Draft Uniform Liens Act 1995

PERFECTION AND PRIORITY OF LIEN

Perfection by possession

10(1) Possession of the goods by the lien claimant or by a person acting on behalf of the lien claimant perfects a lien.

(2) For the purposes of subsection (1), a lien claimant does not have possession of goods if

(a) the goods are in the actual or apparent possession or control of the debtor or the debtor's agent; or

(b) the goods are being held as a result of a seizure or repossession.

Commentary

This Act relies on PPSA terminology, which uses the concept of perfection to distinguish the validity of the lien from the notification steps needed to protect a lien against third parties. A lien may be perfected by possession, but in order to fulfil the function of providing notice, which is a necessary component of perfection, the lien claimant's possession must be visible and apparent. Hence, the necessity to disallow perfection where possession is effected by seizure or the goods are in the possession of the debtor.

(3) A lien perfected by possession remains perfected for the first 15 days after the goods come under the control of the debtor.

Commentary

This subsection establishes a "grace" period for registration.

Perfection by registration

11 Registration in the Personal Property Registry of a financing statement perfects a lien.

Commentary

A lien may also be perfected by registration. Registration may occur at any time, and, as will be seen, if the lien claimant is not registered it will be defeated by certain interests.

Priority of lien

12(1) Except as provided in this Act or any other Act, a perfected lien has priority over an interest that was acquired after the lien attaches.

Commentary

This subsection establishes the residual rule and repeats the common law for possessory liens and the existing statutory law for non-possessory liens. Including this section reflects a policy choice to state the priority rule between lienholders and others, including secured parties, in the Act. The above rule is consistent with the applicable common and statutory law.

At common law, a possessory lien for the improvement of chattels defeated the interests of all third parties. This was also the case for common carriers.

A lien for the improvement of chattels in a PPSA jurisdiction (outside of Ontario) derives its priority from a section in the PPSA like section 30 of the Uniform PPSA:

  • Where a person in the ordinary course of business furnishes materials or services with respect to goods that are subject to a security interest, any lien that he has in respect of those materials or services has priority over a perfected security interest unless an Act in force in the Province provides that the lien does not have priority.

The rule in the Ontario Repairers' and Storers' Act is similar to that in the garagekeepers Acts.

For those jurisdictions with garagekeepers' legislation, the rule is that the lien takes priority over prior secured parties and subsequent secured parties who acquire their interest after the lien is registered. As soon as possession is relinquished, the lienor has 21 days to register. The lienholder's interest is subordinate to the interest of anyone whose interest arises after possession is given up but before the lienholder's interest is registered. The lienholder may obtain an extension of time to register late and the priority of the lienholder continues throughout this extended time.

For storers, as long as the warehousekeeper gave notice to the owner of the goods, which includes a conditional seller, a chattel mortgagee and a grantee under a bill of sale, the warehousekeeper would take priority over all such interests regardless of when such interests may have arisen.

(2) An unperfected lien has priority over a security interest that attaches before the lien attaches.

Commentary

This subsection grants priority as against a prior secured party to the unregistered lien claimant. It is consistent with the common law and existing statutory liens.

This changes the priority given to future advance financiers under the PPSA. Under subsection 33(2) of the PPSA, a perfected security interest securing future advances will defeat the interests of secured creditors who seize the collateral and the interests of their representatives. Subsection 33(3) of the PPSA provides that if future advances are made while a security interest is perfected, the security interest has the same priority with respect to the future advance as it had with respect to the first advance.

It was the Committee's opinion that the special status to be conferred on lienholders by the proposed Uniform Liens Act justifies changing the priority given to future advance financiers by the PPSA. The lienholder is not an ordinary creditor. The lienholder enhances the value of the article. Moreover, future advance financing is not a factor in relation to collateral that would normally be subject to a lien. It plays a role with respect to inventory or accounts financing, but is rare with respect to a single item of collateral.

A secured party making future advances in relation to inventory is not likely to be severely prejudiced by a lien that encumbers one of many items of collateral with respect to a future advance.

Finally, the legislative choice in favour of lienholders in this situation has already been made in those jurisdictions that have garagekeepers Acts and in the Ontario Repairers' and Storers' Liens Act.

Where lien subordinate or ineffective

13(1) If a lien is unperfected at the time a person mentioned in clause (a) or (b) delivers a writ of execution to the sheriff, that lien is subordinate to the interest of

(a) a person who causes the goods to be seized under legal process to enforce a judgment;

(b) an execution creditor entitled by law to participate in the distribution of goods or their proceeds seized under legal process; and

(c) a representative of creditors, but only for the purposes of enforcing the rights of a person mentioned in clause (a).

(2) A lien is subordinate to

(a) the interest of a transferee who gives value and acquires the interest without knowledge of the lien and before the lien is perfected; and

(b) a security interest that attaches after the lien attaches and that is created or provided for in a security agreement executed after the lien attaches and before it is perfected.

(3) A lien is not effective against

(a) a trustee in bankruptcy if the lien is unperfected at the date of bankruptcy; or

(b) a liquidator appointed pursuant to the Winding-Up Act (Canada) if the lien is unperfected at the date the winding-up order is made.

Commentary

This priority rule is equivalent to that contained in s. 19(1) of the PPSA for security interests.

Exceptions

14(1) A buyer or lessee of goods sold or leased in the ordinary course of business of the seller or lessor takes free of any non-possessory lien on the goods whether or not the buyer or lessee has knowledge of the lien.

(2) A buyer or lessee of goods that are acquired as consumer goods takes free of any lien on the goods if the buyer or lessee

(a) gave value for the interest acquired; and

(b) had no knowledge of the lien.

(3) Subsection (2) does not apply to a lien on goods where the purchase price exceeds $1,000 or, in the case of a lease, where the market value of the goods exceeds $1,000.

(4) A buyer or lessee takes free of a lien that is temporarily perfected pursuant to section 10 during the 15-day period, if the buyer or lessee

(a) gave value for the interest acquired; and

(b) had no knowledge of the lien.

Commentary

Again, this is equivalent to the priority positions between secured parties and buyers or lessees under the PPSA.

Priority between liens

15(1) Priority between two or more perfected liens that have been continuously perfected is to be determined

(a) where the services performed by one or more of the lien claimants have resulted in an increased market value of the goods, by the reverse order of perfection but only to the extent of that increase; and

(b) in all other cases, by the order of perfection.

Commentary

This is consistent with the common law and statute law.

(2) For the purposes of subsection (1), an increased market value of goods may be determined by methods other than an actual sale of the goods.

Commentary

A first to register priority rule for lien claimants is unfair to subsequent lien claimants who add value and but for their value the first lien claimant may claim little or nothing. Assume a fact situation where a vehicle has been repaired at a cost of $5,000 and, as a result, is worth $10,000. The vehicle is involved in an accident requiring $6,000 worth of repairs. The repairs are effected. The vehicle is again worth $10,000. But for the intervention of the second repairer, the first repairer would not have been able to satisfy its bill, but with a first in time priority rule the first repairer will be fully paid before the second repairer.

With this scenario in mind, the Committee decided to recommend a modified priority rule that would favour a first in time priority rule except where a subsequent repairer enhances the value, in which case, the subsequent repairer would have priority to the extent of the increase in value brought about by its repairs.

(3) Priority between a lien that has not been continuously perfected and an earlier lien is determined by the order of perfection of the liens.

Commentary

This is self-explanatory.

(4) A perfected lien has priority over an unperfected lien.

(5) Priority between unperfected liens is determined by the order of attachment of the liens.

Commentary

These two subsections are self-explanatory and are consistent with their PPSA equivalents.

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