The recent decision of the Ontario Superior Court of Justice in the bankruptcy of 1231640 Ontario Inc. has highlighted the importance for secured creditors to maintain the perfection of their security in the event that the name of a debtor in receivership changes prior to the appointment of a trustee in bankruptcy.
On November 14, 2001, Royal Bank of Canada (the "Bank") obtained the appointment of an interim receiver of the assets of The State Group Limited pursuant to ss. 47(1) of the Bankruptcy and Insolvency Act. The appointment order contained the usual stay provisions prohibiting all "proceedings" against the debtor and its property without further order of the Court. The order also authorized the receiver to sell certain of the State Group assets. As the assets to be sold included the State Group corporate name the order expressly authorized the receiver to change the debtor’s name to 1231640 Ontario Inc. The name change was effected on November 15.
Subsection 48(3) of the Personal Property Security Act (Ontario) provides that a security interest will become unperfected unless the secured creditor files a financing change statement or takes possession of its collateral within 30 days after learning of the name change. The Bank did not take either step following the name change. On January 31, 2002, the interim receiver made an assignment in bankruptcy on behalf of the debtor and became its trustee in bankruptcy. The Bank asserted a secured claim with respect to State Group assets recovered by the trustee following its appointment. The trustee brought a motion for directions to determine whether the Bank’s security was effective against it in the circumstances. St. Paul Guarantee Insurance Co., a subordinate secured creditor whose security had also become unperfected, challenged the Bank’s claim, relying on ss. 20(1) of the PPSA which provides that an unperfected security interest is not effective against "a person who represents the creditors of the debtor, including an assignee for the benefit of creditors and a trustee in bankruptcy".
The Bank raised four arguments against the application of ss. 20(1) of PPSA.
- The interim receiver was "a person who represents the creditors of the debtor" within the meaning of ss. 20(1) and as the Bank’s security was perfected at the time of the appointment of the interim receiver it remained effective against the trustee notwithstanding the subsequent loss of perfection.
- The stay provisions of the receivership order prevented the Bank from filing a financing change statement and it would be unjust to deny it secured status as a result of complying with the order.
- As a matter of policy the Court should exercise its inherent jurisdiction to crystallize the effectiveness and relative priorities of secured claims as of the date of the appointment of an interim receiver notwithstanding the provisions of ss. 48(3) and 20(1) of the PPSA and the subsequent appointment of a trustee.
- The appointment of the interim receiver constituted possession of the secured property "on behalf of the secured party" pursuant to ss. 26(2) of the PPSA and accordingly the Bank’s security interest was perfected by possession without the necessity of a financing change statement.
The Honourable Mr. Justice Ground rejected all four arguments. As to the first argument, Ground J. concluded that an interim receiver was not a person who represented the creditors of the debtor and that the dispute between the Bank and the trustee should be determined as of the date of the appointment of the trustee at which point the Bank’s security was unperfected.
As to the second argument, while Ground J. concluded that the filing of a financing change statement would be a "proceeding".prohibited by the stay provisions of the order, the Bank could have moved to lift the stay to permit the filing.
As to the third argument, Ground J. held that there was no legislative gap in the PPSA and therefore no justification for exercising inherent jurisdiction to override ss. 48(3).
Finally, with respect to the fourth argument, Ground J. held that for several reasons the interim receiver could not be said to have taken possession of the property in question on behalf of the secured party and accordingly perfection by possession was not available to the Bank.
In the result the Bank’s security was found to be ineffective against the trustee and the proceeds in the possession of the trustee became available to unsecured creditors who otherwise would have received no dividend.
The Bank has appealed the decision but a hearing date has not been set. St. Paul Guarantee Insurance Co. was represented on the motion by BLG.
If you would like more information regarding this decision please contact the authors or any member of BLG’s Insolvency and Restructuring Group. A list of all of the members of the Insolvency and Restructuring group is accessible by clicking this link:
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