Late in 2018, the Saskatchewan Legislature introduced Bill 151, which amends The Personal Property Security Act, 1993 (Saskatchewan) (the SPPSA). To inform you about the upcoming changes and how they may impact you, our Saskatchewan Financial Services team have been tracking the progress of Bill 151 and have brought you a number of posts that discuss the amendments.
To follow our posts, you need only to go to one place, this Financial Services & Insolvency Communiqué, which includes broad descriptions of various aspects of the amendments and links to all of our posts covering many of the amendments in detail – we have been updating it with new links and status reports on the progress of Bill 151 on an ongoing basis.
In case you missed it, Bill 151 was passed into law on March 12, 2019. It awaits Royal Assent and a date to be set for it to come into force.
How does a lapse in perfection after enforcement measures have been initiated affect priority?
In this post, we will make several references to the Report or the CCPPSL Report, which was developed to recommend changes to Canadian Personal Property Security Acts. The Report is a highly valuable resource when analyzing Bill 151, and particularly in the case of this post we will rely on it heavily.
Generally, a secured party perfects its security interest in collateral by registering its interest at the Personal Property Registry (PPR). Subject only to a few exceptions, priority between secured parties is determined based on the party who is first to register. All of the Canadian PPSAs are predicated on the concept that in most circumstances, registration at the PPR is the key factor in determining what party or parties have priority.
Registrations can lapse or be inadvertently discharged, in which case pursuant to section 35(7) of the SPPSA, the secured party has a 30 day window to restore the registration.
That ability to re-register, while a fundamental part of the system, can lead to problematic scenarios that are not always resolved easily. Experts interested in the area do not even necessarily agree on how those problematic scenarios should be resolved as a matter of policy.
As discussed in the CCPPSL Report, various court decisions have held that the time for determining perfection is when enforcement measures are taken by a secured party. For example, such enforcement measures could take the form of seizure of collateral or appointment of a receiver. In such cases, the date of enforcement has generally been treated by courts as the date for determining priority. In the case of receiverships, appointment of the receiver will represent the start of enforcement. In the case of seizure and sale of collateral through a bailiff, the date of seizure will likely be the date of enforcement.
Consider the following example set out in the Report. There are two secured parties, SP1 (first in priority) and SP2 (next in priority). SP1 commences enforcement proceedings, then its registration lapses, and then it re-registers within the 30 days (or perhaps does not re-register). Does SP1 maintain priority, or does SP2 take over first priority?
Under the general judicial rule that priority will be determined as of the start of enforcement, SP1 would maintain priority because it had priority when enforcement began. If SP1 never re-registers, that would seem to be the wrong result.
Section 35(7) contains an exception to the grace period rule, which is that if another secured party (i.e., SP2) makes an advance during the temporary period of imperfection, the intervening advances will have priority. If the date of enforcement governs priority and SP2 had made an advance while SP1 was unperfected, SP1 could have full priority under the judicial rule even though SP2 advanced at a time when SP1 was unperfected. That would seem to be the wrong result, as SP2 could have searched at PPR and SP1 would not have been registered at the time.
As the Report points out, changes in priority upon or after a secured party begins enforcement can have expensive consequences. In the view of the Report’s authors, the case law suggesting that the status quo as of the date that enforcement begins will be the determining factor is inconsistent with the PPSA’s fundamental principle that priority depends on attachment and perfection of security interests.
As a result, the Report recommended changes to the approach taken by courts to such situations, and Saskatchewan has introduced amendments through Bill 151 to help legislate those changes.
Changes under Bill 151
Under Bill 151, the following is added to the PPSA as section 35(11):
(11) The priority status of a security interest in relation to another security interest in the same collateral as provided in this or any other Act is not affected by enforcement measures taken by the holder of the other security interest.
The new language simply states that the date of enforcement does not fix the respective priorities of secured parties. The Report’s authors suggest that this amendment will result in simple and clear interpretation by courts as to what the priority would be in a given situation. Absent the detailed explanations provided in the Report, we are not as confident on that point, but perhaps courts will take their guidance from the Report and develop a body of jurisprudence consistent with the Report’s analysis.
According to the Report, the amendment “has the effect of fixing priority as between security interests at the time that title to the collateral is transferred to a buyer or transferee in enforcement proceedings”, though the basis for that statement is not entirely clear from the Report.
What is clear is that each secured creditor needs to take appropriate steps to ensure that its PPR registrations are maintained and renewed as needed, and that the vigilance with respect to such registrations cannot end when a creditor starts enforcement steps. Registrations need to be maintained throughout insolvency proceedings until all relevant collateral has been disposed of.
How can secured parties protect themselves from the consequences of a change in priority after enforcement has been initiated?
To protect against unintended consequences, secured parties should take the following steps:
- If intending to start enforcing their security, secured parties should ensure that their interest is registered and that they are aware of the date of lapse so that they can take steps to protect their interest from any completing claims;
- If a perfected interest lapses, a secured party should re-register immediately, at a minimum before expiry of the grace period provided in subsection 35(7) of the PPSA;
- Maintain monitoring systems to keep notified of when each registered security interest will expire; and
- Ensure that they have priority over collateral before to agreeing to sell it to a third-party purchaser.
Bill 151 also amends section 59(6)(b) of the SPPSA to provide that any secured party who intends to dispose of collateral must give notice to all secured parties with an interest in the collateral, including those who are in priority positions (as opposed to the old language requiring that notice be given to “a creditor or person with a security interest in the collateral whose interest is subordinate to that of the secured party”). This change will help alert to secured parties with priority of enforcement actions taken concerning their debtors, if they are not already aware.