- Possible Changes to the Canadian Personal Property Security Acts 2000
- Section 2(1) – Definitions
- Section 2(7) – Inter-jurisdictional Harmonization
- Section 3 – Scope of Application of the PPSA
- Section 4 – Exclusions from the Act
- Sections 5-8 – Conflict of Laws Provisions
- Section 9 – Effectiveness of Security Agreements
- Section 10 – Evidentiary Requirements for Security Agreements
- Section 12 – Attachment of Security Interests
- Section 13 – Security in After-Acquired Collateral
- Section 14 – Future Advances
- Section 17 – Rights and Obligations of Secured Party
- Section 18– Secured Party’s Duty to Provide Information about the Security Agreement
- Section 19 – Perfection of Security Interests
- Section 20 – Subordination of Unperfected Security Interests
- Section 21 - Deemed Damages Recoverable
- Section 24 – Perfection by Possession
- Section 29 – Security Interests in Returned, Seized or Repossessed Goods
- Section 30 – Priority of Buyers and Lessees of Goods and Transferees of Licenses
- Section 31 – Priority of Holders and Purchasers of Money and Documentary Intangibles
- Section 32 – Priority of Repairers’ Liens
- Section 34 – Priority of Purchase Money Security Interests
- Section 35 – Residual Priority Rules
- Section 41 – Effects on Account Debtors of an Assignment of Accounts or Chattel Paper
- All Pages
2000 Victoria, BC
A Discussion Paper On Potential Changes to the Model Personal Property Security Act of the Canadian Conference on Personal Property Security Law Part 1 (covering sections 1 to 41)
R.C.C. Cuming, College of Law, University of Saskatchewan
Catherine Walsh, Faculty of Law, University of New Brunswick
Introduction and Overview
This Report suggests possible changes to the Personal Property Security Acts in effect in the Canadian common law provinces and the Yukon Territory, and proposed for adoption in the Northwest Territories and Nunavet. The word “possible”should be stressed. The intention is to generate discussion and comment so as to ensure that any amendments which may ultimately result from these initial proposals enjoy as wide a base of support as possible in the relevant provinces and territories.
The inspiration for the proposed changes is twofold.
The first flows from the approval, in the fall of 1998, of a complete revision of Article 9 (Secured Transactions) of the Uniform Commercial Code in the United States by the National Conference of Commissioners on Uniform State Laws and the American Law Institute. While the Canadian PPSAs differ from Article 9 on many issues of substance, detail and policy, their conceptual structure is rooted in the 1972 Official Version of Article 9, both apply in similar secured financing markets, and the economies of the two countries are closely integrated. In light of these commonalities, the authors of this Report – Professors Cuming and Walsh – co-authored a report to the ULCC last year giving their tentative overview of the possible implications of revised Article 9 for Canadian analysts and legislators. That Report concluded that many features of new Article 9 were unlikely to warrant adoption in Canada, either because they represented a ‘catch-up’ move by the U.S. drafters, the proposed changes already having been made in the Canadian PPSAs, or because they were incompatible with Canadian practice, law or policy.
However, the 1999 Report also identified a number of features of the new Article 9 which the authors felt warranted serious consideration for adoption in the Canadian PPSAs. This Report may be considered a follow-up to last year’s report to the extent that certain of the changes proposed below are inspired by or adapted from new article 9.
The second reason for the proposed changes is simply the passage of time. A decade has passed since the adoption of the first PPSAs derived from the Model Act of the Canadian Conference on Personal Property Security Law (and it has been more than a decade since Ontario replaced its pioneering PPSA with a ‘2nd generation’ version). Although all the Canadian PPSAs have proved to be exceptionally resilient statutory innovations, even the most carefully-crafted legislation needs to respond to the passage of time, both to repair unintended ambiguities and gaps and to respond to new developments in commercial practice and caselaw.
