Possible Changes to the Canadian Personal Property Security Acts 2000

Section 10 – Evidentiary Requirements for Security Agreements

10(1). Subject to subsection (2), a security agreement is enforceable against a third party only where:

(b) the debtor has signed a security agreement that contains:

(i) a description of the collateral by item or kind or by reference to one or more of the following:

(A) goods;

(B) chattel paper;

(C) securities;

(D) documents of title;

(E) instruments;

(F) money;

(G) intangibles;

(H) crops;

(ii) a statement that a security interest is taken in all of the debtor's present and after-acquired personal property; or

(iii) a statement that a security interest is taken in all of the debtor's present and after-acquired property except specified items or kinds of personal property or except one or more of the following:

(A) goods;

(B) chattel paper;

(C) securities;

(D) documents of title;

(E) instruments;

(F) money;

(G) intangibles;

(H) crops;

10.(2) For the purposes of clause (1)(a), a secured party is deemed not to have taken possession of collateral that is in the apparent possession or control of the debtor or the debtor’s agent.

10.(3) A description is inadequate for the purposes of clause (1)(b) if it describes the collateral as consumer goods or equipment without further reference to the item or kind of collateral.

10.(4) A description of collateral as inventory is adequate for the purposes of clause (2)(b) only while it is held by the debtor as inventory.

10.(5) A security interest in proceeds is enforceable against a third party, whether or not the security agreement contains a description of the proceeds.

10.(1) A security interest is enforceable against a third party, other than a secured party, only where:

(a) subject to subsection (2), the collateral is in the possession of the secured party; or

(b) the debtor has authenticated a security agreement that contains a description, whether or not specific, that reasonably identifies the personal property intended to constitute the collateral.

10.(2) For the purposes of clause (1)(a), a secured party is not in possession of collateral that is in the apparent possession or control of the debtor or the debtor’s agent.

10.(3) For the purposes of clause (1)(b), a description of collateral reasonably identifies the collateral if it identifies the collateral:

(a) by item or generic category;

(b) subject to subsection (3) and (4), by reference to a type or category of personal property defined in this Act;

(c) as all present and after acquired personal property;

(d) as all present and after acquired personal property other than property described in the manner set out in (a) or (b); or

(e) by any other method that reasonably enables the personal property intended to be covered by the security agreement to be objectively determined.

10.(4) A description of collateral by generic category is an inadequate description for the purposes of clause (2)(b) if it describes the collateral only as "consumer goods" or "equipment".

10.(5) A description of collateral as inventory is adequate for the purposes of clause (2)(b) only while it is held by the debtor as inventory.

10.6) A security interest in proceeds is enforceable against a third party, whether or not the security agreement contains a description of the proceeds.

COMMENT

1. Substantial changes are proposed for current section 10(1), necessitating the recasting and renumbering of the entire section. The significant substantive changes are underlined in the proposed new version.

1. The wording and structure of current section 10(1)(b) might be read to imply that a generic description of collateral is adequate even if this does not reflect the actual scope of the collateral covered by the security agreement (e.g. “all present or after acquired personal property” would be an adequate description even if the actual intended collateral were only a specific automobile) (compare the approach in the current Ontario Act). This would be inconsistent with the policy reflected in subsections (2) and (3), under which certain generic descriptions are declared inadequate because they would not permit a third party to objectively identify the collateral. More importantly, this interpretation would defeat the third party evidentiary and disclosure functions of the section.

1. Proposed new subsection (2) would make it clear that the collateral description must reasonably identify the personal property intended to constitute the collateral. This does not mean that the description must be specific or excessively detailed. New subsection (3) explicitly confirms that generic descriptions (e.g. “all goods”) and super-generic descriptions (“all present and after acquired personal property”), are perfectly adequate if this is the actual scope of the collateral intended to be covered by the security agreement.

1. The priority effect of current section 10(1)(b) gives rise to a controversial issue in the following sequence of events. Assume that SP1 and D enter into an oral security agreement. SP1 registers a financing statement. SP2 and D enter into a written security agreement which covers the same collateral. SP2 effects a registration. SP1 and D then reduce their agreement to writing. D defaults. Who has priority between SP1 and SP2?

1. There are differing views on the correct answer. Professors Cuming and Wood argue that SP1 acquires a vested priority against SP2 if section 10 has not been complied with when the intervening security interest is acquired. In other words, they read section 10 as qualifying the priority rules which govern competing perfected security interests in Part 3, including the first-to-register rule in section 35(1). Professor Walsh agrees that section 10 qualifies section 35 but only in so far as compliance is a pre-condition to the enforceability (under section 10) and attachment (under section 12) of SP1's interest against SP2. Consequently, she argues that SP1 can comply with section 10 at any point up to when SP1 seeks to actively enforce its security interest against SP2: see Catherine Walsh, “The PPSA Writing Requirement and Priority Among Competing Perfected Security Interests” (1994) 9 B.F.L.R. 217.

1. From a policy viewpoint, both interpretations reflect shortcomings in the current approach. If compliance with section 10 is necessary before SP2's interest is acquired, SP2 would presumably also have to show that it had complied with section 10 before SP1 reduced its own agreement to writing. This would deprive the first-to-register rule in section 35 of much of its intended dispute-avoidance value since priority among competing registered security interests under section 35 would be effectively subject to the order in which the competing parties had reduced their security agreements to writing. On the other hand, if SP1 can comply at any time before it seeks to actively assert its priority rights against SP2 under section 35, there seems little point in requiring compliance with section 10 in the first instance.

1. Proposed new subsection 10(1) would resolve these problems by excepting secured parties from the range of third parties against whom a security agreement which does not comply with section 10 is unenforceable. This would eliminate the current debate concerning the impact of section 10 on the operation of the section 35 priority rule. At the same time, this approach would not deprive potential secured creditors of the right to objective proof of the existence and scope of any competing security interest covered by a registered financing statement. Their interests would still be adequately protected by section 18, under which a potential secured creditor can require the debtor to demand from the holder of a competing registered interest an authenticated written statement of the details of the collateral under the security agreement (if any). A secured party who responds to a demand under section 18 is estopped from later claiming that the information provided was incorrect.

1. Under the proposed reformulation, compliance with section 10(1) would remain a necessary pre-condition to the enforcement of a security interest against other third parties, including transferees who are not secured parties, a trustee in bankruptcy and unsecured judgment creditors. It is important that these other classes of third parties have objective written proof of the contents of a security agreement in order for them to assess their positions vis-á-vis a secured party or person claiming to be a secured party. They do not have the same practical facility as a potential secured party to take advantage of section 18. The potential for fraud on the part of secured parties in misstating the scope of the collateral covered by a security interest is much greater when a trustee or judgment creditor, or even a transferee, is involved.

1. However, changes are proposed below to section 12 and 20 to clarify the relationship between non-compliance with section 10 and the priority of these other classes of third parties. Under current section 12, compliance with section 10 is a pre-condition to third party attachment of a security interest. The proposed reformulation of section 12 below deletes this requirement. A proposed addition to section 20 below would instead make compliance with section 10 a pre-condition to the perfected status of a security interest for the limited purpose of the section 20 subordination rule. Under this approach, a security interest would be subordinated to transferees (other than secured parties), judgment creditors, and a trustee in bankruptcy if the secured party has not complied with section 10 when their interests ‘vest’ under section 20. This is also the substantive result under the current Act but the proposed changes achieve it in a more direct and transparent fashion.

Next Annual Meeting

2018 Conference (Centennial)

Delta Hotel

Québec City, QC

August 12 - 16, 2018