If a financing statement registered under the Ontario Personal Property Security Act does not set out, in the manner required by the Ontario PPSA, all of the collateral in which a secured creditor is taking a security interest, then the secured creditor risks losing priority vis-à-vis third parties with respect to collateral not so set out. Such was the result in the Ontario case of Re Bankruptcy of Duesling Transportation Inc. where it was held that two secured creditors did not have priority over certain collateral because such collateral was not properly set out in the financing statement and the error or omission was not otherwise cured by the Ontario PPSA.
Deusling is a reminder that the Ontario PPSA requires all of the collateral classification boxes (or box where only one applies) on an Ontario financing statement in which a security interest is taken to be "checked off" and that a secured creditor should not instead rely on a general collateral description to set out such collateral. It also affirms one of the purposes of the Ontario PPSA – to provide a sufficient level of information so that a subsequent reader can make an informed decision as to whether or not to request waivers or estoppels of a secured creditor.
In Deusling, Doug and Susan Duesling sold shares to Duesling Transportation Inc. for $1,500,000. As security for the payment of the unpaid portion of the purchase price, the company gave the Dueslings a promissory note and a security agreement granting a security interest in the company's accounts and equipment. The Dueslings registered a financing statement under the Ontario PPSA. The Duelings' financing statement had the collateral classification box "other" checked off and the general collateral description box contained "General Security Agreement dated June 28, 2007." The collateral classification boxes "accounts" and "equipment" were not checked off. The company subsequently went bankrupt and the trustee in bankruptcy disallowed the Dueslings' claim that they had a perfected security interest in the accounts and equipment of the Company in priority to the trustee in bankruptcy.
Unique to Ontario, and until certain provisions of Bill 152 are proclaimed into force eliminating Ontario's "check the box" system, an Ontario financing statement contains collateral classification boxes ("consumer goods," "inventory," "equipment," "accounts" and "other") and a general collateral description box. Currently, the Ontario PPSA requires that a financing statement set out (by checking off the collateral classification box or boxes), among other things, the classification of the collateral as consumer goods, inventory, equipment, accounts or that the classification is other than consumer goods, inventory, equipment or accounts or any combination thereof. A description may be entered in the general collateral description box but it is not required. The court held that the Dueslings' did not have a perfected security interest in the accounts and equipment of the Company in priority to the trustee in bankruptcy because "accounts" and "equipment" were not checked off.
The Ontario PPSA contains a cure provision that provides that a financing statement is not invalidated nor is its effect impaired by reason only of an error or omission in the financing statement or in its execution or registration unless a reasonable person is likely to be misled materially by the error or omission. The court affirmed that the test is objective (not subjective) and that setting out the classification of the collateral by checking off all of the appropriate boxes (or box) is material since it is required by the Ontario PPSA. The Dueslings argued that a reasonable person would not be misled since "General Security Agreement dated June 28, 2007" would have prompted the need to make inquiries of them as to what collateral they had a security interest in. The court rejected this argument and held that the cure provision did not apply because, for example, a reasonable person viewed objectively might conclude that "General Security Agreement dated June 28, 2007" only referred to the collateral represented by the checked collateral classification box "other" (and notwithstanding the title "General Security Agreement" since it is not always the case that a "General Security Agreement" actually contains a grant of security in all of a debtor's personal property). While the court noted that it is possible for the cure provision to apply where the general collateral description is sufficient it held that the Dueslings' general collateral description was not a description of the collateral at all but a description "of the nature of their security interest." Accordingly, the Dueslings' error or omission could not be cured and the Duelings did not have a perfected security interest in the accounts and equipment of the company in priority to the trustee in bankruptcy .