Structure of Report
In structuring the body of their report, the authors have used the Model PPSA adopted by the Canadian Conference on Personal Property Security Law (CCPPSL) as the prototype for the various discrete PPSAs in effect throughout the country. Changes to the existing text of the relevant section are denoted by underlining for new text, and by strike-out if it is proposed to delete old text. Where substantial changes are proposed, the old text appears in its current form followed by the new text. The comments which follow the proposed text give the author’s explanations for why they believe the relevant change is warranted.
The CCPPSL Model was chosen as the prototype for the various Canadian PPSAs because it has been adopted, with minor variations, by all PPSA jurisdictions except Ontario, the Yukon Territory and Nunavut. However, as the comments explain in greater detail, the substance and policy of most of the proposed changes would apply equally to the Ontario PPSA.
Although there is no published version of the Model PPSA, the Saskatchewan PPSA is virtually identical. Readers who wish to consult the Model Act in the course of reading this report can therefore use the Saskatchewan version (or the New Brunswick version if a French language text is preferred).
Subject-Matter Scope of Report
The changes proposed in this Report relate only to Parts I, II and III of the Model PPSA. In very general terms, these Parts deal with the scope of application and interpretation of the PPSAs, conflict of laws, attachment of security interests and the evidentiary requirements for an effective security interest, the inter partes rights and obligations of the secured party and debtor, perfection and priorities, and the rights and obligations of third party account debtors obligated on chattel paper or accounts.
The authors intend to prepare a second part to this report, for completion in June 2001, outlining possible changes in the remaining parts of the Model Act, including the function and operation of the PPSA registration regimes, the post-default enforcement regime for security interests, and general and transitional issues.
Limited French Translation
Unhappily, limited resources did not permit translation of the detailed body of this Report into French. It is hoped that the general overview of the proposed changes which follows immediately below goes some distance towards repairing this omission for the French language reader (and may also be of assistance to the more casual English language reader).
Overview of Proposed Changes
A number of the changes proposed in the body of the report are in the nature of clarification or housekeeping exercises. This overview summarizes only those proposals of real substantive significance or interest.
Electronic media considerations: New definitions of “authenticated”, “data message” and “writing” are proposed to ensure that the various notices, demands, and agreements contemplated by the PPSA can be authenticated and communicated using electronic media and electronic signatures.
Computer software in goods: It is proposed to add an explicit reference to a computer program in the definition of “goods” in order to remove any doubt that “goods” includes any computer program incorporated in them or integral to their operation (e.g. a brake chip in an automobile). This change would eliminate any perceived necessity to take separate security interests in the goods and the computer program.
Aquatic goods: Changes are suggested to the definition of “crops” and “goods” to confirm and clarify the applicability of the Act to aquatic goods produced in aquacultural operations.
Supporting obligation: It is proposed to revise the definition of “collateral” to include a “supporting obligation” so that a reference anywhere in the Act to “collateral” would include any supporting obligation associated with that collateral. “Supporting obligation” is a proposed new term defined to mean guarantees and other secondary obligations taken to support a primary obligation associated with an intangible, chattel paper, a document of title or an instrument. The express recognition of “supporting obligations” would confirm the principle, implicit in current law, that a supporting obligation is an automatic incident of the collateral it supports. Although the proposed definition is similar to that found in article 9-102, this report does not propose specific rules to govern the attachment, perfection, and priority status of supporting obligations equivalent to those found in articles 9-203, 9-308, 9-310 and 9-322. Rather, by amending the definition of “collateral” to include supporting obligations, attachment and perfection of a security interest in a supporting obligation would occur automatically on the attachment and perfection of a security interest in the collateral to which the supporting obligation relates, and the priority status of the supporting obligation would follow that of the related collateral.
Distinction between true leases and security leases: Neither the Model Act nor any other Canadian PPSA contains guidelines equivalent to UCC §1-201(37) for determining when a lease is in substance a security agreement. Generally this has not been a problem since all PPSA jurisdictions except Ontario subject true leases of a specified duration to the perfection and priority rules of the PPSA. This leaves a small area (enforcement) for disputes to arise over the characterization issue. Nonetheless, statutory guidelines would offer useful clarification especially in the absence of any authoritative judicial test. The proposed new provision generally tracks UCC §1-201(37) with the notable addition of a provision dealing with open-end leases.
