Ontario’s Open for Business Act, 2010, which came into force on October 25, 2010 (the “Act”), contains a number of noteworthy and welcome amendments to the Personal Property Security Act (Ontario) (the “PPSA”). These changes: (i) reinstate the inadvertently repealed former section 46(3), which limited the scope of the collateral in which the secured party can claim a perfected security interest to that found in the optional general collateral description field in the financing statement, (ii) reinstate the exclusion of sale- leaseback transactions from the definition of “purchasemoney security interest” (“PMSI”), (iii) extend the time a creditor has to register a non-inventory PMSI from 10 days to 15 days, and (iv) allow a debtor to require a secured creditor to amend overly broad PPSA registrations.
limitations of collateral descriptions
Until August 1, 2007, section 46(3) of the PPSA provided in effect that where a financing statement or financing change statement contained an optional narrative “general collateral description” in addition to the mandatory “check the box” collateral classification, the security interest of the secured party was limited to the narrower scope of the optional description. However, Bill 152 repealed s. 46(3) in the expectation that mandatory narrative collateral descriptions (in use in all other PPSA provinces) would soon replace the old check the box system. However, the repeal was premature because the new narrative descriptions will require extensive computer upgrades which are still not on line.
S. 46(3) enabled subsequent secured parties to take a security interest in assets of the debtor that would otherwise have been caught by the broad categories of the checked boxes and to be confident that the prior secured party could not claim a perfected security interest in collateral other than that set out in the general collateral description, reducing the need to obtain estoppel letters, acknowledgments or waivers. For example, an equipment financer reviewing a prior registration where “equipment” had been checked could safely rely on a description limiting the collateral to “Xerox photocopier serial no. 9876543” to make advances on the security of the debtor’s other equipment.
Once section 46(3) was repealed, however, secured parties, purchasers and other users of the PPSA registry could no longer rely on the limiting effect of a general collateral description. The practical result was that, unless a PMSI was obtained, secured parties had to assume that a prior security interest extended to all items within the broad categories designated by the checked boxes regardless of any limitations in the narrative description; and to ensure priority, practitioners had to obtain estoppel letters, acknowledgments or waivers from prior secured parties confirming the narrower scope of their security interests.
The Act restores the language of former s. 46(3) in new s. 46(2.1), which now provides:
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.
This amendment is retroactive to August 1, 2007, meaning that the uncertainty introduced by the premature repeal of s. 46(3) is now history.
definition of PMSI
A PMSI is a security interest that secures payment of the purchase price of collateral in favour of the seller or a loan in favour of a lender who funded the purchase price. If the secured party complies with certain notice and registration requirements set out in the PPSA, the PMSI has priority over any other security interest in the collateral given by the debtor. Until 2007, the definition of PMSI expressly excluded sale-leasebacks from qualifying as PMSIs on the theory that sale-leasebacks were inconsistent with the policy behind a PMSI, which was to encourage business debtors to increase their pools of assets. However, on January 1, 2007, as part of the amendments accompanying proclamation of the Securities Transfer Act, 2006 (the “STA”), the final line of the original definition that excluded sale-leaseback transactions was inadvertently deleted. Retroactive to January 1, 2007, the dropped line has now been restored by adding the clause “but does not include a transaction of sale by and lease back to the seller.”
extension of PMSI registration time from 10 to 15 days
The Act also harmonizes Ontario’s PPSA with the other PPSAs in Canada by extending the time to perfect a PMSI in collateral other than inventory from 10 to 15 days. In the case of tangible collateral such as goods, the time period begins to run when the debtor obtains possession of the collateral. In the case of intangibles, such as accounts receivable, the time period begins when the security interest attaches.
demand for financing change statement
In addition the Act amends section 56 of the PPSA to give debtors the right to demand that the secured party amend its PPSA registration where the collateral classification or description is overly broad.
Under new s. 56(2.2) a debtor can demand that the secured party remove from a financing statement collateral classifications that do not apply to the collateral in which the secured party actually has acquired a security interest. For example, if a secured party had a security interest only in inventory but also checked the “equipment”, “accounts” and “other” boxes, the debtor can now require the secured party to register a financing change statement removing the superfluous collateral classifications.
Similarly, s. 56(2.3) allows a debtor to demand that a secured party that has a security interest only in particular assets within a broad class to register a financing change statement appropriately limiting the scope of the collateral to those particular assets through a general collateral description.
These amendments to the PPSA should be welcome as they re-instate important provisions that had been inadvertently repealed and harmonize the PPSA with other jurisdictions in Canada.