Federal Security Interests Research Study and Report 2000

PART TWO: FEDERAL STATUTORY PROVISIONS DEALING WITH SECURITY INTERESTS

I. CLASSIFICATION

There is a wide range of federal statutory and regulatory provisions dealing with security interests.; For analytical purposes, these provisions can be classified into three general categories:

Provisions related to the granting or taking of security interests by federally-regulated enterprises

This area encompasses security interests relating to Banks and other financial institutions, railways and rolling stocks and agricultural and agri-food enterprises.

Provisions related to the granting or taking of security interests on federally-regulated property

This area is composed of security interests relating to intellectual property, real and personal property owned by the federal Crown, real and personal property owned by Indians and non-consensual federal security interests.

Miscellaneous provisions

A number of federal statutes also address security interests relating to bankruptcy issues, pensions and benefits, and miscellaneous legislative issues.

It must be emphasized that the analysis provided below does not purport to examine every federal statute dealing with federal security interests.; Indeed, it does not address security interests in the area of aeronautics, fisheries, mining (i.e. royalties), employment, maritime shipping, and oil and gas.; More specifically, we will not examine the following statutory and regulatory provisions:

Aeronautics Act, R.S.C. 1985, c. A-2, s. 4.

Air Canada Public Participation Act, R.S.1985, c. 35 (4th Supp.), ss. 8(1)(a).

Atlantic Fisheries Restructuring Act, R.S.C. 1985, c. A-14, ss. 4(1)(a) and 4(1)(b).

Canada Marine Act, 1998, c. 10, s. 31, 91 and 117.

Canada-Newfoundland Atlantic Accord Implementation Act, 1987, c. 3, s. 102-118.

Canada-Nova Scotia Offshore Petroleum Resources Accord Implementation Act, 1988, c. 28, s. 105-121.

Canada Petroleum Resources Act, R.S.C. 1985, c. 36 (2nd Supp.), s. 84-100.

Canada Shipping Act, R.S.C. 1985, c. S-9, s. 45-54 (see also amendments not in force in 1998, c. 16).

Civil Air Navigation Services Commercialization Act, 1996, c. 20, s. 56(1).

Federal Court Act, R.S.C. 1985, c. F-7, s. 22(2)(c).

Historic Canal Regulations, SOR/93-220, s. 49-51.

National Energy Board Act, R.S.C. 1985, c. N-7, s. 111 and 114.

Petroleum and Gas Revenue Tax Act, R.S.C. 1985, c. P-12, s. 31.

II.  BANKS AND OTHER FINANCIAL INSTITUTIONS

A.  Introduction

There is a wide range of federal legislative provisions dealing with the granting of security interests by federally-regulated financial institutions.; Given the variety and breadth of these provisions, it is impossible to examine all of them in this report.; Instead, the purpose of this section is to identify certain provisions which have been characterized as problematic. These provisions can be divided into three categories: (1) provisions authorizing the taking or granting of security interests by specific financial institutions (or categories of financial institution); (2) provisions that purport to create loan guarantee or loan insurance regimes; and (3) the Bank Act provisions.; Some of the issues and problems arising out of each of these categories are examined below.; A summary of these provisions is provided in Appendix A.

B. Provisions authorizing the taking or granting of security interests

The federal legislative provisions authorizing the taking or granting of security interests generally relate to two types of federal financial institutions:; federally-owned financial institutions (i.e crown corporations) and federally-regulated financial institutions (e.g. cooperative credit associations).;

The first category includes the following legislative provisions:; Business Development Bank of Canada Act, 1995, c. 28, s. 15(1); Canada Deposit Insurance Corporation Act, R.S.C. 1985, c. C-3, s. 10(1); Canada Mortgage and Housing Corporation Act, R.S.C. 1985, c. C-7, s. 27-28; Canadian Payments Association Act, R.S.C. 1985, c. C-21, s. 17; and Export Development Act, R.S.C. 1985, c. E-20, s. 10(1.1)(d) and 10(6).; The second category includes the following:; Cooperative Credit Associations Act, 1991, c. 48, s. 383, 395, 475, etc.; Insurance Companies Act, 1991, c. 47, s. 470, 500, 542.07 and 559; and Trust and Loan Companies Act, 1991, c. 45, s. 419 and 458.

