8) of the PPSA pursuant to the new rules. Under the new rules, the location of the debtor would be Saskatchewan (i.e. the debtor’s jurisdiction of incorporation) and perfection would be governed by the Saskatchewan PPSA. Nevertheless, if at the time of re-registration, the Saskatchewan PPSA has not been amended to reflect the new Ontario rules, then the Saskatchewan PPSA would deem the location of the debtor to be Ontario (i.e. the location of debtor’s chief executive office) and direct the secured party to the Ontario PPSA. Helpfully, section 8.1 of the Ontario PPSA makes clear that, reference to the law of a jurisdiction is a reference to the internal law of that jurisdiction, excluding its conflict of law rules. In this instance, that means that the secured party would have to register under the Saskatchewan PPSA to ensure perfection in Ontario. To be sure, until the conflict of laws rules under each of the PPSA regimes across Canada are harmonized, it will be prudent for secured parties to register in the jurisdictions dictated by the existing Ontario rules and the new Ontario rules (in the above example, in Ontario and in Saskatchewan).

Priority: The existing rules apply for the purpose of ascertaining the location of a debtorto determine the law governing the priority of a security interest in intangible collateral perfected before December 31, 2015, in relation to another security interest granted before December 31, 2015 in the same intangible collateral. However, if a security interest is perfected on or after December 31, 2015, in accordance with the new rules, the new rules will apply for the purpose of ascertaining the location of the debtor to determine the law governing the priority of that security interest in relation to any other security interest in the same collateral.

While this new regime is expected to eliminate some guesswork, it will be important for secured parties to familiarize themselves with the new rules and remain mindful of the transitional implications. As a starting point, secured parties should:

  1. assess which of their existing PPSA registrations should be re-registered, determine in which jurisdictions such re-registrations should be made, and complete such re-registrations prior to December 31, 2020; and
  2. update their due diligence practices to ascertain the location of debtors in accordance with the new rules for all PPSA searches and registrations made after December 31, 2015.

Part 2 - Elimination of the consumer goods five-year registration limit effective November 16, 2015

Subsections 51(5), 51(6) and 54(2) of the PPSA—repealed November 16, 2015—provided that, where the collateral listed in a financing statement (or a notice of security interest with respect to fixtures registered on title to real property), is or includes consumer goods,2 the registration period of that financing statement could not exceed five years. If such a financing statement (or a notice of security interest with respect to fixtures) included a registration period which exceeded this five year limit, then the registration period was statutorily reduced to five years. Put another way, a financing statement having a ten year registration period and relating to consumer goods, would be deemed to have a registration period of only five years. Similarly, the extension of a financing statement (or a notice of security interest with respect to fixtures) could only be made for a period of up to five years and, importantly, such renewal period would begin immediately upon registration of the renewal (and not at the end of the initial five year period). The main purpose of these rules was to protect consumer debtors from excessively lengthy registration periods.

Following the repeal of subsections 51(5), 51(6), and 54(2) of the PPSA, registrations and renewals pertaining to consumer goods collateral can be made without regard to any limit on registration periods. This should be a welcomed change for secured parties because:

  1. Secured parties can now synchronize the terms of their PPSA registrations with the terms of their underlying secured obligations. For example, if a lender extends financing to a borrower, repayable in seven years and secured by the borrower’s consumer goods, the lender can now file a PPSA financing statement for seven (or more) years to match the terms of its financing rather than five years.
  2. These amendments eliminate instances where a secured party, unfamiliar with the five-year registration limit, registers a financing statement for a period greater than five years, only to be unknowingly unsecured for the balance of its registration period.
  3. These amendments reduce the administrative burden and associated costs of having to file multiple renewals to achieve a desired registration period.
  4. These amendments should be helpful to parties managing registrations across various Canadian jurisdictions since Ontario was the only jurisdiction in Canada with a maximum registration period for filings relating to consumer goods.

Importantly, the PPSA does not include transitional rules for these changes, nor does it state that these changes are retroactive. In effect, a registration that was filed prior to November 16, 2015 that relates to consumer goods and has a registration period that is greater than the extinct five-year limit may now endure the full term of the longer registration period and will not be statutorily reduced.