- Bank of Montreal v Innovation Credit Union, 2010 SCC 47; on Appeal from Saskatchewan C.A. 2009 SKCA 35, 324 Sask. R. 160
- Royal Bank of Canada v. Radius Credit Union Ltd., 2010 SCC 48 ; on Appeal from Saskatchewan C.A. 2009 SKCA 36, 324 Sask. R. 191
The Supreme Court of Canada upheld the Saskatchewan Court of Appeal decisions in these two cases in favour of the prior, unperfected security agreements held by the credit unions and found the Banks were subordinate under their subsequent, registered Bank Act security.
In the Innovation case, the prior security agreement of the credit union covered the same equipment as made subject to the Bank’s section 427 security.
In the Radius case, the credit union had a prior general security agreement with a security interest over after acquired property of the debtor, which subsequent assets became subject to that Bank’s section 427 security.
The Supreme Court of Canada held that the first in time security agreements prevailed as the Bank could not acquire any greater interest than the debtor had when the section 427 security was subsequently created. The Court looked to the Bank Act to see if there was a priority rule that dealt with prior security and found none. It did note that section 428 provided a rule giving the holder of the section 427 security priority ahead of subsequently acquired interests in the same collateral.
The Court held that the proper interpretation of sections 427(2) and 435(2) and the combined effect of these two sections provide that the Bank cannot acquire a greater interest than the debtor has in the collateral. While the provincial law cannot alter the Bank Act, where the Bank Act is silent the Bank Act looks to provincial law to determine the rights of the debtor in the property at the relevant time. The PPSA priority rules do not apply to settle the issue, but the provincial security interest exists outside of the Saskatchewan PPSA priority rules and informs the rights of the debtor in the collateral.
As stated in the extract below, the Supreme Court of Canada has noted that various parties have called for reform or repeal of Bank Act security. The Law Commission of Canada (“LCC”), the Uniform Law Conference of Canada (“ULCC”), various academics and authors have spoken out in favour of repeal of section 427 security to, among other things, remove uncertainty in priorities as between provincial and federal law. The Canadian Bar Association has endorsed the recommendations of both the ULCC and the LCC.
Charron J. wrote as follows in the Innovation case, leaving it to Parliament to act:
Indeed, there appears to be a broad consensus as to the need to reform the scheme so as to harmonize it with the provincial PPSA regimes, and some commentators have gone so far as to suggest its total repeal, arguing that such a scheme is unnecessary in light of contemporary personal property security statutes in the provinces: see J.S. Ziegel, “Interaction of Personal Property Security Legislation and Security Interests Under the Bank Act” (1986-87), 12 Can. Bus. L.J. 73, at pp. 91-95; Uniform Law Conference of Canada, Uniform Law Conference of Canada: Commercial Law Strategy (loose-leaf); Law Commission of Canada, Modernizing Canada’s Secured Transactions Law: The Bank Act Security Provisions (2004), at pp. 26-30. [para 25]