In its recent decision in Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd., 2021 ONCA 221, the Ontario Court of Appeal (ONCA) clarified the requirements for foreclosure on investment property under the Personal Property Security Act (Ontario) (the PPSA). The decision confirmed that a secured creditor’s right under Section 17.1(2) of the PPSA to “sell, transfer, use or otherwise deal” with investment property over which it has control does not include an independent right of foreclosure without notice. A secured creditor that wishes to foreclose on such collateral must comply with the applicable procedural requirements in Part V of the PPSA. However, the ONCA also underscored the need for courts to take a flexible approach to the foreclosure notice requirements where a clear intention to retain collateral in satisfaction of the debt has been demonstrated to the debtor in advance of the foreclosure.
The principals of Romlex International Ltd. and Canada Grace Park Ltd. incorporated Atlas Springbank Developments Ltd. (Atlas Springbank) in connection with a plan to develop certain commercial real estate. Romlex held 55% of Atlas Springbank’s shares (the Pledged Shares) and Canada Grace held the remaining 45%.
For reasons not disclosed in the decision, Atlas Springbank made a loan to Atlas (Brampton) Limited Partnership (Atlas Brampton), a limited partnership owned by the principal of Romlex. Atlas Brampton promptly defaulted on the loan by failing to make its first interest payment. Atlas Springbank, Romlex, Atlas Brampton and Canada Grace, among others, entered into an agreement (the Security Agreement) pursuant to which Romlex agreed to pledge the Pledged Shares to Canada Grace and agreed that the Pledged Shares would be “transferred” to Canada Grace for the nominal sum of $2 upon (further) default by Atlas Brampton, thereby allowing the principal of Canada Grace to take complete ownership and control of Atlas Springbank. (Presumably, there was some disagreement between the principals of Romlex and Canada Grace with respect to the loan arrangement, which gave rise to the security being granted to Canada Grace, although there is no mention of this in the decision.)
Atlas Brampton again promptly defaulted by (i) being put into receivership by a third party almost simultaneously with the execution of the Security Agreement and then (ii) subsequently failing to pay the balance of the loan when it came due. In response, Atlas Springbank’s solicitor sent a notice of default (the Notice of Default) informing the principal of Romlex that she had transferred the Pledged Shares to Canada Grace pursuant to the Security Agreement. Atlas Brampton, Romlex and the principal of Romlex (collectively, the Debtor Entities) applied to the Ontario Superior Court of Justice (SCJ) for, among other relief, (i) a declaration that the transfer of the Pledged Shares to Canada Grace was null and void and (ii) an order that they were entitled to prior notice of Canada Grace’s intention to foreclose on the Pledged Shares and an opportunity to redeem the Pledged Shares.
The Decision of the Superior Court of Justice
The SCJ considered whether Canada Grace had complied with the requirements for “disposal” set out in Part V and held that it had not, with the result that it was not entitled to exercise that remedy under the PPSA. However, relying on the decision in Harry D. Shields Ltd. v. Bank of Montreal, 7 O.R. (3d) 57, the SCJ held that Canada Grace was entitled to exercise remedies contracted for in the Security Agreement and that an independent right amounting to foreclosure was contained in the Security Agreement. The Debtor Parties appealed.
Issues on Appeal
The ONCA addressed the following issues in its analysis on appeal:
- What was the nature of Canada Grace’s security interest in the Pledged Shares (i.e., did the Security Agreement give Canada Grace control over the uncertificated Pledged Shares)?
- Did section 17.1(2) of the PPSA permit Canada Grace to foreclose on the Pledged Shares?
- Did Part V of the PPSA permit Canada Grace to foreclose on the Pledged Shares?
The Decision of the Ontario Court of Appeal
Canada Grace had control over the Pledged Shares
Canada Grace argued that it had control over the Pledged Shares and was therefore entitled, pursuant to section 17.1(2) of the PPSA, to take the Pledged Shares in satisfaction of the debt. The ONCA reviewed the applicable principles governing “control” of uncertificated securities under the Securities Transfer Act, 2006 (Ontario) (the STA). Adopting a functional approach, the ONCA noted that a control agreement need not take a particular form. The court held that a power of attorney clause in the Security Agreement constituted the agreement of the issuer of the shares to take instructions from the secured party without the further consent of the pledgor and was sufficient to give Canada Grace control of the pledged shares given that the issuer of the pledged shares, the registered owner and the secured party, among others, were party to the agreement.
A secured creditor is not entitled to foreclose on investment property pursuant to section 17.1(2) of the PPSA without notice
The Debtor Entities argued that Canada Grace, as a secured creditor, could not foreclose on collateral without following the procedure set forth in Part V of the PPSA. In contrast, Canada Grace argued that, as a secured creditor with control over investment property, it was entitled under section 17.1(2) of the PPSA to deal with the Pledged Shares in accordance with the Security Agreement and need not comply with the foreclosure requirements in Part V. The Security Agreement did not contain any notice requirements for foreclosure nor any right of redemption.
Since section 17.1(2) of the PPSA does not explicitly include acceptance (i.e., foreclosure) of investment property collateral in satisfaction of the debt secured by the security agreement, the question for the ONCA was whether the right to “sell, transfer, use or otherwise deal” in section 17.1(2) includes a right of foreclosure.