Given that the above-mentioned provisions are relatively straightforward they have generated very little litigation.; Indeed, the limited cases that have examined these provisions were concerned with their interaction with section 136 of the BIA.; For example, in Goodwyn v. Federal Business Development, the Federal Business Development Bank ("FBDB", the predecessor to the Business Development Bank of Canada) appealed a trustee's disallowance of its claim filed in bankruptcy.; The FBDB argued that it was an agent of the Crown and, therefore, it enjoyed a preference under section 136(1)(j) of the Bankruptcy and Insolvency Act (then 107(1)(j) of the Bankruptcy Act), which grants a priority to claims of the Crown in Right of Canada.; The current version of this provision (which is substantially similar to the provision examined in Goodwyn) reads as follows:

136. (1); Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payments as follows:

(…)

(j); in the case of a bankrupt who became bankrupt before the prescribed date, claims of the Crown not mentioned in paragraphs (a) to (i), in right of Canada or any province , rateably notwithstanding any statutory preference to the contrary.

To support its submission, the FBDB invoked subsection 42(1) of the Federal Business Development Act (the predecessor to subsection 3(4) of the Business Development Bank of Canada Act) which stated that the FBDB is "…for all purposes an agent of the Crown".; For its part, the trustee submitted that while ss. 42(1) designated the FBDB as an agent of the Crown, other portions of the Act had the effect of compromising such status.; The trustee further submitted that, in any event, the preference under section 136(1)(j) was restricted to the Crown, not its agents including the FBDB.

The Supreme Court of Ontario (sitting in bankruptcy) rejected the trustee's arguments.; According to Master Ferron, the provisions of the Federal Business Development Act designated the FBDB a Crown agent and therefore it enjoyed a preference under the Bankruptcy Act.; It should be noted that the same submissions were considered in re Forte (1984) 46 O.R. (2d) 199 (Ont. S.C.), which resulted in the same decision.

These cases have significant implications for federally-owned financial institutions, as they suggest that any federally-owned Crown agent financial institution benefits from the preference contained in section 136(1)(j).; Said Crown agent financial institutions include the Business Development Bank of Canada (see subsection 3(4) of the Business Development Bank of Canada Act), the Canada Deposit Insurance Corporation (see subsection 3(2) of the Canada Deposit Insurance Corporation Act), the Canada Mortgage and Housing Corporation (see subsection 5(1) of the Canada Mortgage and Housing Corporation Act), and the Export Development Corporation (see section 18 of the Export Development Corporation Act).; It excludes, however, the Canadian Payments Association (see subsection 3(2) of the Canadian Payments Association Act which specifies it is not an agent of the Crown).

C. Provisions that purport to create loan guarantee or loan insurance regimes

The federal provisions relating to loan guarantees and loan insurance have recently been the subject of much controversy.; In particular, the loan guarantee and insurance programs outlined in the Canada Student Loans Act and Canada Small Business Financing Act respectively have been criticized as inadequate by various commentators.; Some of these criticisms are examined below.

1. Canada Student Loans Act

With respect to the student loan program, it is important to note that student loans are generally extended at a time when the recipient has no income or assets and would therefore not qualify for conventional loan financing.; The student loans enable the recipient student to obtain a post-secondary education which, presumably, will enable such recipient to improve his income capability.; Student loans are expected to be repaid out of the student’s post schooling income, with the repaid funds then being loaned to new students.

