Possible Changes to the Canadian Personal Property Security Acts 2000

 

Section 34 – Priority of Purchase Money Security Interests

34.(6) A non-proceeds security interest in accounts that is given for new value has priority over a purchase-money security interest in the accounts as proceeds of inventory if a financing statement relating to the security interest in the accounts is registered before the purchase-money security interest is perfected or a financing statement relating to it is registered.

34(10) A purchase money security interest in an item of collateral does not extend to or continue in the proceeds of the item after the obligation to pay the purchase price of the item or to repay the value given for the purpose of enabling the debtor to acquire rights in it has been discharged.

COMMENT

1. Different PPSA jurisdictions have adopted different policies on the issue of priority between a prior registered accounts financier and an inventory financier claiming priority in accounts as proceeds of inventory. Section 34(6) of the Model Act has been adopted in the PPSAs of the western provinces. It does not appear in the Atlantic Canada PPSAs. These Acts instead require inventory financiers, as a condition of preserving purchase money super priority in the accounts, to give advance notice of their intention to take a purchase money security interest in inventory to the holder of a prior registered security interest in the debtor’s accounts. The Ontario PPSA also preserves the inventory financier’s super-priority in proceeds in the form of accounts, but that Act does not make advance notice to the accounts financier a pre-condition to preserving super priority.

1. Section 34(6) is included in this report to signal that the Atlantic and Ontario approaches require reconsideration. The current policy is not inappropriate in the context of true secured financing transactions where the holder of the prior registered interest in the accounts is typically an all-assets general bank financier. However, where the debtor has sold its accounts outright to a transferee who has perfected by registration, the policy is far less defensible. This is especially true in the light of the explosive growth in securitisation transactions, which depend on the ability of the originator of the accounts to effect a secure sale of the securitised accounts.

1. This concern could be met by adopting subsection 30(6) but confining its operation to a true sales of accounts (this likely would be held to be the intended result under the current Ontario and Atlantic PPSAs even without an express rule). However, such a bifurcated approach is contrary to the policy of the Model Act to minimize litigation on the question of whether formally similar transactions are more appropriately characterized as giving rise to a true or a deemed security interest in substance. Consequently, it is suggested that consideration be given to adopting section 34(6) without any such qualification.

1. Section 34(7) of the model act is included in this report to signal to those PPSA jurisdictions which have not yet adopted it the need to consider doing so. In Chrysler Credit Canada Ltd. v. Royal Bank [1986] 6 W.W.R. 338 (Sask.C.A.), the Saskatchewan Court of Appeal concluded that a purchase money security interest in the traded-in property (proceeds) survived the discharge of purchase money loan. This conclusion was thought to be unacceptable and inconsistent with the concept of purchase money security interest and was specifically reversed by section 34(10). As to its further significance, see comment to the definition of "purchase money security interest".

Next Annual Meeting

2018 Conference (Centennial)

Delta Hotel

Québec City, QC

August 12 - 16, 2018