Inter-jurisdictional harmonization: A new interpretative canon is proposed, taken from the Atlantic PPSAs, to encourage inter-jurisdictional harmonization in the judicial interpretation of each province’s personal property security regime.
Purchase money inventory financing
Extensive additions are proposed to the current definition of “purchase money security interest” in section 2. New clause (iii) would remove any suggestion that purchase money status is lost when a purchase money obligation is refinanced or restructured. New clauses (vi) and (vii) would address the problem of cross-collateralized purchase money security interests in inventory. The proposed additions would extend pmsi priority to any inventory that was formerly subject to a pmsi to secure undercollateralized debt arising under separate pmsi transactions. This reflects the conceptual approach adopted in article 9-103(b) but restricts cross-collateralization to a "related" transaction. This is a legitimate limitation. The law should facilitate crosscollateralization where the parties contemplate a continuing relationship that involves pmsis from the outset so that the secured party need not keep separate accounts for each separate subtransaction. Beyond this, there is a risk of prejudice to prior secured creditors of the same debtor.
Security interests in licenses: In line with the current Saskatchewan PPSA, it is proposed to expand the definition of “intangible” in the Model Act to expressly include a “license” as separately defined. This would eliminate any doubt that the “personal property” in which a security interest under the PPSA can be taken includes rights under, e.g. an agricultural production quota, notwithstanding that transfer of the right is restricted or subject to the prior consent of the granting authority.
Security interests in wages: S. 4 of the Model Act currently excludes all security interests in wages, salary, commissions, etc., other than fees for professional services. The scope of the exclusion is broader than the prohibition on the assignment of wages, etc. found in provincial employment standards legislation. In the authors view, there is no general justification reason for continuing to exempt valid wage assignments from the general PPSA rules applicable to security interests in accounts. It is therefore proposed to delete the exclusion subject to a local variation in cases where the local policy of the enacting jurisdiction so requires.
Security interests in tort claims: S. 4 currently excludes all security interests in tort damages claims from the scope of the Model Act. It is proposed to narrow the exclusion to damages claims for personal injury or death. This is similar to Article 9-109(d)(12) except that the PPSA expansion is not restricted to tort claims given by persons in the course of business. For excluded tort claims, it is also proposed to extend the exclusion to cover a right to payment which derives from the excluded claim, as where the claim is represented by a settlement agreement. This differs from Article 9 under which excluded tort claims remain subject to sections 9-314 and 9-322 with respect to proceeds and priorities in proceeds. It was felt such a qualified application of the PPSA would lead to unnecessary complexity, and that the same body of non-PPSA law should govern both the excluded claim and any rights to payment derived from the claim.
Trust transactions: New text is added in s. 4 to confirm that the PPSA concept of security does not encompass the interest of a transferor under a "Quistclose trust" or similar arrangement involving the transfer of funds for a specified purpose, failing which the funds (or their proceeds) are to be returned to the transferor as the beneficiary of an express, implied or resulting trust. The proposed text would also confirm the exclusion of arrangements involving the sale of services by an agent on terms that the agent is to hold the proceeds of such sales on trust for the principal less any agreed commission. A typical example would involve the sale of cargo or passenger transportation services to third parties by a firm acting as sales agent for the carrier.
Bank Act security interests: New text, derived from the current Saskatchewan PPSA, is proposed in section 9 to address the problem of "double dipping" on the part of banks purporting to take both Bank Act security and PPSA security to secure the same obligation owing the bank by the same debtor.
Security interests in ships: New text is proposed for s. 4 to expressly exclude security interests taken in registered ships or recorded vessels under the Canada Shipping Act (C.S.A.). The proposed exclusion is not confined to mortgages which are registered under the C.S.A. but would extend to all security interests covering registered ships or recorded vessels even where the security agreement is in a form incapable of registration as a mortgage under the C.S.A., e.g. a conditional sales contract. This approach would ensure that buyers and prospective secured parties of registered ships and recorded vessels can rely with confidence on a search of the C.S.A. registry, without having to undertake a concurrent search of the provincial PPRs. The application of the provincial PPSAs would be confined to security interests in boats which are licensed under the C.S.A. but not recorded or registered in the federal ownership registry.
