Recent amendments to Ontario’s Personal Property Security Act1 (the “PPSA”) to accommodate electronic chattel paper will expedite the process of financing and securing electronic chattel paper, while modernizing Ontario’s PPSA legislative regime.
“Tangible” and “Electronic” Chattel Paper
Following in the footsteps of amendments to Saskatchewan’s Personal Property Security Act and Article 9 of the United States Uniform Commercial Code (the “UCC”), amendments to Ontario’s PPSA2 adopt the concept of perfection by control of electronic chattel paper. The amendments will allow for chattels to exist both in a tangible (paper) form and electronically, changing the definition from “writing” to “record”.3 This evolution will significantly impact the process and speed for creditors and lenders to secure and finance security interests in electronic chattel paper.
Perfection by Control of Electronic Chattel Paper
Possession is a key concept in Section 22(1) of the PPSA, which provides for perfection by possession of a security interest in tangible chattel paper.4 While “possession” is not defined in the PPSA, it is interpreted as physical control of the document.5 Amendments to the PPSA include a new provision providing an equivalent to perfection by control for electronic chattel paper.6 In order to establish perfection by control of electronic chattel paper, six criteria must be met, as set out in subsection 1(3) of the PPSA:
- a single authoritative record of the electronic chattel paper exists that is unique, identifiable and unalterable;
- the authoritative record identifies the secured party as the transferee of the record;
- the authoritative record is communicated to and securely maintained by the secured party or the party’s designated custodian;
- copies of or amendments to the authoritative record that add or change an identified transferee of the authoritative record can be made only with the consent of the secured party;
- each copy of the authoritative record and any copy of a copy is readily identifiable as a copy that is not the authoritative record; and
- any amendment of the authoritative record is readily identifiable as to whether it is authorized or unauthorized.
Under the current PPSA, “possession” is required to obtain a superior priority status in a security interest in tangible chattel paper as a purchaser of tangible chattel paper.7 Priority rules under the PPSA have been amended to account for electronic chattel papers. Moving forward, a purchaser (i.e. buyers and lenders) of chattel paper will have priority over any security interest so long as the purchaser either has possession of the tangible chattel paper, or has control through perfection of the electronic chattel paper.8
In order to address possible conflict from simultaneous existence of both forms of chattel paper, a new priority rule has been included. Section 28(3.1) of the PPSA provides that, in the event the rights of a tangible chattel paper are transferred in the form of an electronic chattel paper for new value and in the ordinary course of the purchaser’s business, but then are subsequently transferred to a different party by the tangible chattel paper who takes possession of it for new value and in the ordinary course of that party’s business, the purchaser of the tangible chattel paper will take priority over the purchaser of the electronic chattel purchaser, so long as the tangible chattel paper does not indicate that it has been assigned to anyone other than the purchaser.9
While it is currently unclear when these amendments will come into force, these changes to the PPSA will have the effect of modernizing Ontario’s PPSA regime, bringing it in line with the UCC and reducing costs facilitating chattel paper financing.
*Portia Biswas is a 2019 summer student at Aird & Berlis LLP.