Possible Changes to the Canadian Personal Property Security Acts 2000

Section 12 – Attachment of Security Interests

12.(1) A security interest attaches when:

(a.i) a security agreement exists between the debtor and the secured party;

(a) value is given; and

(b) the debtor has rights in the collateral or the power to create a security interest in the collateral in favour of the secured party; and

(c) except for the purpose of enforcing rights between the parties to the security agreement, the security interest becomes enforceable within the meaning of section 10;

unless the parties have specifically agreed to postpone the time of attachment, in which case it attaches at the time specified in the agreement.

12.(2) For the purposes of clause (1)(b), and without limiting other rights, if any, that the debtor may have in the collateral,:

(a) a lessee pursuant to a lease for a term of more than one year or a consignee pursuant to a commercial consignment has rights in the goods when the lessee or consignee, or the lessee’s or consignee’s agent, obtains possession of them pursuant to the lease or consignment.;

(b) a debtor pursuant to a transaction within section 3(1) in which a security interest in goods is created by the secured party’s retention or reservation of ownership has rights in the goods when the debtor, or the debtor’s agent, obtains possession of them pursuant to the transaction; and

(c) a transferor of an account or chattel paper is deemed to retain rights in the accounts or chattel paper notwithstanding the transfer.

COMMENT

1. The proposed addition to section 12(1)(a) is designed to make it clear that a security interest can be given by a debtor who does not own the collateral but who has the power to create a security interest in it, whether that power is given by the owner or by the law (e.g. by operation of principles of agency or estoppel or by virtue of a statutory rule as found, e.g., in provincial sale of goods or factors and agents legislation).

1. Current section 12(2) clarifies the operation of the “rights in the collateral” requirement in cases where a lessee or consignee gives a security interest in goods which are already subject to a prior deemed security interest in the nature of a true lease or a true consignment within section 3(2) of the Act. Under such transactions, the lessor or consignor has ownership of the collateral; the lessee or consignee has only a possessory interest. Section 12(2) confirms that this possessory interest constitutes sufficient rights to support attachment of a competing security interest in the leased or consigned goods.

1. Current section 12(2) may seem redundant since section 12(1) only requires “rights in the collateral”, not ownership, and possession clearly constitutes sufficient rights to permit the lessee or consignee to give a security interest in the leased or consigned goods. However, it is important to know not just whether but also when a lessee or consignee acquires sufficient rights to support the attachment of a competing security interest. This is because the PPSA subjects the lessor’s and consignor’s interest to the same perfection and priority rules which apply to true purchase money security interests. It follows that if the lessor or consignor fails to effect timely perfection, or fails to perfect at all, its ownership interest will be subordinated – under section 35 – to a security interest given by the lessee or consignee if that competing security interest has attached (and is perfected). Section 12(2) confirms that the competing security interest attaches when the lessee or consignee acquires possession of the goods. Thus, any goods covered by the lease or consignment which still remain in the consignor’s or lessor’s possession will not be caught by the competing interest.

1. The same timing question arises when a true purchase money security interest is created in goods owned by a secured party who reserves its ownership to secure payment of the price, e.g. under a conditional sale or security lease or security consignment. The secured party’s initial ownership raises the question of when the debtor acquires rights in the goods sufficient to support attachment of a competing interest. Does the debtor’s contingent ownership right mean that a prior security interest (covering after acquired goods) given by the debtor would attach to the goods as soon as the retention of title agreement was entered into, even before the goods were delivered to the debtor. If so, a secured party who retains ownership but who fails to perfect in time (or at all) risks subordination to competing secured parties even in respect of goods which remain in its possession whereas a true consignee or true lessee in the same position would be indirectly protected by virtue of the attachment rule in section 12(2). The result is an invitation to litigate the distinction between true consignments and leases and security consignments and leases, particularly in inventory financing arrangements. To avoid this, a new clause 2(b) is proposed under which the debtor would acquire rights in collateral subject to a reservation of ownership by the secured party only when the debtor acquires possession of the goods.

1. Proposed new clause 12(2)(c) is designed to address the conceptual problems which arise in satisfying the “rights in the collateral” requirement when a debtor transfers or creates a security interest in accounts or chattel paper which were the subject of a previous transfer. Having previously sold the accounts or chattel paper outright, the debtor no longer would appear to have any rights in the collateral to support attachment of the second security interest. This creates conceptual problems in the event that the second transferee registers before the first. Under the general priority rule in section 35, the interest of the second transferee is clearly meant to have priority. But that priority depends on the second interest having attached, and attachment in turn depends on the debtor still having rights in the collateral when the second interest was created, notwithstanding the prior sale. Proposed clause 12(2)(c) resolves the problem by deeming a transferor, for the limited purposes of section 12(1), to retains its rights in the accounts or chattel paper notwithstanding the transfer.

1. The proposed rule reflects the current understanding of analysts while eliminating the conceptual acrobatics necessary to justify the result under the current Act. See Buckwold and Cuming, “The Personal Property Security Act and the Bankruptcy and Insolvency Act: Two Solitudes or Complementary Systems?” (1997), 12 B.F.L.R. 467, at 487 (observing that by deeming the interest of a seller of accounts or chattel paper to be a security interest, the PPSA implicitly deems the seller to retain rights in the collateral after the sale since a secured transaction inherently involves a relationship in which the debtor has ownership of the collateral and the secured party has a mere charge). Compare Bridge, Macdonald, Simmonds, Walsh, “Formalism, Functionalism and Understanding the Law of Secured Transactions” (1999) 44 McGill L.J. 567, at 586, n. 59 (observing that the “rights in the collateral” requirement in s. 12 implicitly includes the debtor’s “contingent” power – under the registration-driven priority structure of the PPSA – to defeat the interest of a buyer of accounts or chattel paper by transferring or charging the accounts a second time to a transferee or secured party who registers first).

1. It should be emphasized that section 12(2) is not concerned with priorities except in the indirect sense that a competing secured party must establish that a debtor under a deemed security transaction (or under a reservation of title security agreement) has sufficient rights in the collateral to support attachment of the competing interest. Nor is it intended to empower the debtor to create a security interest in any greater rights in the collateral than the debtor possesses. This can occur indirectly, however, if the consignor, lessor or transferor fails to perfect and is subordinated under the priority structure of the Act. It has sometimes been argued that the competing claimant’s priority is then limited to the debtor’s property rights under the relevant transaction (nemo dat quod non habet), e.g. the debtor’s possessory rights in the case of a lease or consignment or nothing at all in the case of a sale of chattel paper or accounts. The drafters of revised Article 9 dealt with the issue by deeming the debtor to have acquired or retained (as the case may be) the property rights of the lessor, consignor, or transferor for the purposes of vesting those rights in the prior-ranking secured party. The authors of this Report consider this to be unnecessary in a Canadian context. The definitions of “security interest”, “secured party” and “debtor” in section 2 make it clear that the prior-ranking claimant acquires the full ownership interest of the subordinated owner. Moreover, despite the occasional wrong turn, Canadian courts have generally recognized that such arguments are inconsistent with the conceptual basis and priority structure of the PPSAs: see e.g. TCE Capital v. Kolenc, [1992] 2 C.B.R. 99 (Ont. Bktcy); Re Giffen (1998), 155 D.L.R. (4th) 332 (SCC); and see Cuming and Buckwold, supra.

Next Annual Meeting

2018 Conference (Centennial)

Delta Hotel

Québec City, QC

August 12 - 16, 2018