Conflict of laws
Choice of law for priority: It is proposed to add a specific reference to priority in the choice of law rules of the Model Act, thereby eliminating any doubt that the designated law governs not just the priority consequences of the failure to perfect a security interest and the priority of perfected security interests over unperfected security interests, but also the priority status of the security interest against other competing third party claimants, including perfected security interests, and buyers and lessees of the collateral.
Effect of relocation of collateral to enacting jurisdiction: It is proposed to extend the scope of section 5(3) to require local perfection for all collateral, not just goods, governed by the choice of law rule in section 5, where the collateral is brought into the enacting jursidiction..
Effect of relocation of collateral to other jurisdictions: Current section 5 addresses the conflicts implications of relocation only if the collateral is relocated to the enacting jurisdiction. The proposed changes would clarify that if the collateral is relocated to some other jurisdiction, the law of that other jurisdiction governs the requirements for maintaining the validity and perfected status of the security interest, the effect of perfection or a lapse in perfection, and priority between the security interest and an interest acquired after relocation.
Effect of relocation of debtor: Current section 7 requires application of the law of the location of the debtor for security interests in mobile goods, intangibles, and non-possesory security interests in money and documentary intangibles. It addresses the conflicts implications of a relocation of the debtor to any jurisdiction, not just the enacting jurisdiction. However, it requires re-perfection under the law of the new jurisdiction within the time limits specified in section 7(3) even if the new jurisdiction is not the enacting jurisdiction. This may be challenged as an excessive application of forum standards to extra-provincial events. It is proposed to confine current section 7(3) to cases where the debtor re-locates to the enacting jurisdiction, and to add a new section 7(3.1) to cover cases where the debtor relocates to some other jurisdiction. This would bring section 7 into line with the conceptual changes proposed for section 5.
Conflict in choice of law rules: Sections 5 and 7 currently direct the application of different and potentially conflicting laws to determine the perfected and priority status of a security interest in a security, an instrument, a negotiable document of title, money or chattel paper. Under section 5, the law of the location of the collateral governs if the security interest is perfected by possession. Under section 7, the law of the location of the debtor governs if the security interest is non-possessory. Where a non-possessory interest comes into conflict with a possessory interest, proposed new section 7(2.1) would resolve the conflict in choice of law rules by requiring application of the law of the jurisdiction where the collateral was situated when the possessory interest attached.
Elimination of renvoi: It is proposed to delete the current reference in s. 7 to the conflicts of laws rules of the jurisdiction in which the debtor is located, thereby eliminating any possibility of renvoi in the application of the choice of law rule in section 7.
Choice of law for enforcement procedure: Under current section 8, procedural issues relating to the enforcement of a security interest are governed by the law of the jurisdiction in which the collateral is located in the case of tangibles, and by the law of the forum in the case of intangibles. In line with general conflict norms, it is proposed to amend section 8 to refer all procedural issues to the law of the forum where enforcement is pursued.
Preservation of mandatory substantive enforcement rules: Section 8 refers substantive issues involved in the enforcement of a security interest to the proper law of the security agreement. It is proposed to add language confirming this is subject to any overriding ‘mandatory’ provisions of a more closely connected law. This would ensure that a secured party could not evade applicable debtor-protection rules via a choice of law clause in favour of a more remotely connected law which does not offer equivalent protection.
Validity and attachment of security interests: Under sections 5 and 7, the law governing the validity of a security interest is determined by reference to the location of the collateral or the debtor, as the case may be, when the security interest attaches. To address potential conceptual difficulties in applying this rule, it is proposed to add new text in section 8 to confirm that location means location when the security interest would have attached but for any alleged invalidity. The proposal would also confirm that the term “attaches” in sections 5-7 does not refer to the domestic attachment rules of the PPSA, but to the attachment rules of the designated law.
