Securing Personal Property in Ontario Under the Personal Property Security Act

A Guide to Foreign Sellers and Suppliers
In any situation where a foreign seller or supplier of goods to an Ontario customer or dealer will not receive immediate payment upon delivery, there arises the question of how to effectively secure the foreign creditor's claims against the Ontario debtor. If you are a foreign seller or supplier in this situation, be warned: you cannot necessarily rely upon the fact that your contract is governed by the law of your home country. A "reservation of title" clause in that contract will not have the same effect in Ontario as it may in your domestic jurisdiction.

Foreign lawyers often mistakenly assume that Ontario has a system for securing claims in personal property which is similar to their own. Changes to Ontario law have in fact created a system similar in many respects to the American Uniform Commercial Code (UCC). This misapprehension of foreign lawyers can create a shock for their clients, when an Ontario buyer or distributor defaults upon its obligations, and the client discovers that it cannot take back the goods which the buyer or distributor has failed to pay for. Other creditors, by following the Ontario system, have taken priority over the foreign seller or supplier, and have lawfully seized the goods. To help ensure that this does not happen to you, this article will attempt to explain how you can comply with Ontario law for securing claims in personal property.

The P.P.S.A.
The perfection of enforceable claims in personal property is governed in Ontario by the Personal Property Security Act (PPSA). The many devices by which one can create a security interest (i.e. debentures, conditional sales contracts, chattel mortgages, etc.) remain usable in Ontario, but the system has been simplified by providing a uniform set of rules to govern them. The PPSA recognizes that all such security devices have the same purpose: securing payment of a debt or obligation. With that in mind, the PPSA creates precise rights and obligations, all within the single concept of the "security interest."

In order to secure a claim under the PPSA one must obtain a "perfected" security interest in the collateral (goods which have not yet been fully paid for, over which the seller or supplier wishes to secure a claim). The rights of a foreign creditor in such personal property are not effectively protected unless it has acquired a perfected security interest in that property. There are two steps in the creation of a perfected security interest: attachment and perfection.

Attachment of a Security Interest
Attachment of the security interest means that all of the events necessary under the PPSA for the initial creation of a security interest have taken place. The rights of the creditor in the property are then enforceable only as against the debtor (the buyer or distributor). Attachment alone will not protect a creditor from the claims of third parties to the same goods.

The three events necessary for attachment to occur are:

1. the creditor must give value for the security interest;
2. the debtor must acquire rights in the collateral; and
3. there must be a written security agreement signed by the debtor, in which the property being secured is described in a manner sufficient to identify it.

A security agreement can cover property that is to be acquired by the debtor in the future; thus, on the mere acquisition of property by the debtor a valid security interest in that property will be created.

The security agreement is an agreement which may be separate from the contract of sale, distributorship agreement or promissory note which is also connected with the transaction. The security agreement should be drafted or reviewed by an Ontario lawyer experienced in secured transactions, who will understand the necessity of paying attention to such details as:

• the inclusion of a "granting clause," which explicitly states that the debtor is granting the creditor a security interest in the collateral;
• specifically listing all of the debts and obligations being secured under the agreement, such as the payment of attorney fees and collection fees, and the debtor's obligation to maintain insurance coverage on the collateral; and
• a broad and detailed description of the collateral being secured, sufficient that the security agreement will not need to be amended when new goods are sent to the buyer or distributor.

All security agreements drafted outside of Ontario, covering goods which are to be stored in Ontario should be reviewed by counsel in Ontario to ensure their sufficiency.

Perfection of a Security Interest
As stated earlier, it is necessary to "perfect" a security interest in order to ensure the recognition of the creditor's rights in the collateral as against third parties. It is vital that perfection occur as soon as possible. Where two creditors claim a perfected security interest in the same goods of the debtor, the priority between the claims of those creditors is generally decided by determining which secured party perfected earlier.

Perfection occurs when the security interest has attached and all steps required for perfection have been taken. The most common method of perfection is registration. All types of collateral may be perfected by registering a "financing statement" with the proper Ontario authorities. A financing statement contains only a skeletal outline of the security arrangement between the parties. A central registration system, accessible from any place in Ontario, provides information on all personal property security devices in Ontario. Once the registry system is searched under the name of the debtor, the searcher is put on notice as to whether a secured transaction has occurred involving that debtor. The searcher must then make further inquiries of the parties to that transaction to determine the state of affairs between them, with respect to the amount of the loan and the collateral being used to secure its payment.

