In the technical language of the Personal Property Security Act (the “PPSA”), a secured party requires both attachment and perfection to obtain a perfected security interest that has priority over third parties. In simpler language this means that, in most cases, a secured party must obtain a signed security agreement from its debtor and also register a financing statement in the appropriate Personal Property Registry to perfect its security interest.
That’s not so hard to do. And it’s even easier than that, because the order in which those two things happen does not matter. In fact, there is a significant benefit to a secured party registering a financing statement before a security agreement is even signed. Why? Because priority between competing security interests that are perfected by registration is determined by the order of registration of the financing statements, without regard to when the signed security agreement is actually obtained. Therefore, if a financing statement is registered early by a secured party in the course of a transaction but a security agreement is not signed and delivered until later, the secured party will have the benefit of priority for its security interest against competing security interests from that earlier date of registration.
For example, assume the following facts:
- January 10, 2017 - Lender A registers a financing statement against Joint Debtor X
- January 20, 2017 – Lender B registers a financing statement against Joint Debtor X, and also obtains a signed security agreement from the debtor on that date
- February 10, 2017 - Lender A obtains a signed security agreement from Joint Debtor X
So, between Lender A and Lender B, who has priority? If no other priority rule applies, the residual priority rule under the PPSA gives priority to Lender A, based on the earlier registration of its financing statement. It does not matter that Lender A did not complete its security package, by obtaining its security agreement, until February 10, a full 21 days after Lender B had both its security agreement and financing statement in place. Under that residual priority rule, priority between competing security interests that are perfected by registration is determined by the order of registration.
But what if the transaction between Lender A and Joint Debtor X does not complete and no security agreement is ever signed? In that case, Lender A would not have achieved “attachment” and therefore would not have a perfected security interest. As a result, Lender A’s earlier registration would not give it priority over Lender B, and Lender A would simply discharge its financing statement, leaving Lender B as the first to register.
In Ontario, saving your place in the registration line early can have another distinct advantage. It can reduce the number of PPSA estoppel letters needed from equipment lessors and other secured parties who might otherwise register in the middle of a more lengthy financing.
The lesson is that in many cases for determining priority under the PPSA, the race is to the swift, and the first to register will have priority. So don’t delay, register today, and get the signed security agreement later. This is not a courtroom, so you cannot be found out of order.