Bill 152: An Act to Modernize Various Acts Administered by or Affecting the Ministry of Government Services ("Bill 152")

On December 20, 2006, Bill 152 received Royal Assent. Bill 152 amends a number of Acts administered by the Ministry of Government Services, including the Personal Property Security Act (Ontario) ("PPSA"). The PPSA is Ontario's personal property registration legislation, which is the equivalent to Article 9 of the American Uniform Commercial Code . Bill 152 will assist in harmonizing Ontario's legislation with the PPSAs in other Provinces. Some of the key amendments to the PPSA, the majority of which are set to come into force on August 1, 2007, are described in this article.

Application of the PPSA to Long-Term Leases

One of the most important changes to the PPSA as a result of Bill 152 is the amendment of Section 2, which will expand the application of the PPSA to a lease of goods under a lease for a term of more than one year even though the lease may not secure payment or performance of an obligation. The effect of this amendment is significant: equipment lessors will now have to register their long-term leases in order to perfect their lease as a purchase-money security interest ("PMSI") under the priorities scheme of the PPSA. It will also be prudent for lessors to register their existing long-term leases if they have not already done so.

A number of definitions have been amended to accommodate this change. The definition of a "debtor" will now include a lessee of goods under a lease for a term of more than one year, and a "purchase-money security interest" will include the interest of a lessor of goods under a lease for a term of more than one year. A "lease for a term of more than one year" will be a defined term that includes a lease with an initial term of more than one year or a lease with an initial term and renewal terms collectively totalling more than one year, but does not include a lease by a lessor who is not regularly engaged in the business of leasing goods.

Although long-term leases will now be subject to the priorities scheme of the PPSA, the new Section 57.1 states that Part V of the PPSA, which sets out rights and remedies on default, applies to a security interest only if it secures payment or performance of an obligation. Thus, it appears that Part V is not intended to apply to true leases.

Conflict of Laws

Sections 7 and 7.1 of the PPSA state that the location of the debtor at the time the security interest attaches determines the applicable law that will govern the validity, perfection and priority of (1) a security interest in an intangible or goods that are of a type that are normally used in more than one jurisdiction, if the goods are equipment or inventory leased or held for lease by a debtor to others; and (2) a non-possessory security interest in an instrument, a negotiable document of title, money and chattel paper. Previously location was determined by the debtor's place of business or chief executive office.

These conflict of laws provisions will be amended by Bill 152 to define the location of a business debtor (including corporations, limited partnerships and organizations) by reference to the province, territory or U.S. state in which it was incorporated, continued, amalgamated or otherwise organized, as opposed to the debtor's place of business or chief executive office.

Therefore, in order to perfect a security interest in the type of collateral mentioned above, secured parties will now have to register in the debtor's jurisdiction of incorporation despite the fact that this may not be a jurisdiction in which the debtor has any assets. Registration in this situation will be critical for secured parties with an interest in the type of collateral mentioned above: although security interests in existing accounts would be perfected under the existing registration, in order to perfect an interest in any new accounts acquired after August 1, 2007, the secured party will need to register in accordance with the debtor's location as determined by Section 7(3), which may not be the same as the location of the debtor's chief executive office.

Enforceability of Security Agreements

Subsection 9(2) states that a security agreement is not unenforceable against a third party by reason only of a defect, irregularity, omission or error unless the third party is actually misled. This provision will be repealed by Bill 152 in order to eliminate the conflict that exists between this provision and clause 11(2)(a), which requires a security agreement to be in writing and contain a description of the collateral sufficient to enable it to be identified.

Subsection 9(3), which states that the failure to describe some of the collateral in a security agreement does not affect the effectiveness of the security agreement with respect to the collateral that is described, will also be repealed.

Protection of Buyers Not in Possession

Section 28 of the PPSA provides that a buyer of goods from a seller who sells the goods in the ordinary course of business takes them free from any security interest given by the seller even though it is perfected and the buyer has knowledge of such perfection, unless the buyer also knew that the sale constituted a breach of the security agreement. Bill 152 will add provisions to the PPSA providing that Section 28 will apply whether or not:

(a) the buyer took possession of the goods;

(b) the seller was in possession of the goods at any time

(c) title to the goods passed to the buyer; or

(d) the seller took a security interest in the goods,

unless the goods were not identified and agreed upon by the parties at the time the contract was made, or were not marked or designated to the contract.

The equivalent provisions for lessees of goods in the ordinary course of business will be similarly amended.

PMSI Notice

Subsection 33(1) will be amended to require a secured party registering a PMSI in respect of inventory to, before the debtor receives possession of the inventory, give notice in writing to every other secured party who has a registered interest in inventory or accounts receivables. Previously only notice to secured parties having a registered interest in inventory had to be notified.

Defences Available to Account Debtors Against Assignees

Subsection 40(1) will be amended to provide that an account debtor may set up by way of defence against an assignee of the debt,

(a) all defences available to the account debtor against the assignor arising out of the terms of the contract or a related contract, including equitable set-off and misrepresentation; and

(b) the right to set off any debt owing to the account debtor by the assignor that was payable to the account debtor before the account debtor received notice of the assignment.

A new Subsection 40(4) will be added to the PPSA, providing that a term in the contract between the account debtor and the assignor that prohibits or restricts the assignment of, or the giving of a security interest in, the whole of the account or chattel paper for money due or to become due or that requires the account debtor's consent to the assignment or the giving of a security interest, (a) is binding on the assignor only to the extent of making the assignor liable to the account debtor for breach of their contract; and (b) is unenforceable against third parties.

Electronic Registration

Section 46 of the PPSA will be amended to require all future financing statements and financing change statements to be registered electronically.

Elimination of the "Check the Box" System

Currently, a secured party has the option to describe the collateral that is the subject of the registration by providing a narrative description of such collateral in the "General Collateral Description" lines of the financing statement and checking all or some of the following collateral classification boxes: "Consumer Goods", "Inventory", "Equipment", "Accounts" and "Other". This system of describing collateral will be eliminated and secured parties will be required to provide a narrative description of their collateral. However this change is on hold until a later date.

Furthermore, if a secured party classifies the collateral as consumer goods, the financing statement will be deemed to have a registration period of 5 years unless a shorter period is indicated on the financing statement.

Exemptions from Seizure

A new Subsection 62(2) will be added to the PPSA in order to protect a debtor's personal and household goods from seizure. The provision will state that if any of the collateral in which the secured party has a security interest, other than a PMSI or a possessory security interest, is property that would be exempt under the Execution Act from seizure, that property is exempt from the rights of the secured party under the PPSA.

Acceptance of Collateral in Satisfaction of Secured Obligations

Upon the default of a debtor, if a secured party accepts the collateral in satisfaction of the obligation secured, the secured party must notify certain persons, who may object to the secured party's proposal within 30 days if it would adversely affect their interest in the collateral. Bill 152 will reduce this 30-day time period to 15 days. However, the affected person may make an application for an order by the Superior Court of Justice to extend this 15-day period.

Court Orders

Section 67 of the PPSA will be amended to provide that if a secured party has taken security in both real and personal property to secure payment or performance of the debtor's obligation, then upon application to the Superior Court of Justice, the court may make any order necessary to enable the secured party to accept both the real and personal property in satisfaction of the obligation secured or to enable the secured party to enforce any of its other remedies against both the real and personal property.

Service of Notices

The provisions of the PPSA regarding methods of service, which currently require certain notices to be served only by personal service or registered mail, will be amended to permit, in addition, delivery by prepaid courier, telephone transmission of a facsimile and electronic transmission.