As might be expected, the default rate among students is extremely high.; Under section 7 of the Canada Student Loans Act , the loss sustained by the chartered banks (which are currently responsible for the day-to-day administration of the program pursuant to an agreement negotiated with the federal government in 1995) as a result of a student's default may be recovered from the federal government provided that certain conditions are satisfied.; Section 29 of the Regulations states that where the federal government compensates a lender under section 7 of the Act, the lender shall take steps to collect due payments of principal and interest and realize on any security on behalf of the government.;

Prior to the 1997 amendments to the Bankruptcy and Insolvency Act, student loans were considered preferred claims in bankruptcies.; They are now unsecured claims in bankruptcies, having no preference over other unsecured liabilities of a bankrupt.; However, even though student loans are merely an unsecured debt, the courts have shown an increasing reluctance to grant an absolute discharge in cases where student loans form a significant amount of a bankrupt's indebtedness.; At the same time, the courts have also made it clear that the existence of student loans is only one factor to be considered in a discharge hearing.; Other important factors include the bankrupt's employment status, prospects and income and on occasion the bankrupt's age and health.

The discharge orders granted by the courts have varied widely from province to province.; Discharge orders made in British Columbia, for example, on average require payments to be made for three years in length and permit bankrupts to immediately obtain discharges upon consenting to judgment in the stipulated amount.; Discharge orders issues in the Maritime provinces and Alberta generally require payments for five to six years but also permit discharges with a consent to judgment.; In contrast, Saskatchewan discharge orders appear to impose the longest repayment term, generally six to eight years and, in one instance, a fifteen year term.; Furthermore, Saskatchewan courts do not allow the bankrupts to consent to judgment until they have established good payment records and consequently such bankrupts remain in limbo for extraordinary periods of time.

In addition to these regional inconsistencies, the administration of the federal student loan program is currently under significant financial pressures as a consequence of an increasing default rate among student loan recipients.; In order to be compensated for this credit risk, the participating Canadian chartered banks (Bank of Nova Scotia, Royal Bank of Canada and Canadian Imperial Bank of Commerce) recently sought to renegotiate their student loan agreement with the federal government. According to media reports, the federal government offered to increase the annual payment from $50-75 million (depending on the bank) to $155 million annually to the banks to compensate them for this enhanced credit risk.; This amount was rejected as insufficient by the banks.

As a result of the government's failure to reach a satisfactory agreement with the banks, the Department of Human Resources Development (“DHRD”), which is responsible for the Canada student loans program under the Canada Student Loans Act, announced in March 2000 that it would reassume responsibility of the program beginning on August 1, 2000 (i.e. the expiry date of the current five-year agreement with the three participating banks).; According to bank executives, this situation will cost the federal government approximately $250 million annually.; We understand that as of the date of this report, DHRD is in the process of calling an expension of interest from foreign financial institutions.

2. Canada Small Business Financing Act

The Canada Small Business Financing Act (CSBFA) was enacted in December, 1998 to replace the small business loans program introduced in 1961 under the Small Business Loans Act (SBLA).; Its primary objective is to increase the availability of financing for the purpose of the establishment, expansion, modernization and improvement of small businesses.; Under section 5 of the; CSBFA the Minister is obligated to indemnify a qualifying lender for a specified percentage of the resulting loss sustained under a defaulting loan, provided that the requirements of the CSBFA and the Regulations have been met.; The Regulations outline the specific procedures and conditions in the granting and administering of Canada Small Business Financing loans and in the submission and substantiation of claims for loss for loans made after March 31, 1999.

Pursuant to section 8 of the Regulations, lenders are expected to extend loans under the CSBFA as if such loans are being extended in the ordinary course of business. Specifically, section 8 specifies that before making a loan, a lender contemplate certain credit risk due diligence.; In addition, section 14 requires the lender to "…take valid and enforceable first-ranking security in the assets of the small business whose purchase or improvement is to be financed by the loan".

