On August 1, 2007, a package of amendments to the Personal Property Security Act (Ontario) (PPSA) came into force. One of the amendments was the repeal of then section 46(3). That section provided as follows:
Except with respect to rights to proceeds, where a financing statement or financing change statement sets out a classification of collateral and also contains words that appear to limit the scope of the classification, then, unless otherwise indicated in the financing statement or financing change statement, the secured party may claim a security interest perfected by registration only in the class as limited.
Section 46(3) had often been relied upon by lenders prior to making loans to their borrowers. When registering a financing statement under the PPSA, one must describe the collateral by checking off certain collateral classifications (e.g. inventory, equipment, accounts, etc). One can also describe the collateral in words. In cases where a prior registered financing statement described the collateral in words, in addition to checked-off collateral classifications, former section 46(3) allowed lenders to rely on the word description to limit the broader collateral classifications. In many cases, this avoided the need to obtain estoppel letters from third-party creditors in which they acknowledged to what their collateral was limited.
The 2007 amendments were originally intended to have included the removal of the check-the-box registration system. That change would have brought the PPSA registration system in Ontario into line with those in other provinces. If the check-the-box system were no longer in place, there would be no need for section 46(3). However, the government’s PPSA computer system needed certain upgrades before the check-the-box system could be changed to a pure word description system, and so the check-the-box system remained (and continues to remain) in place. Section 46(3), however, was inadvertently repealed. This led to some uncertainty. After the section was repealed on August 1, 2007, word descriptions of collateral could not technically be relied upon to limit the scope of a prior registered financing statement.
The Ontario government has now reinstated former section 46(3). The Open for Business Act, 2010 received Royal Assent on October 25, 2010. The Act includes new section 46(2.1) to the PPSA, which reinstates former section 46(3), and the legislation deems the amendment to be effective as of August 1, 2007.
As long as the check-the-box system remains in place in Ontario, this amendment will restore some certainty to the effect under the PPSA of a word collateral description in a financing statement. Where appropriate, lenders will, once again, be able to rely on limiting word descriptions in financing statements, rather than have to obtain estoppel letters from third-party creditors.