Federal Security Interests Research Study and Report 2000

PART THREE: POLICY AND CONCLUSION

I. OBJECTIVES OF THE CURRENT FEDERAL PERSONAL PROPERTY SECURITY REGIME

Diversity is inherent in Canada’s personal property security regime - the provinces have adopted similar, yet different, personal property security legislation, while Quebec is unique among Canadian personal property law in its application of the Civil Code.; These systems all operate under the umbrella of related personal property provisions in the federal statutes discussed in this paper.; The challenge, however, is unifying the diversity of personal property security practice, and “filling the gaps”, so to speak, in situations where neither the provincial, nor the federal statutes provide clear and concise guidance.; Furthermore, the current federal systems offer no consistency in approach.; For example, the security system under the Bank Act establishes a basic framework, but must borrow from provincial law on several matters.; As well, an additional federal registration is required in the case of certain intellectual property rights in order to protect a security interest against certain third parties.; However, the registration system is not as developed or searchable as the provincial system, and the effect of registration on priorities and other key considerations is unclear.; Any unified federal security system must seek to remedy these deficiencies, while at the same time accommodating future changes to the business environment.

A. What are the statutory objectives underlying the above-mentioned provisions?

The statutory objectives surrounding the previously discussed federal statutes are very specific to the purposes of each statute.; For example, provisions in the Indian Act that limit the ability to take security in the property of Indians are intended to maintain the special property status of Indians created by the Act.; Likewise, statutory provisions relating to personal property security in pensions and benefits were created to maintain income bases for retired individuals, and to achieve important social objectives.; In the case of Bank Act security, personal property security provisions were developed in order to ensure that Banks were effectively secured for the large amounts of money loaned by Banks to individuals.; Federal statutes impacting on security interests in the agricultural sector were designed to protect what has traditionally been seen as a key component of Canada's economic and historical makeup - the family farm.; The primary function of these agricultural statutes is to provide a process whereby farmers in financial difficulty are insulated from the normal enforcement measures available to creditors under provincial personal property security regimes.; Specifically, the federal statutes delay a creditor's ability to enforce its security and set up a mediation process designed to promote a negotiated settlement of the debtor-creditor conflict.

As can be seen from the examples given above, the objectives underlying those federal statutes impacting on security interests vary considerably in accordance with the specific statute.; There is no objective to create an overarching federal security interest regime.; The statutes do not attempt to create a complete personal property security regime.; Their impact on security interests is for the most part haphazard and peripheral to their primary objectives.

B. Are these objectives fulfilled by the current federal personal property security regime?

In certain areas, particularly where the the impact on security interests is minor or incidental, it can be argued that the federal statutes affecting security interests adequately fulfill their objectives.; For example, the modest goal of providing farmers facing financial difficulty with some extra time before their creditors can enforce their security is achieved by the Farm Debt Mediation Act.; This goal may be described as "modest" in the context of security interests, as it does not involve a registration component and does not impact on the key areas of priority and perfection.; Section 244 of the BIA achieves a similar goal of providing debtors with some extra time before creditors can enforce their security.

The federal statutes are somewhat less effective where they purport to impact on the "key areas" identified above.; The statutes whose impact on security interests is more pronounced tend to create problems involving duplication and uncertainty as to whether the federal or provincial statute should govern.; These problems are particularly evident with the federal intellectual property statutes and the Bank Act.; In the case of the IP sections dealing with registering "transfers" and "assignments", neither their purpose not their effect is clear.; For example, the term "transfer" is not defined, and it is thus unclear whether creating a security interest would constitute a "transfer".; The resulting confusion leads most lenders to register security interests in intellectual property under both the provincial and federal statute.; The security provisions in the Bank Act produce a similar duplication, with banks taking both a Bank Act security interest and a PPSA security interest in the same collateral to secure the same obligation.; Where this is done, it is unclear whether the bank can obtain the best of both worlds by relying on its Bank Act security to defeat a competing third party and then asserting its PPSA security interest to defeat another.; Other problems with the Bank Act security provisions include their limited scope, their lack of a comprehensive priority system and their lack of a comprehensive enforcement procedure.; Given these weaknesses and uncertainties, it is arguable that the objective of ensuring that banks are secured for the large amounts of money they lend could be better served by either revising the Bank Act to modernize and expand the security provisions or by repealing the provisions and allowing security interests taken by banks to be governed by provincial PPSA legislation.; A similar argument can be made with respect to the registration provisions found in the federal IP statutes.

C. Should the current federal personal property security regime strive to fulfill other objectives in light of modern commercial practices?