Similar to the Canada Student Loan Program, the CSBFA/SBLA program has been the subject of much criticism in recent years as a consequence of the increasing default rate among CSBFA/SBLA loan recipients.; Indeed, Industry Canada’s annual report in March, 2000, noted that the total value of the claims paid out to banks under section 5 of the CSBFA/SBLA have increased from approximately; $32 million in 1993-1994 to $221 million in 1998-1999.; Meanwhile, the aggregate amount of the loans extended under the CSBFA/SBLA decreased from $2.5 billion in 1993-1994 to $1.6 billion in 1998-1999.;

According to said annual report, this increase in the program's default rate was the result of less stringent lending criteria between 1993 and 1995 (i.e. prior to the adoption of the CSBFA), and an increase in the average value of loans.; However, it is important to note that while the average value of the loans made under the program has gone from $58,794 in 1993-1994 to $71,549 in 1998-1999, the total number of loans made during this period decreased from 43, 351 to 22,278.

In addition, the CSBFA/SBLA program has also been subject to an increasing criminality rate.; During the last three years, the RCMP has reportedly investigated 70 cases of alleged fraud where, for instance, loan recipients tendered fraudulent invoices to document equipment acquisitions for purposes of qualifying for loans under the program.; Section 8 of the Regulations (discussed above), which requires banks to exercise the same due diligence standard as undertaken under their conventional loans, was introduced largely in response to this phenomenon.; Unfortunately, given the relatively small loan amounts made under the CSBFA (i.e. $71,549 in 1998-1999), the economics do not justify the costs associated with properly investigating the veracity of the information supplied by the applicable loan applicant.

D.Bank Act security

1.Summary of section 427

The most important, and most controversial provision of the Bank Act relating with federal security interests is section 427.; In short, subsection 427(1) permits a chartered bank to lend money to certain specified categories of borrowers on the security of certain specified types of collateral, provided the borrower delivers to the bank an assignment in a prescribed form.; Under subsection 427(2), the delivery of the prescribed document gives a security in the property in question to the bank, whose rights and powers are equivalent to those of a warehouse receipt or bill of lading, or, depending on the type of property, a first and preferential lien and claim.

The actual assignment by the borrower is not registered.; Instead, under section 427(4), a Notice of Intention is to be registered in the prescribed form, setting out the borrower's intention to give a section 427 security.; The Notice of Intention must be registered in the appropriate Bank of Canada office not more than three years prior to the execution and delivery of the assignment by which the security was given.; The appropriate Bank of Canada office will be the one located in the province where the borrower has its place, or principal place, of business.

The Notice is to be signed by the borrower, but it does not identify the principal amount that is to be advanced or even the nature of the collateral.; In fact, the mere registration of a Notice of Intention does not necessarily mean that a section 427 security has been or will be given by the borrower.; No limit is placed on the number of assignments under section 427 that may be made by the borrower within three years after the registration of the Notice of Intention.; If a Notice of Intention is not registered, subsection 427(4) provides that the rights and powers of the bank in respect of the secured property are void as against creditors of the assignor and as against subsequent purchasers or mortgagees in good faith of the secured property.

To release its security, the bank registers a certificate of release in the appropriate Bank of Canada office pursuant to paragraph 427(4)(b).; This step permanently cancels the particular Notice of Intention; it cannot be used to "lift" the security temporarily.; In re Weiss Air Sales Ltd., a bank registered a certificate of release in order to facilitate a proposed sale of inventory by the debtor.; After the proposed sale fell through, the bank sought to reinstate its security with a new Notice of Intention.; No new assignment was made and no further funds were advanced.; The Court held that the cancellation of the original Notice of Intention by the bank released its section 427 security.; Thus, upon a later default the bank could not enforce its security by seizing the debtor's assets because it was then only an unsecured creditor.; According to the Court, "[w]hile under other systems, steps can be taken to temporarily 'lift' liens, charges or encumbrances, or to rearrange priorities, there is no such mechanism in the Bank Act".