Registry Searches
The filing of a financing statement effectively puts the public on notice of the existence of a security interest, and the public has a responsibility to search the registry system for such financing statements. A foreign seller or supplier should arrange to have an Ontario lawyer conduct a search under the prospective buyer or distributor's name or corporate name. A foreign seller or supplier should know whether a perfected security interest already exists in the goods of the Ontario buyer or distributor, and whether those (secured) goods are similar to those which are to be sent to that buyer. If that is the case, the foreign seller or supplier may not be able to take first priority in its interest over the goods which it is exporting.

If a search turns up previous filings with respect to the same collateral as the goods being exported, the buyer or distributor should be asked for further information, for example requesting copies of the security agreements. In such cases, it will often be necessary for the buyer or distributor to produce some other form of security before the transaction can be completed.

Conflict of Law Issues
The PPSA provides rules to sort out international conflicts of law which may affect the validity, perfection and effect of the perfection of security interests, the effect of bringing collateral into Ontario from outside the province, and procedural and substantive issues affecting the enforcement of the secured party's rights.

Principal PPSA Conflict Rules
The PPSA provides that the validity, perfection and effect of perfection or non-perfection of a security interest will generally be determined by the following rules:

1. the law of the jurisdiction where the collateral is situated at the time the security interest attaches, if the security interest is in goods, or a possessory security interest in a security, an instrument, a negotiable document of title, money or chattel paper, or
2. the law of the jurisdiction where the debtor is located at the time the security interest attaches, if the security interest is in intangibles, equipment that is of a type normally used in more than one jurisdiction, or inventory leased or held for lease by a debtor to others that is of a type normally used in more than one jurisdiction, or is a non-possessory security interest in a security, an instrument, a negotiable document of title, money or chattel paper.

Rule (A) is subject to any other PPSA rule which may apply, while rule (B) is not. For the purposes of rule (B), the debtor is "located" at the debtor's:

1. place of business, if there is only one such place;
2. chief executive office, if there is more than one place of business; or
3. principal place of residence, if there is no place of business.

PPSA Change of Location Rules

Rule (B)
If the debtor changes location from another jurisdiction to Ontario, a security interest granted by the debtor in collateral which is subject to rule (B) (the PPSA conflict rule based on the debtor's location) and which is perfected under the laws of the jurisdiction where the debtor was located when the security interest attached, that security interest will continue to be perfected in Ontario if it is perfected in Ontario by the earliest of:

1. 60 days from the change of location;
2. 15 days from the secured party receiving notice that the debtor has changed location; or
3. expiry of perfection under the law of the other jurisdiction.

Rule (A)
A security interest in goods which are brought into Ontario is subject to a similar temporary perfection rule. A security interest in goods that was perfected under the laws of another jurisdiction in accordance with the general PPSA conflict rule applicable to goods will continue to be perfected in Ontario if a financing statement is registered in Ontario before the goods are brought into Ontario, or if such security interest is perfected in Ontario by the earliest to occur of:

1. 60 days after the goods are brought into Ontario;
2. 15 days from the secured party receiving notice that the goods have been brought into Ontario; or
3. expiry of perfection under the law of the other jurisdiction.

In circumstances where the parties understand at the time the security interest attaches that the goods will be kept in a jurisdiction other than that in which the goods are located when the security interest attached, and the goods are in fact moved to that other jurisdiction within 30 days after attachment, the security interest is governed by the laws of the jurisdiction in which the goods are to be kept.

Additional PPSA Conflict Rules
Procedural matters affecting the enforcement of the rights of a secured party are governed by the law of the location of the collateral at the time of enforcement, unless the collateral at issue are intangibles. Where the collateral is intangible, the procedure is governed by the law of the forum.

Substantive matters affecting the enforcement of the contract between the secured party and the debtor are governed by the "proper law of contract." The determination of the proper law of contract will be governed by the common law.

Creditors' Remedies
A creditor who possesses a perfected security interest has many advantages. The protection which they are given extends beyond the specific goods exported to the Ontario buyer or distributor, to other types of collateral. As mentioned earlier, a properly-drafted security agreement will cover the debt or after-acquired property and future advances from the creditor. A perfected security interest in collateral can also be extended to cover certain kinds of "proceeds" from that collateral, ie. goods received in trade for the collateral or insurance benefits received from loss of the collateral.

