The basic rule of priority for security interests under modern personal property security laws is that the first to register has priority. Of course, this rule has exceptions which arise through the application of other priority rules under the applicable Personal Property Security Act (“PPSA”) or under other laws. Further, other factors, such as priority agreements among secured creditors, may alter the priority of these registrations. However, before priority even becomes an issue, one must have a valid registration. Without a valid registration, one loses priority.

One reason why a registration may not be valid is that the underlying instrument in respect of which the registration was made does not constitute a valid security agreement under the PPSA. In a relatively recent case in Alberta, one such security agreement fell under the scrutiny of the courts. The judge's decision provided some lessons in respect of what constitutes a valid security agreement and why it is important to ensure that a secured lending transaction has or will occur with some degree of certainty.  

In Matco Capital Ltd. v. Ramparts Energy Ltd., the registrations of financing statements at the Personal Property Registry by holders of special warrant certificates had been ordered to be discharged for failing to prove that a valid security agreement existed to support the registrations. The registering parties held special warrant certificates that were eventually converted into preferred shares that were both retractable and convertible. The key feature of these preferred shares was that the holders could request that the corporation redeem the shares at a certain date in the future. If the corporation could not repurchase those preferred shares on that future date, the price of any unredeemed shares was to become a debt. On becoming a debt, and only from that point on, the corporation granted the shareholders (now creditors) a security interest in its personal property.

The key issue was whether this future debt transaction and the future granting of this security interest constituted a security agreement which could justify the registration of a financing statement prior to that future date.

In the end, the special warrant certificates/preferred shares did not constitute security agreements under the PPSA of Alberta. Lenders (or, more appropriately, future lenders) are not allowed to register financing statements in anticipation of a future secured debt transaction that is subject to future uncertain events. Unfortunately, the court did not comment further to indicate what level of certainty is required.

The PPSA of Alberta, like in other jurisdictions, allows lenders to register financing statements in advance of the signing of documents or the advance of a loan. This is typically seen as a practical and efficient solution to facilitate lending transactions. If the deal does not go through, the registration can be discharged.

Registering a financing statement in advance of a secured transaction that may or may not occur in the future is considered an abuse of this privilege. Consider perfected security interest prior to the retraction/conversion date. The shareholders would have been the first to register, but the other lender would have perfected its security interest first. Yet, the first to register would have priority. The shareholders would have leap-frogged the subsequent lender with a security interest that may or may not come to fruition.

Registrations are not always as they seem. Every now and then, they may be challenged and priority may be at issue. Priority is not necessarily determined by the date of registration. If the underlying interests do not support the registration that is sought, the registration may be discharged and priority may be lost. what would have happened if the shareholders had retained their registrations and another lender had registered a financing statement later in time and held a perfected security interest prior to the retraction/conversion date. The shareholders would have been the first to register, but the other lender would have perfected its security interest first. Yet, the first to register would have priority. The shareholders would have leap-frogged the subsequent lender with a security interest that may or may not come to fruition.

Registrations are not always as they seem. Every now and then, they may be challenged and priority may be at issue. Priority is not necessarily determined by the date of registration. If the underlying interests do not support the registration that is sought, the registration may be discharged and priority may be lost.