The ONCA concluded that section 17.1(2) (and, in particular, the phrase “otherwise deal” therein) does not permit foreclosure on investment property free of compliance with Part V of the PPSA for the following reasons:
- The section 17.1(2) exception to the general enforcement scheme in Part V of the PPSA must be construed narrowly since it runs contrary to the debtor protection elements of Part V;
- The principle of implied exclusion and a plain reading of the words “sell, transfer, use or otherwise deal” excludes a power of foreclosure because the legislature would have included foreclosure if it intended for such remedy to be available under section 17.1(2), particularly given its extensive treatment of foreclosure in Part V;
- Reading foreclosure into “otherwise deal” does not fit well into the debtor protection statutory scheme governing foreclosure in Part V of the PPSA because the Part V process allows the debtor to object and obtain a better result by way of a sale instead and the words “otherwise deal” are not sufficiently precise to displace this mechanism; and
- Permitting foreclosure under section 17.1(2) would be inconsistent with the purposes underlying such provision (i.e., easing capital market transactions, derivatives and margin trading) because the Security Agreement does not engage the complexities of the indirect holding system or place Canada Grace in the same position as a broker or securities intermediary who must dispose of investment property quickly to liquidate depreciating accounts.
Therefore, a secured creditor with control over investment property must comply with the foreclosure procedure in Part V of the PPSA if it wishes to foreclose on such collateral.
Canada Grace complied with the PPSA Part V requirement for foreclosure
Having concluded that Part V applied to Canada Grace’s foreclosure on the Pledged Shares, the ONCA next considered whether Canada Grace had complied with the Part V requirements. On this question the ONCA also clarified the approach to be taken when evaluating the sufficiency of a foreclosure notice under the PPSA.
Part V of the PPSA requires the secured creditor to give notice of its proposal to accept collateral in satisfaction of a secured obligation by serving the notice on certain persons, including the debtor, the owner of the collateral, and every person who has a security interest in the collateral. However, the PPSA does not set out the required contents of such notice. To clarify this area of the law, the ONCA noted that a foreclosure notice should ordinarily expressly cite the PPSA and include:
- the amount of the secured obligation;
- a description of the collateral;
- expression of the clear intention to retain the collateral in satisfaction of the debt (and not as continuing security); and
- an indication that the parties receiving notice have 15 days to object.
However, the ONCA also recognized that, especially in the absence of express content requirements in the PPSA and in light of the functional approach courts must take when interpreting the PPSA, foreclosure notices should not be strictly evaluated against such criteria in every case. The ONCA stated that where “the secured creditor’s intention to foreclose on the collateral is clear in the circumstances, even when one or more of [the above] elements is absent, and the debtor is under no illusion about the consequences of failing to pay… it is not unfair to expect the debtor to attempt to redeem the collateral within 15 days.”
Canada Grace submitted at least five communications with the Debtor Entities that it argued constituted adequate notice under Part V of the PPSA, including a letter from Canada Grace’s solicitor demanding Romlex transfer the Pledged Shares to Canada Grace (in response to the receivership default), a note from the principal of Romlex confirming that Romlex would transfer the Pledged Shares, subsequent demands for transfer from Canada Grace’s solicitor and the Notice of Default. The ONCA considered each notice other than the Notice of Default as individually inadequate but, when taken together, adequate to indicate Canada Grace’s intent to effect the transfer of the Pledged Shares pursuant to the Security Agreement if Atlas Brampton’s default was not remedied.
The Debtor Entities argued that the Notice of Default was deficient for not expressly stating Canada Grace’s intention to retain the Pledged Shares and offering Romlex an opportunity to redeem them. However, the ONCA considered the context and words of the communications from Canada Grace as the default continued and concluded that the Debtor Entities were aware of Canada Grace’s intention to foreclose and the consequences of failing to redeem. The court also noted that at no point did the Debtor Entities tender fulfilment of the loan or provide evidence of Atlas Brampton’s ability to repay the loan. Accordingly, Canada Grace was held to have provided adequate notice of foreclosure in the circumstances, and the foreclosure on the Pledged Shares was upheld.
Atlas (Brampton) helpfully clarifies the enforcement remedies available to secured creditors with control over investment property. While the ONCA’s interpretation of section 17.1(2) restricts a secured creditor’s ability to foreclose on investment property by mandating compliance with Part V of the PPSA, the decision provides welcome guidance on the content of an adequate foreclosure notice under the PPSA. Secured creditors seeking to foreclose on collateral can take comfort in the ONCA’s pronouncement that a foreclosure notice that includes the details cited in Atlas (Brampton) “would be difficult to attack on the ground of sufficiency.” Moreover, the functional approach to evaluating adequacy of a foreclosure notice adopted by the ONCA may assist a foreclosing creditor whose notice is deficient but where the creditor’s intention to foreclose is clear in the circumstances. The decision made clear that the ONCA’s functional approach would likely assist a creditor only in those situations where, as was the case with Romlex, the debtor is clearly aware of the consequences of failing to pay the secured obligation.