Characterization of “security interests”: Proposed new clause 8(2)(c) would confirm that the term “security interest” for the purposes of sections 5-7 means any interest which under the domestic law of the enacting jurisdiction would constitute a security interest. This proposal ensures that the choice of law rules in sections 5-7 are applied even when the relevant lex situs would not characterize the interest in question as a security interest.
Choice of law for security interests in proceeds: Proposed new clause 8(2)(d) would confirm that law governing the validity, perfection, and priority status of a security interest in proceeds of original collateral is the law which, under sections 5 and 7, would govern a security interest in proceeds of that kind if they were original collateral.
Writing requirement for third party effectiveness of security agreements
Collateral description: The current wording of section 10 implies that a generic description of collateral in a security agreement is adequate even if the actual scope of the intended collateral is narrower. The proposed new wording 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 excessively detailed. Generic descriptions (e.g. “all goods”) and super-generic descriptions (“all present and after acquired personal property”) would continue to be acceptable so long as they reflect the intended scope of the collateral.
Priority effect of writing requirement: The priority effect of the writing requirement in current section 10 is controversial. Some argue that a secured party acquires a vested priority if section 10 has not been complied with when a competing security security interest is acquired. Others argue that compliance is possible at any time up to when the secured party seeks to actively enforce its security interest against the competing security interest. From a policy viewpoint, neither approach is satisfactory. The proposed new wording would resolve the problem by excepting secured parties from the range of third parties against whom a security agreement which does not comply with section 10 is unenforceable. 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.
Attachment of security interests: “rights in the collateral”
It is proposed to amend section 12 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 operation of law. Amended section 12 would also clarify that a debtor acquires rights in collateral subject to a reservation of ownership by the secured party only when the debtor acquires possession of the goods. This ensures protection of a secured party who fails to perfect in time (or at all) from the risk of subordination to competing secured parties in respect of goods subject to the agreement of sale which still remain in its possession. Finally, amended section 12 would confirm that a transferor of accounts or chattel paper under an outright sale retains sufficient rights to support attachment of a competing security interest. This reflects the current understanding of analysts while eliminating the conceptual acrobatics necessary to justify the result under the current Act.
Attachment of security interests in after acquired consumer goods
It is proposed to delete the current section 13 restriction on non-purchase money security in after-acquired consumer goods (a change which already has been made in the Saskatchewan Act). It is felt that the social policy concerns which underpin the restriction would more appropriately be met by extending the exemptions on seizure of consumer goods in provincial judgment enforcement law to all creditors including secured creditors.
Attachment of security interests in future crops
It is proposed to delete the one-year limitation on security in future growing crops from current section 13 on the basis that it is paternalistic and unfair. The current rule means that crop financing under the PPSA is generally not available because of the increased transaction costs and risks resulting from the restriction. Since security taken under the federal Bank Act is not subject to any equivalent restriction, agricultural producers are effectively limited to bank financing and are denied access to the wider credit market available to other debtors.
Perfection of security interests in chattel paper
The proposed changes to section 24 would recognize the common practice of ‘marking’ chattel paper to identify the secured party as an alternative to taking physical possession for the purposes of perfection. This change would allow “electronic chattel paper”, the subject of a new proposed definition in section 2, to be perfected by possession.
Priority for future advances
Against judgment creditors: Proposed new section 20(1.1) would allow a secured party who has registered a financing statement, but whose security interest does not attach until after registration, to enter into the security agreement and make advances without risk of subordination to an intervening judgment creditor otherwise entitled to priority under subsection (1). Priority for these advances would be conditioned on the secured party acting without actual knowledge of the intervening creditor’s interest. This change would reduce transaction costs and risk for secured parties without unduly inconveniencing judgment creditors.
Against buyers: The proposed new section 35(6.1) would make it clear that a buyer or lessee is not affected by the priority status given to future advances made with knowledge of the transfer to the buyer or execution of the lease.