2.Analysis

The Bank Act provisions dealing with security interests have been the subject of much academic literature.; The purpose of this section, however, is not to duplicate these analyses, but rather to provide a non-extensive overview of some of the problems and issues that have been identified.;

In general terms, legal commentators and practitioners have identified the following difficulties with the Bank Act's regime:

Undue emphasis on title and ownership rights

Section 427 uses a title-oriented approach to determine the validity of security interests.; For instance, paragraphs 427(2)(a) and (b) state that in order for a bank to be entitled to the rights and powers of a section 427 security, the person giving the security must be the "owner" of the collateral at the time of delivery of the security document or become the owner of the collateral at any time thereafter before the release of the security by the bank.; As a result, it would appear that a bank is precluded from acquiring valid security unless the debtor is the "owner" of the collateral at the time of the creation of the section 427 security interest.; By contrast, subsection 2(a) of the Ontario Personal Property Security Act states that "this Act applies to (…) every transaction without regard to (…) who has title to the collateral that in substance creates a security interest".; (This being said, it should be noted that the title-oriented nature of Bank Act securities has been somewhat eroded by court decisions such as Royal Bank of Canada v. Sparrow Electric Corp., infra).

Uncertainty in relation to the order of priorities between section 428(1) and PPSA security interests

In Rogerson Lumber Co. v. Four Seasons Chalet Ltd., the Ontario Court of Appeal held that section 428(1) of the Bank Act does not override a retention of title under a conditional sale agreement governed by the Ontario Personal Property Security Act ("PPSA") regardless of whether the purchase money security interest was perfected under the PPSA.; The Court also held that the first to file rule in the PPSA does not apply to a section 427 interest.; There are, however, contrary Saskatchewan decisions.; Accordingly, there remains some uncertainty in relation to the order of priority between section 428(1) and PPSA security interests.

Anachronistic nature of section 427

Some legal commentators have argued that the present Bank Act security does not reflect the modern commercial reality that certain classes of secured creditors should be given special status.; Each province that has enacted personal property legislation has recognized, for example, that a purchase money creditor (i.e. an unpaid vendor or financier of specific purchased property) should be entitled to a security interest in the goods sold or financed which, subject to compliance with certain procedural requirements, will have priority over all other security interests given by the same debtor.; In addition to potentially providing inadequate protection to certain creditors, this lack of recognition in the Bank Act of the special status of certain classes of creditors impacts adversely on borrowers trying to obtain specific financing from a bank which is not its main banker.

Lack of detail

The Bank Act's shortcoming in this regard relate to four factors:

(a0 In most modern day transactions, banks need to take security in more than just inventory and book debts generated from the sale of such inventory.; Generally speaking, apart from certain limited classes of equipment, the Bank Act prohibits this practice and consequently the banks are compelled to acquire security under the applicable provincial system.

(b) A Bank Act security can only be taken from certain kinds of borrowers.; While the list of eligible borrowers have grown over the decades, there is no explanation as to why any class of borrower remains excluded.; The practical result of such exclusion is that the banks will take security under the applicable provincial system.; Similarly, s. 427 securities are only available to one kind of lender, i.e. banks.; It is questionable whether an assignment of Bank Act security to a lender that is not a bank is operative, particularly as to revolving advances subsequent to the assignment.

(c) Bank Act security can only be taken as security for actual present and future loans and not for any other kind of obligation.; It is therefore not possible, for example, to take Bank Act security for obligations under a guarantee or for any kind of past obligation.; This is another reason for banks having to resort to security under the applicable provincial system.

(d) It has been held that only legal entities can give Bank Act security.; This means that other forms of business entities such as general partnerships, limited partnerships, unincorporated associations, organizations, syndicates, joint ventures, trusts and trade unions are effectively prohibited from granting Bank Act security.; In all such cases, banks again have to rely upon provincial security regimes.