Further, the seller or supplier will receive specific rights which can be enforced if the buyer or distributor defaults under the terms of the security agreement. These rights are enforceable even where the buyer or distributor has not declared bankruptcy. These include the right to take possession of the collateral, and the right to notify a debtor of the buyer or distributor that such debtor is to pay their debt to the seller or supplier from now on. The seller or supplier has the choice of whether to exercise these PPSA remedies, or to simply sue the buyer or distributor for breach of contract.

Where the buyer or distributor does declare bankruptcy, a creditor with a perfected security interest has a high degree of priority in the bankruptcy scheme. If there are insufficient assets in the bankrupt's estate to satisfy all of the bankrupt debts, certain creditors are entitled to satisfy their claims first, while others must wait, collecting little or possibly nothing on their claims. Generally, the claims of the holder of a perfected security interest will rank ahead of those of persons with unperfected security interests, and those whose security interests were perfected later in time.

Purchase-Money Security Interests
The PPSA provides special priority rules for what it calls a "purchase-money security interest." A purchase-money security interest ("PMSI") is the interest which a seller or lessor takes in the collateral, to secure the payment of all or part of the price of the collateral which has been sold or leased. It can also refer to the interest taken in collateral purchased or leased to a lender who gives value to the debtor for the purpose of enabling the debtor to acquire rights in that same collateral.

A PMSI that complies with the requirements of the PPSA gives the party secured by that PMSI priority over any other person who claims an interest in that specific collateral, as granted by that same debtor. The PMSI rule exists in order to ensure that a debtor wishing to make additional purchases of property will always be able to obtain credit from a new financier or supplier. Recognition is given to the fact it is only by the credit of this new financier or supplier that the debtor's pool of assets increased, and the new financier or supplier is thus able to look to that collateral to satisfy its claim before anyone else's claim can attach to that collateral.

The requirements which must be met by a PMSI-secured party are complex. Should a foreign seller or supplier believe that its transaction with an Ontario buyer or distributor could be the subject of a PMSI, an Ontario lawyer should be retained to examine the transaction and to draft the appropriate PMSI security agreement.

Conclusion
The PPSA (Ontario) provides a simple and reliable system whereby foreign sellers and suppliers can determine how their interest in the property they are exporting will rank with that of the buyer or distributor's other creditors. To make full use of this system in protecting their own interests, foreign sellers and suppliers should remember the notice requirements of the PPSA system, and be prepared to file notice of any interest which they claim with the Ontario personal property registrar, as early as possible.

The foregoing comments are of a general nature, and are not intended nor should they be used as a substitute for legal advice or opinions which can be rendered only when related to specific fact situations.

Personal Property Security Act ("PPSA"), R.S.O. 1990, c. P.10, s. 2(a). Security interests are created under the PPSA "without regard to the person who has title." McLaren, Richard H. Secured Transactions in Personal Property in Canada, 2nd ed. ("McLaren"), pages 1-3 to 1-4. PPSA, s. 2. PPSA, s. 11 (2). PPSA, s. 12. McLaren, pp. 2-12 to 2-16. PPSA, s. 30 (1). PPSA, s. 19. McLaren, pp. 3-21 to 3-22. PPSA, s. 18; McLaren, p. 3-23. Re Lambert (1994), 7 P.P.S.A.C. (2d) 240 (Ont. C.A.), at p. 254. McLaren, p. 30-3. The legal definitions of the terms intangibles, possessory security interest in a security, non-possessory security interest in a security, instrument, negotiable document of title, money and chattel paper are found in section 2 of the PPSA. PPSA, ss. 5(1) and 7(1) PPSA, s. 7(4) PPSA, s. 7 (2) PPSA, s. 5(1) PPSA, s. 5(2) PPSA, s. 7 (1) PPSA, s 8(1)(a), (b) PPSA, s. 8(1)(c) PPSA, s.25. PPSA, s. 62 (a). PPSA, s. 61. PPSA, S. 59 PPSA, s. 30 (1). PPSA, s. 1 (1) definition, "purchase-money security interest." PPSA, s. 33 (1). McLaren, pp. 5-40 to 5-41.

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