Under Canadian personal property security legislation perfection of a security interest is effected by registration or by taking possession of the collateral. Perfection relates to the steps required to be taken in relation to a security interest in order to make it effective against third parties. A security interest is only enforceable against a debtor and third parties if it has attached and been perfected.
In a recent Alberta case Michael Kallis and Suzanne Kallis v. First Capital Management Ltd. et al. the Alberta Court of Queen's Bench examined the issue of perfection by possession through an escrow agent. Under the loan agreement, pledged shares were to be secured by delivering them to an escrow agent. Under Canadian law, in certain circumstances, possession by an escrow agent can constitute perfection of a security interest. However, in deciding if the purported security interest had been perfected, the Honourable Mr. Justice G.C. Hawco was faced with a unique set of facts in this case as the share certificates in question had not actually been delivered to the escrow agent.
The proposal trustee disallowed the secured creditor claim on the basis that by failing to deliver the share certificates to the escrow agent, the security interest was not enforceable as it had not been perfected by possession. The creditor appealed the proposal trustee’s disallowance on the basis that a transfer of the securities to the escrow agent was not required, as the debtor had always acknowledged that the shares in question were being held for that specific creditor. The primary piece of evidence indicating that the debtor was holding the shares for the creditor was a post-it note on the share certificates indicating that they were being held for that creditor.
Remarkably, the honourable Mr. Justice G.C. Hawco granted the creditors’ appeal and determined that perfection of the security interest had been effected despite the fact that the share certificates were not delivered to the escrow agent and remained in the possession of the debtor. In making this ruling the honourable Mr. Justice G.C. Hawco placed emphasis on the fact that the debtor had maintained and acknowledged that it was physically holding the pledged shares on behalf of the creditor, and that this acknowledgement constituted “delivery” under the Securities Transfer Act. The honourable Mr. Justice G.C. Hawco concluded by stating:
There need be no actual delivery to an escrow agent, even though that was anticipated, and indeed required, in one of the agreements. The escrow agent need not make the acknowledgment. The acknowledgment may be made, as it was in this case, by the debtor who had previously acquired possession of those certificates. The security has therefore been sufficiently perfected and the Applicants are entitled to be regarded and treated as secured creditors.
This decision is important as it suggests that the concept of possession under personal property security legislation may be broader than actual physical possession, and that in some instances possession can be deemed even if the collateral remains in the possession of the debtor.