Double registration and double documentation

One of the techniques adopted by banks for maximum protection is to obtain, where possible, a security interest under the relevant provincial legislation as well as section 427 security.; The effect of such double documentation has not yet been considered in Ontario but appears to have been accepted in Saskatchewan.; For their part, legal commentators remain divided over the legal effect of such double documentation.; In particular, there is much uncertainty about whether it is possible for a secured party to hold successive security interests in the same collateral governed by two incompatible chattel security regimes and, if it is possible, whether the bank must elect one security interest over another and, if so, at what point.

III. RAILWAYS AND ROLLING STOCKS

A. Statutory Provisions

There are two primary federal statutes which govern the taking of personal property security in railroads and rolling stock. These provisions are summarized in Appendix B.

The Canada Transportation Act (the “CTA”), creates a scheme by which any mortgage, hypothec or assignment issued by a railway company may be deposited in the office of the Registrar General of Canada, and notice of the deposit is to be published in the Canada Gazette without delay.; Furthermore, section 105 of the CTA applies the same deposit and registry system for mortgages, hypothecs, assignments and other forms of security relating to rolling stock.; Finally, section 106 of the CTA provides that insolvent railway companies may prepare and file a scheme of arrangement in the Federal Court, and grants the Federal Court power to restrain any action against the railway company that the Court considers appropriate.; This section, however, still permits a creditor to take possession of rolling stock under a security agreement, bailment, mortgage or hypothec, under certain conditions.

The CN Commercialization Act enables the Minister of Transport (with the approval of the Minister of Finance) to enter into an agreement or arrangement with CN, or any other person, regarding the management of any debt, obligation incurred by, or security interest in CN.; The Minister is further permitted to enter into an arrangement to dispose of or manage any of CN’s shares, and to pay out of the Consolidated Revenue Fund any amounts relating to the management of CN’s security interests.

B. The Current Security Registration Regime

Sections 104 to 106 of the CTA are the primary sections governing security interests in rolling stocks.; These sections create one registry system, currently located in Ottawa under the supervision of the Minister of Industry and the Corporations Directorate.; The centralized registry system created by these sections raises a number of issues regarding the taking of security interests in railways and rolling stock.

1. Validity, Priority and Enforcement of Security Interests

The CTA fails to mention any method by which the validity, enforcement or priority of the registered security interests may be maintained.; Indeed, sections 104 and 105 of the CTA provide instructions for the registration and deposit of these security documents in the central registry.; However, Industry Canada itself suggests that the validity of the deposit is not guaranteed.; For example, Industry Canada’s Policy Statement 16.1 states that:

“By accepting a deposit under section 104 or section 105 of the CTA, the Registrar does not provide any opinion on the substantive validity of such document.; As a result, acceptance and registration by the Registrar of a document pursuant to section 104 [or 105] of the CTA does not ensure that it is a mortgage or hypothec [or that the instrument evidences a security document relating to rolling stock] for the purposes of the statute.”

Furthermore, the CTA provides no assurances regarding the priority of security instruments that are deposited in this registry. While section 104 of the CTA is silent as to third parties, section 105(3) provides that once the deposit is made, the document is “valid against all persons”.; While this statement appears to suggest the creation of a priority system, at least in relation to rolling stock, Industry Canada is notably silent on the subject.; Policy Statement 16.1 maintains that the registry will not provide any position regarding the priority of the documents.;

This scheme of registration creates uncertainty regarding the need for creditors to also register their documents in provincial PPSA registration systems.; Sections 104 and 105 of the CTA state that once a mortgage, hypothec, assignment or other document is deposited in the registry in accordance with the CTA, registration or filing “under any other law respecting real or personal property” is not required.; Notification, according to the steps outlined in the CTA, must also be completed before registration is deemed sufficient.; Once again, Industry Canada is non-committal in its endorsement of this principle and states in Policy Statement 16.1 that it “appears” that provincial registration is unnecessary, but that “[f]iling exclusively at the federal level is entirely at the discretion of the user".;

