Earlier this year we reported on the changes made to the Personal Property Security Act in Ontario and Alberta as a result of the enactment of the Securities Transfer Act in those provinces (link to previous article). A second set of changes to the Personal Property Security Act of Ontario (the "PPSA") that were enacted under the Ministry of Government Services Consumer Protection and Service Modernization Act, 2006, will come into force on August 1, 2007. Two important changes that have been identified with an asterisk below will come into force on a date yet to be determined. The latter change, dealing with changes to the requirements for the description of collateral, will become effective when the necessary changes have been made to Ontario’s PPSA registration system.
Many of these changes bring the Ontario PPSA more closely into line with the Personal Property Security Acts in force in the other provinces and territories, while others mark a departure from those other statutes. Legislative harmony among the PPSA jurisdictions continues to remain elusive.
The Principal Changes
Among the changes, the following will probably have the most impact:
- A security agreement will include a "lease for a term of more than one year" regardless of whether the lease secures payment or performance of an obligation. The interest of a lessor under such a lease will constitute a "purchase-money security interest" (PMSI) and the lessee thereunder will be a "debtor".
- A "debtor" may be a person who has an interest in the collateral but who does not owe any debt or other obligation to the secured party.
- Financing statements may now be registered only electronically. Forms will be completely replaced by prescribed electronic formats.
- A PMSI financier of inventory (including a vendor) must now give notice of their PMSI to secured parties who have prior registrations not only against "inventory" as a classification of collateral, but also "items or types of inventory" (even if the collateral classification of inventory has not been checked) or "accounts".
- Any prohibitions or restrictions on the assignment of money due or to become due under an account or chattel paper, if the whole of the account or chattel paper is assigned, cannot be enforced by the account debtor against the assignor (except for claims for breach of contract) and are unenforceable against assignees and any other third parties
- Documents and notices sent to and by secured parties and debtors may now be sent by fax and e-mail
- * Where "the debtor is located", which determines the law that governs a security interest in accounts and other intangible property, certain mobile goods and a non-possessory security interest in certain other collateral, will, in the case of corporations and other entities, no longer be based on a subjective determination of the location of a "chief executive office" or "place of business", but rather will, for the most part, be determined on the basis of clearly defined rules such as the jurisdiction of incorporation, continuance or amalgamation, if the debtor is a corporation
- * The current "check-the-box" collateral classifications on financing statements will be replaced by the requirement that the collateral be described by "item or type". These changes will be set out in a Minister’s order. If the new requirements are similar to those in the other PPSA jurisdictions, some descriptions will have to use prescribed words (e.g., if the security interest is over all of the debtor’s property) but language for other descriptions will have to be developed. Generally, however, the description of collateral will be much longer and will require careful review both when registering and conducting searches.
The Impact of these Changes
How some of these changes may affect your practices and procedures is discussed below.
Lease for a term of more than one year
Currently, only leases of personal property "that secure payment or performance of an obligation" constitute security agreements, and therefore require registration of a financing statement in order to protect the interest of the lessor in the leased property. In many cases, whether a lease secures payment or performance of an obligation is difficult to determine and therefore it has become common practice to register leases, particularly if there is an option to purchase. Also, when enforcing a lease, secured parties will often follow the procedures respecting default and realization imposed by the PPSA. After August 1, 2007, every "lease for a term of more than one year", whether it is a "financing lease" or a "true lease", will have to be registered, although the default and remedies provisions of the PPSA will not apply if the lease is a "true lease".
But a "lease for a term of more than one year" is not necessarily for an initial term of more than one year. It could have an initial term of less than one year if the lessee remains in uninterrupted possession of the lease property for a period of more than one year. As well, it will include a lease if the total of the original term and all renewal terms exceeds one year, but it will not include (i) a lease from a lessor that is not regularly engaged in the business of leasing (which may be difficult to rely on), or (ii) in most cases, a lease of household furnishings as part of a lease of land.
A debtor may have an interest in the collateral but may not owe the obligation that is secured
The definition of "debtor" has been changed to clarify that a debtor does not have to be liable for the payment or performance of an obligation owed to the secured party in order to create a valid security interest in collateral. Accordingly, there is no longer any doubt that a person who has an interest in property, but owes no obligation to the secured party, may grant security in that property for an obligation owed by a third party to the secured party. Currently, the careful approach has been to have the person granting the security also give a guarantee to the secured party (often with recourse limited to the collateral), thereby creating an obligation that is owed to the secured party by the grantor of the security. This will no longer be necessary, although it may still be useful to obtain a guarantee in order to be able to enforce a covenant to pay against the guarantor.
Currently a PMSI notice only needs to be given to a secured party who has registered a financing statement against the debtor in which the collateral is classified as "inventory". However, beginning August 1, 2007 and in advance of the change from the "check-the-box" collateral classification to a narrative description of collateral, PMSI notices will have to be given to a prior registered secured party if their registration relates to collateral of the same item or type even though they may not have checked the inventory collateral classification. Collateral descriptions in prior registrations will therefore have to be reviewed carefully to determine whether the same items or type of "inventory" are the subject of a security interest even if the collateral is incorrectly classified as equipment on the financing statement.
An important new requirement is that a PMSI notice will also have to be given to a secured party claiming a security interest in "accounts" even though the prior registrant has not registered against inventory. If notice is not given, then the account financier will have priority over the inventory PMSI creditor’s claim to proceeds of inventory by virtue of the account financier’s prior registration.
Where the debtor is located
If the collateral is "intangibles" (primarily accounts and contract claims), mobile goods (those normally used in more than one jurisdiction), if the mobile goods are equipment or leased goods, or if the security interest is a non-possessory security interest in instruments, negotiable documents of title, money or chattel paper, the location of the debtor will determine the law that is to govern the validity of the security interest and matters related to perfection.
If the debtor is an individual, the rule will be the same — the debtor will be located where that person has his or her principal place of residence. However, for debtors other than individuals, the rules will change. Whereas in the past reference was made to a place of business or chief executive office or debtors other than individuals, that fact-based assessment will be replaced by a much clearer set of rules based on the agreement or government document (i.e., articles or letters patent) under which the entity was created or organized. The principal rules for determining where a debtor is located will be as follows:
- A corporation or limited partnership that has been incorporated, continued, amalgamated or otherwise organized under a provincial or territorial law will be located in that province or territory.
- A corporation incorporated, continued or amalgamated under a federal law will be located where the registered office or head office of the corporation is located as set out in its articles, letters patent, incorporating statute or other constating document under which it was incorporated, continued or amalgamated, or, failing that, as set out in its by-laws.
- A general partnership will be located in the province or territory, the laws of which are to govern the partnership, as stated in the partnership agreement.
- A corporation and other registered organization organized under the laws of a state of the United States will be located in that state. A corporation and other registered organization that is organized under United States federal law will be located either in a particular state if the law designates a state or permits the corporation or other organization to designate a state, or, failing that, in the District of Columbia.
- Trusts will be located in the province or territory, the laws of which are stated to govern the trust, or, if not stated, the province or territory in which the administration of the trust by the trustees is principally carried out.
The grace periods provided under the current law for the continued perfection of security interests where there has been a change in the location of a debtor will continue to apply, and so a secured party will have up to 60 days after a corporate debtor, for example, has changed its registered head office in order to perfect its security interest in another jurisdiction, unless it receives notice of a debtor’s relocation, in which case the grace period will be 15 days.
Even though a corporation’s status is suspended or revoked, for example, by failing to file annual returns, that will not affect its location for purposes of the PPSA.