In a pair of companion cases, the Supreme Court of Canada unanimously turned down an opportunity to patch over a priority lacuna in the federal Bank Act, S.C. 1991, c. 46 and, instead, held such security could rank after unregistered security granted under Saskatchewan’s Personal Property Security Act, S.S. 1993, c. P-6.2. In doing so, the Court (quite rightly) rejected a judicial fix and instead dropped the problem squarely at the feet of Parliament to repair. The decision has national application given the similarity in PPSA regimes across the country. Some report that the decision has “destroyed Bank Act security” and others wisely encourage banks to register their security under the applicable PPSA regime.
The decisions, Bank of Montreal v. Innovation Credit Union 2010 SCC 47 and Royal Bank of Canada v. Radius Credit Union Limited 2010 SCC 48, both dealt with the priority of unregistered PPSA security over subsequently granted (and registered) Bank Act security. In both cases, debtor farmers obtained loans by granting Bank Act security but neglected to tell their bankers of the earlier unregistered PPSA security they had given. Following default, their loans were called and the issue became which creditor took priority to the collateral which, in one of the cases, was also after-acquired?
The Court held that despite the provincial security being unregistered, it still took priority. As the Bank Act is silent on the issue of priority over unregistered interests, and since property rights are a provincial power, the Court turned to the Saskatchewan PPSA to sort out the mess. Under provincial law, the banks could not take any greater interest in the property than the debtor had to give at the time the security was taken. When the Bank Act security was granted, the debtors had already pledged their interest to the credit unions. For the after-acquired property, the credit union had obtained an “inchoate proprietary interest in (the) collateral” which crystallized when the after-acquired assets were purchased. The credit union had this interest before the bank.
The SCC did not have kind words for the Bank Act, calling it “old and somewhat archaic”. On the other hand, the various provincial personal property security statutes “greatly clarified, simplified, and rationalized the law of secured lending in personal property”. As Christine Kellowan notes, whether Parliament will step in to enact a rule to provide priority for this “archaic legislation” will be a matter of future debate. What ever else, chartered banks will want to consider carefully the possible existence of unregistered PPSA security in the lending analysis and take steps to protect against it.