Nevertheless, the uncertainty regarding registration and priorities still exists.; For example, the CTA does not discuss whether an instrument registered solely in the federal registry will take precedence over an instrument that is registered only under provincial PPSA legislation, but prior to when the first instrument was registered at the federal level.; Nor does the CTA discuss the possibility of whether registration at both the federal and provincial levels will ensure greater security for the creditor.; Thus, there is the potential for registrations under the CTA and provincial PPSA legislation to conflict.

From a constitutional perspective, the Federal Government is given authority, under section 91 of the Constitution Act, to regulate railways and related security interests.; Indeed federal jurisdiction in this area may be classified as a matter that is not merely a “private or local nature”.; Furthermore, under section 92 of the Constitution Act, matters relating to railways are specifically excluded from provincial jurisdiction.

Case law itself may offer some guidance as to whether or not provincial personal property legislation can be read together with security legislation affecting railways.

In the case of Zygocki et al. v. Hillwood Justice Van Camp reviewed a mortgage affecting railway land.; The mortgage had been imposed pursuant to section 77 of the Railway Act, a predecessor of today’s CTA.; At the time of the case, the mortgage was over 40 years old.; The central issue was whether or not this mortgage still affected the railway land because the mortgage was in existence for longer than 40 years, and thus violated the provisions of the Registry Act.

Justice Van Camp reviewed both the provincial and federal legislation and found that:

“...it is to be presumed that the Province did not intend to enact legislation in conflict with the statute of the Dominion Parliament within its undoubted jurisdiction...if there is conflict, the Dominion legislation prevails...”

and

“However, where the legislation has been dealing with different subject-matters, and where the legislation of the Province relates to companies generally and has been passed for purposes on which the Province has authority to legislate, the provincial legislation will apply to Dominion companies if it is not directed to interfering with status and preventing exercise of powers.”

The Court eventually decided that the 40 year mortgage should be removed from the railway lands as continuing the existence of the mortgage would only violate the principles under the Registry Act.; Thus, the Court read both provincial and federal legislation as complementary.

Thus, Justice Van Camp’s commentary suggests that the courts may be inclined; to find that the CTA would prevail over the provincial PPSA legislation in that the CTA addresses subject-matter exclusively within the jurisdiction of the federal government (although there is certainly no substantial authority for this).; It appears, however, that the courts are more likely to rely on a conflict of laws examination on a “case-by-case approach” in order to determine the precedence of federal versus provincial legislation.; Unfortunately, this process only adds to the uncertainty of the system.

Provincial real property legislation (such as the Registry Act (Ontario) and the Land Titles Act (Ontario)) also contains provisions relating to security interests in railway property.; For example, section 44(1) of the Land Titles Act (Ontario) (LTA) provides that all registered land is subject to the liabilities, rights and interests listed in this section including, among others, an interest deposited with the Receiver General of Canada pursuant to the Railway Act .; Under this provision, if the previous owner of the land was a railway company, then the interest registered under the Railway Act would only bind the land if a note of the previous ownership of the land by the railway company has been entered onto the title.; Similarly, section 113(5) of the Registry Act (Ontario) provides that the sections of the Act relating to a notice of claim do not apply to a corporation constructing a railway, nor do they apply to land used or owned for the purpose of operating a railway.; Case law has not considered the relevant priority claims as between the CTA and these provincial real property provisions.; Clearly, these provincial acts contemplate railway property as unique, although clarification of the effects of these acts on registration under the CTA would assist the railway personal property regime.