Priority of unperfected security interests
Against the debtor’s trustee in bankruptcy: After the model PPSA was drafted, the Bankruptcy and Insolvency Act was amended to delete the concept of relation-back from the date of a receiving order to the date of the petition as the effective date of bankruptcy. In order to maintain the effect of the original rule in section 20, it would be necessary to replace the current reference to the date of bankruptcy in section 20 with a reference to the date of the initial bankruptcy event. This Report does not necessarily propose that change. Amended text is included merely to create an opportunity to reassess whether the date of filing a petition is the appropriate date for determining the effectiveness of an unperfected security interest against a trustee in bankruptcy.
Against buyers of tangible collateral: Proposed alternative A to section 20(3) would delete the requirement that a buyer must take without knowledge of an unperfected security interest to obtain priority. While this approach may seem radical, it would have the great advantage of eliminating difficult problems of proof and of protecting a buyer who, while being aware of a security interest in the relevant goods, honestly believes that the seller will discharge the security interest using the purchase price paid by the buyer. It also would remove an inconsistency in the current priority structure of the Act. It is clear that a secured party can gain priority under section 35 by acquiring and perfecting a security interest with full knowledge of a prior unperfected security interest. The same is true of an execution creditor who can gain priority over an unperfected security interest even though the creditor grants credit and enforces his or her judgment with full knowledge of the security interest. So why not also buyers?
Against buyers of intangible collateral: Proposed section 20(4) already appears in the current Saskatchewan and Atlantic PPSAs but not in the other Acts. Its purpose is to approximate the position of a buyer of an instrument or a security or the holder of a negotiable instrument under section 20(3) with the position of a transferee of the same type of property under sections 31(4)-(6). Under the latter sections, an ordinary course transferee takes free of the security interest even though the collateral was acquired with knowledge of it. In the absence of proposed section 20(4), a non-security transferee of property would be in a worse position when in competition with the holder of an unperfected security interest than a transferee of the equivalent property in competition with the holder of a perfected security interest. There can be no policy justification for this anomaly.
Priority of buyers of licences
Proposed new section 30(2.1) would extend the same protection to a transferee of a licence in the ordinary course of business that section 30(2) currently gives to ordinary course buyers and lessees of goods.
Priority repercussions of a failure to include a specific serial number description in a financing statement
The proposed addition of a reference to “consumer goods” in sections 30(7) and 35(4) are intended to change the priority repercussions of a failure to register a serial number description in a financing statement covering serial numbered goods where the goods are held by the debtor as consumer goods. Under the current scheme, failure to register by serial number is fatal to perfection in the case of consumer goods, whereas the priority repercussions of using a generic description are less drastic for equipment. In the latter case, the secured party is subordinated to a buyer for value without notice under section 30(7), and the security interest is treated under 35(4) as unperfected for the purposes of a competition between competing security interests. However, a generic description is sufficient for priority over a judgement creditor or a trustee in bankruptcy. In the view of the authors, this distinction lacks a sufficient policy rationale and introduces unnecessary complexity into the priority structure of the Act. It is therefore proposed to change the Act to authorize the optional use of a generic description for all serial numbered goods, subject to the risk of subordination, in the case of both consumer goods and equipment, to buyers and competing secured parties who have registered by serial number.
Priority in proceeds of money, a negotiable instrument, a security or a negotiable document of title
Proposed new section 31(6.1) would make it clear that the special priority position of a holder of money and a transferee of a negotiable instrument, a security or a negotiable document of title carries over to the proceeds of the property. There is no point in having priority in such forms of collateral if their conversion into proceeds (other than money which the secured party takes into possession thereby bringing itself within section 31(1)) results in the loss of that priority status.
