As part of the Ontario government’s continuing efforts to update and modernize business law, more than 30 provincial statutes have been amended by An Act to modernize various Acts administered by or affecting the Ministry of Government Services (formerly Bill 152) (the “Act”).
The Personal Property Security Act (“PPSA”) is one of the statutes substantially amended by the Act. In this abridged article, a few of the key changes that have practical, everyday significance will be briefly canvassed.
Definition of “Debtor”
The Act expands the definition of “debtor” to include a person who “owns or has rights in the collateral, including a transferee of or a successor to a debtor’s interest in collateral.” Of significance, the new definition expressly contemplates that the person who owes payment or other performance of the obligations secured may be different than the person owning or having rights in the collateral. From a practical perspective, this will obviate the need to obtain a guarantee from a person owning collateral where the sole reason for such guarantee is to enable the secured party to obtain a valid security interest in such collateral.
For example, when a shareholder of a borrower is required to pledge shares as security for a loan to the borrower but is not otherwise required to guarantee the indebtedness, we often obtain a “limited recourse guarantee” to create an obligation that can be secured by the share pledge. With the extension of the definition of debtor contained in the Act, such shareholder will simply be able to grant a pledge without having to give a limited recourse guarantee.
Leases for a Term of More Than One Year
Another important change to the PPSA made in the Act is that the PPSA will apply to leases for a term of more than one year. The PPSA will apply to such leases “even though the lease may not secure payment or performance of an obligation.” The issue of whether a lease is a “true lease” or a “financing lease” has been the subject of considerable litigation over the years. Since all leases (regardless of type) with a term of more than one year will be subject to the PPSA, lessors (or their counsel) will be required to file financing statements and otherwise comply with the provisions of the PPSA in respect of such leases. Counsel will no longer have to analyze factors such as the identity of the lessor, the value of any purchase options and intention of the parties in determining whether registration of a financing statement is necessary to protect the lessor’s interest.
It is important to note that the term “lease for a term of more than one year” includes, in certain circumstances, leases for one year or less. For example, if a lease provides that it is renewable for one or more terms at the option of one of the parties or by agreement of all of the parties and therefore could extend beyond one year, it will be deemed to be a lease for a term of more than one year for purposes of the PPSA. Despite this amendment, however, the Act adds new section 57.1 to the PPSA, which provides that the rights and remedies on default, as set out in Part 5 of the PPSA, only apply to leases that secure payment or performance of an obligation.
Therefore, where there is a “true lease,” the rights and remedies of the parties after default will continue to be determined outside the PPSA.
Transactions in the Ordinary Course of Business
Section 28 of the PPSA sets out various provisions to protect a buyer of goods who purchases from a seller who sells the goods in the ordinary course of business. Such a buyer receives the goods free of any security interest granted by the seller, even a perfected security interest of which the buyer is aware. The Act will add to this protection by providing that it applies whether or not (i) the buyer takes possession of the goods, (ii) the seller was in possession of the goods at any time, (iii) title to the goods passed to the buyer, or (iv) the seller took a security interest in the goods. These changes are reflective of the Ontario government’s policy of protecting consumers over secured parties.
The Act makes a significant change to the provisions and procedures relating to purchase- money security interests (“PMSI”) in inventory. One of the sources of conflict under the existing PMSI rules is between inventory financiers and receivables financiers. Since a secured party which follows the rules relating to inventory PMSIs gets a priority in respect of such inventory and the proceeds thereof, a secured party which finances the accounts receivable of such debtor could lose its priority with respect to accounts receivable purchased or financed by it. More troubling, this could happen without its knowledge. Since the inventory financier is only required to send a PMSI notice to prior secured creditors who have checked the “inventory” box on the financing statement, receivables financiers are not necessarily notified of the PMSI being claimed in the inventory and its proceeds (including the receivables arising from the sale of such inventory). Under the Act, a secured party seeking to obtain a PMSI with respect to inventory will be required to give notice to all secured creditors with a prior registered security interest in inventory and accounts. This will be a fundamental change in the manner in which inventory financiers protect their interests.
Service of Notices
As another illustration of the Act’s modernization of business law, Section 68 of the PPSA will be amended to update the means by which notices and documents may be sent, and will include the sending of notices by fax or electronic transmission (in addition to personal service, prepaid courier and registered mail). Section 68 will also be amended to provide for the deeming of receipt of notices; of significance is the fact that the amendments will deem inventory PMSI notices to be delivered upon expiry of a 10-day period following registration of registered mail, if delivered in that fashion, or upon actual receipt or the first business day after, whichever is earlier, of transmission by fax or electronic transmission. This amendment will create certainty for inventory financiers as to when the priority of the PMSIs will commence.
There are a number of additional changes to the PPSA in the Act, including amendments to the conflicts of laws provisions, and the fact that registration will no longer be permitted in paper form; only electronic registrations will be accepted. Furthermore, the commentary from the government that accompanies the Act indicates that the system for registration in Ontario of “checking the boxes” on a financing statement will be replaced with a system requiring the secured party to describe the collateral in which it has a security interest (as is the case will all other provinces and territories in Canada). The timing for this change is not yet known and depends, in large part, on the government ensuring that its computer system is able to handle this change.