2. The Registration System

The registry system created by the CTA is itself an inadequate system.; Indeed, it appears that section 104 intends only to provide notice to third parties of mortgages and hypothecs, rather than a system to register documents of title.; However, section 105 of the CTA, which deals with documents relating to rolling stock, contemplates registrations relating to title instruments, such as documents evidencing sales and conditional sales.; Nevertheless, the CTA refrains from guaranteeing information beyond mere notice to interested individuals.; Policy Statement 16.1 specifically states that “the filing system does not provide an index or other features of a title system”.

In addition, the current registry is an awkward system for creditors to file and search for registrations.; The registry is located in Ottawa and filings are made either by mail, fax or in person.; Once the registry receives a deposited document, a confirmation and acknowledgement letter are mailed to the registrant approximately five days following the date of filing. Thus, registrants are not able to immediately confirm that their registrations are valid and effective.; Indeed, it may take up to several months for searches to appear on the system.; This time delay requires an interested party to examine the “day-book” at Industry Canada in order to determine whether any recent security interests have been created.; Furthermore, searches are difficult to perform on this outdated registry system.; Although the documents are now scanned into a computer database system, interested parties are required to conduct their own searches, and no telephone or verbal confirmations are permitted.; As well, the records have not been amalgamated or linked to reflect the amalgamations of various railroad companies and various other transactions.; Thus, a party is required to search under each possible name. Interested parties are also required to make appointments in order to search the registry’s database.

The final step for registration involves the registrant arranging for the publication of the deposited document in the Canada Gazette.; Although a necessary step, this additional obligation contributes time and delay to the process of registration.; As well, the CTA does not address the question of priorities in this situation.; For example, the legislation does not canvass the possibility of Party A registering an interest in the railway land or rolling stock under provincial PPSA legislation after a Party B has registered its interest under the CTA, but before the Party A has had a chance to publish its interest in the Canada Gazette.; Finally, the practical value of publishing a notice in the Canada Gazette is questionable at best.; A searching party may not have ready access to the Canada Gazette and this publication and a manual search through this publication is open to human error.; Indeed, publication in the Canada Gazette would be unnecessary if an adequate registration system were to be established.

C. Intermodal Transportation and Railway Security

One important issue relating to railway security is that of intermodal transportation and the acquisition of security in rolling stock.; For example, what is the status of security in rolling stock once that rolling stock is removed from the railway and transported by a truck to its final destination?; This issue does not appear to be addressed either by legislation or by case law.; Thus, it appears that in the absence of any security interest protection in this situation, secured creditors should register their interests under the various provincial PPSA registration schemes.; The practical difficulties of effecting these registrations suggest that future amendments to the current scheme should address the priority conflicts between PPSA and the CTA in the context of rolling stock and intermodal transportation.; The current scheme must change to accommodate changes in the transportation industry.

D. International Interests in Mobile Equipment

One initiative taken by the International Institute for the Unification of Private Law (UNIDROIT) may eventually affect the method by which creditors obtain security in railway rolling stock.

In December of 1997, a preliminary draft UNIDROIT Convention on International Interests in Mobile Equipment was created.; This draft Convention was submitted to the UNIDROIT Governing Council in February of 1998.; The purpose of this future convention is to “provide for the constitution and effects of a new international interest in mobile equipment”.; This convention would create an international register where security interests in mobile equipment (such as railway rolling stock, satellites, aircraft, etc.) would be registered.; Of course, this initiative is still in the research stage and faces a number of challenges.; Academics have raised a number of issues, including: the method by which domestic and international transactions should be distinguished; the type of equipment that should be covered under the convention; whether or not the registry should be “asset-based”; and the method under which; local law would be preserved while still making the convention’s benefits available to all.; If and when the convention is approved, Canada would likely become a signatory and incorporate the law into Canadian transportation practice.

E. Conclusion

The registration regime established by the CTA for railways and rolling stock would benefit from further clarification of priorities as between provincial and federal registrations, as well as more defined commentary on the validity and effects of registration.; As well, a more easily accessible and comprehensive search system would only add to the effectiveness of the overall scheme.

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