Issues involving secured lending have become immensely more complex and important since the time the security provisions in the Bank Act and the registration sections in the federal IP statutes were developed.; The creation of detailed and thorough provincial PPSA legislation and the case law surrounding it is a reflection of this.; The presence of the PPSA suggests that where federal objectives and provisions collide with those of the PPSA, the federal provisions might be redundant.; In other words, the Bank Act objective of ensuring that bank loans are secured may already be accomplished by the PPSA.; Similarly, registering a security interest in IP with the CIPO adds little in terms of accomplishing the lender's usual objective of achieving certainty with respect to priority and perfection.; If the objective of the IP sections was different - if, for example, the federal government set out to create an "IP security interest" designed to solve some of the problems associated with taking and giving security in IP - the presence of the sections might be justified.; At the very least, the objective would be somewhat different from that of the PPSA.; Of course, this would require significant amendments to the statutes.; Creating a sui generis security interest in IP is, however, one federal objective that might be worth pursuing in light of modern commercial practices.

D. Considerations for future reform

As previously discussed, many problems discussed with federal security provisions identified above, would likely be solved by individual legislative additions to the applicable statute.; Unfortunately, however, the current state of affairs produces no consistency in approach.; For example, the scheme established under the Bank Act must borrow concepts from the provincial law on several matters.; Likewise, the security interest regime created by the Canada Transportation Act conditionally “pre-empts” the provincial registry system, while at the same time, leaving other matters to the determination of provincial law.

Reform of the current federal security interest regime must be undertaken, but critics are divided on the proper course to take.; Some critics advocate the complete abolition of certain federal security interest regimes, specifically the provisions of the Bank Act.; One major problem with Bank Act security is that it introduces layers of complexity and costs for all parties.; The effects of a repeal of these provisions remain to be analyzed.

Other commentators have proposed key factors to be considered, prior to the wholesale unification of all federal security interest provisions under the guise of one single federal personal property security statute.; Roderick J. Wood proposes several key concerns which must be examined prior to the creation of any unifying statute.; Firstly, it must be determined whether or not the federal security system would provide a comprehensive code.; If not, thought must be given as to what law would be used to supplement the federal statute.; Secondly, it must be determined whether or not the federal system would be the exclusive means by which a security interest would be taken, and to what extent provincial law would play a part.; Thirdly, if the federal security system is not to be exclusive, it must be answered whether a secured party could hold security in the property at both a federal and provincial level.; If this is the case, thought must be given as to whether the parties could elect between federal and provincial law, and whether a single security document could give rise to security under both the federal and provincial systems.; Fourthly, a method of registration must be created - either a centralized federal registry, or a registry on regional bases.; It must also be determined to what extent the provincial registries would be utilized.; Fifthly, if the federal security system is not exclusive, the creators must give thought as to the method by which priorities will be determined when a provincial security interest conflicts with a federal security interest.; Finally, the creators of a federal security system must determine to what extent the law of civil and common law may be harmonized and incorporated into the federal system, and to what extent provincial law may be harmonized with federal legislation.

II. OPTIONS AVAILABLE TO THE FEDERAL GOVERNMENT

There are several options the federal government may pursue in an attempt to solving existing problems with the current federal security interest regime.; First of all, the government may choose to modify the security interest provisions of each individual federal statute, as discussed above.; Alternatively, the government could suspend a select few problematic security provisions, as suggested, for example, in relation to the provisions of the Bank Act.; Thirdly, in an attempt to unify all federal security interest provisions, the government could enact a comprehensive federal personal property security act.;

A. Evaluation of the various options

A review of all relevant federal security interest provisions suggests that it may be difficult to find an underlying objective sufficient to unify all the systems under the umbrella of a single federal personal property statute.; As examined in this paper, certain changes to individual security systems may be sufficient to compensate for existing deficiencies.; For example, only minor changes may be required to produce a more effective and clear registration system for security interests in railways and rolling stock under the Canada Transportation Act.; The implementation of a unified federal personal property security act would produce a massive change to the existing federal security interest system and, as might be expected, may produce further complications and adjustments.; To be worth the effort, any unified federal personal property security act must effectively resolve the majority of the outstanding issues with the current federal security interest regime.

The suspension of currently problematic security interest provisions may provide a temporary solution.; As previously discussed, some critics have advocated the abolition of the security interest provisions under the Bank Act.; If this step were to be taken, the federal government must ensure that the unique security needs of the banks are met.; A better solution may be to amend the current security provisions to more effectively address the problems associated with taking Bank Act security.

Regardless of the method eventually used to remedy any deficiencies, the current federal security interest regime is clearly in need of modification and reform.; In the end, the approach employed must strive to fulfil the purpose behind personal property security legislation - predictable and certain commercial transactions.

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