Priority of new purchasers for value of chattel paper
Current section 31(7) distinguishes between the priority of non-inventory financiers and the priority of other secured parties as against a new purchaser for new value who takes possession of the chattel paper in the ordinary course of the purchaser’s business. The proposed reformulation would eliminate this distinction thereby enabling inventory financiers to preserve priority in chattel paper which is proceeds of inventory by monitoring the debtor’s handling of the paper to ensure that their name is inscribed on it as the purchaser. This change is a logical consequence of the adoption of ‘marking’ in section 24 as a method of perfection to accommodate the use of electronic chattel paper. It also reflects the authors’ recognition that the concerns posed by the commercial financing patterns which existed when the distinction was first introduced are no longer present.
It is also proposed to include chattel paper purchasers within subsection 31(6). As a result of this change, a purchaser of chattel paper has knowledge sufficient to defeat its priority under subsection (7) only if the chattel paper is acquired with knowledge that the transaction violate the terms of the security agreement between the debtor and a prior perfected secured party. This change would not, however, eliminate ‘marking’ as a means for prior secured parties who are actively monitoring the debtors’ chattel paper to preserve their priority claim in specific paper. Under the reformulated subsection (7), the purchaser would take priority only if the specific paper is not already inscribed with the name of a competing claimant.
Much more substantial changes to section 31 will be required on implementation of the proposed Uniform Securities Transfer Act.
Priority between a prior registered accounts financier and an inventory financier claiming priority in accounts as proceeds of inventory.
Different PPSA jurisdictions have adopted different policies on the issue of priority between a prior registered accounts financier and an inventory financier claiming priority in accounts as proceeds of inventory. Section 34(6) of the Model Act would award priority to the accounts financier. Section 34(6) is included in this report to signal to jurisdictions with the opposite rule (Ontario and the Atlantic provinces) the need to reconsider their approach. Giving priority to the purchase money inventory financier is not inappropriate in the context of true secured financing transactions. However, where the debtor has sold its accounts outright to a transferee who has perfected by registration, the policy is far less defensible especially in the light of the growth in securitisation transactions, which depend on the ability of the originator of the accounts to effect a secure sale of the securitised accounts. This concern could be met by adopting subsection 30(6) but confining its operation to a true sales of accounts (this likely would be held to be the intended result under the Ontario and Atlantic PPSAs even without an express rule). However, such a bifurcated approach encourages litigation on the appropriate characterization of the transaction. Consequently, it is suggested that consideration be given to adopting section 34(6) without any such qualification.
Priority effect of lapse or inadvertent or fraudulent discharge of registrations
The proposed new section 35(7.1) would relieve a secured party from any need to re-activate its perfected status, in order to maintain protection against prior subordinate interests, where a registration lapses or is fraudulently or inadvertently discharged after the secured party has begun enforcement measures.
Priority in the event of a corporate amalgamation
Proposed sections 35(10-(11) are designed to address the issue of priority that arises when two or more corporations which have given security interests in their existing and after-acquired property amalgamate and the "new "corporation acquires property that falls within the collateral description of the security agreements executed by the amalgamating corporations.
Protection of account debtors
Derived from article 9-209, proposed new subsection 41(10) would empower a debtor, on termination of a security relationship involving accounts or chattel paper, to require the secured party to send a written notice to any account debtor to whom a notice of the assignment has been sent, releasing the account debtor from any further obligations to the secured party.
If we are to maintain the current broad uniformity which exists among the Canadian PPSAs, it is necessary that there be some vehicle for disseminating ideas about desirable amendments for broad discussion. It is hoped that this Report, delivered as it is through the aegis of the ULCC, offers one such potential vehicle.
While the subject matter of the Report is of obvious direct interest to legislators and analysts in the common law provinces, the authors trust that some of the substantive and policy issues which are addressed will also be of interest to colleagues in the province of Quebec, in view of the commonalities which exist between many of the substantive and policy choices reflected in the Canadian PPSAs and in the Quebec Civil Code provisions on real security in movables.
Comments are welcome on the proposals for change which are made here, as are suggestions for what proposals might usefully be put forward in Part 2, which, as noted earlier, will deal with the provisions of the Model Act relating to registration, enforcement, and more general issues. Professor Cuming may be contacted at Professor Walsh may be contacted at
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