Canada: PPSA 2007: What’s Changing

Originally published in Blakes Bulletin on Financial Services, May 2007

The year 2007 is an exciting time from a business law reform perspective. Two-thirds of the Ontario Government’s threephase plan to modernize and reinvigorate Ontario’s business laws will come into force during this year.

The first phase involved the introduction of the Securities Transfer Act, 2006 (STA) and a number of complementary changes to the Ontario Business Corporations Act (OBCA) and the Ontario Personal Property Security Act (PPSA). The STA and these complementary changes came into force on January 1, 2007. Bill 152, entitled An Act to modernize various Acts administered by or affecting the Ministry of Government Services, 2006, represents the second phase. As its title suggests, Bill 152 will amend a number of statutes, including making a number of long-overdue reforms to the PPSA. The third phase is primarily intended to modernize the laws that govern the not-for-profit sector. These laws are seriously out of date, not having been substantively revised in almost 50 years. During this month, the Ontario Government plans to release for comments a consultation paper on a new not-for-profit act.

This Blakes Bulletin will focus on the PPSA amendments in Bill 152 as well as many changes in practice that the STA will require be made when taking security in all types of securities.

Bill 152 makes approximately 15 changes to the PPSA. Four of the most significant changes to the PPSA relate to: (i) the inclusion of true leases within the scope of the PPSA, (ii) facilitating accounts receivable financing and securitization, (iii) simplifying the rules for determining where to register security interests in certain types of collateral, such as mobile goods, intangibles and documentary intangibles, and (iv) eliminating the "check-box" collateral classification system. The first three of these changes are described in separate articles in this bulletin.

All of the PPSA changes will come into force on August 1, 2007, except for the third and fourth changes mentioned above. The Ontario Government has indicated that it will not bring this third change into force until a critical mass of other PPSA jurisdictions have agreed to introduce the same rules in their jurisdictions. The elimination of the "check-box" collateral classification system will not be implemented until the PPS Registry’s computer system has been re-programmed, which is expected to take at least two years to complete.

Most of the other changes to the PPSA can be classified into the following three categories:

There are some technical amendments that enhance debtor protections.

Section 28(1) of the PPSA, which protects a buyer when a seller sells goods in the ordinary course of business, has been amended to ensure that the buyer is protected whether or not (i) the buyer took possession of the goods, (ii) the seller was in possession of the goods at any point in the transaction, (iii) title to the goods was transferred to the buyer or (iv) the seller took a security interest in such goods, so long as the goods were identified and agreed upon by the parties at the time the contract was made or were marked or designated to the contract.

Similar amendments are being made to the corresponding protection given under section 28(2) of the PPSA to lessees of goods from a lessor who leases the goods in the ordinary course of business.

Section 62 of the PPSA has been amended to prevent a secured party from seizing property that would be exempt from seizure under the Execution Act (Ontario). This amendment will reverse the 1995 Ontario General Division decision in Re Vanhove, which held that the exemptions provided by the Execution Act (Ontario) do not apply to a secured creditor seeking to enforce its security against the personal property and household goods of a debtor. This new exemption will not apply to a secured party who holds either a purchase-money security interest in such goods or a possessory security interest in such goods.

A number of amendments are being made that reflect the new methods of communication that have been introduced since the last major reform of the PPSA in 1989 and the significant reductions in the cost of data storage since the 1970s.

All future PPSA registrations must be made electronically. It will no longer be possible to do a paper filing. One of the advantages of eliminating paper filings is that the gap period between the date of the search and the currency date of the search results will be measured in minutes rather than in days.

Prior to Bill 152, in order to take advantage of the 10-day deemed receipt provision in section 68, it was necessary for notices and other documents given under the PPSA to be given or delivered by personal service or registered mail. Bill 152 will permit such notices and other documents to also be sent by prepaid courier, facsimile and by e-mail. Any notice or other document sent by facsimile or by e-mail will be deemed to have been given on the earlier of (i) the day on which the addressee actually receives the notice or document and (ii) the first business day following the day that such facsimile or e-mail was sent.

Under the PPSA, the primary method of describing a secured party’s collateral has been to check up to five boxes on the financing statement. The five boxes are "consumer goods", "inventory", "equipment", "accounts" and "other". No other jurisdiction in Canada or the United States has a personal property security registry that uses the "check-box" system. Apparently, the early use by Ontario of a computerized registry is responsible for the current Ontario system. In the 1970s, data storage space was extremely expensive. Accordingly, it was necessary to develop collateral description rules that would minimize data storage requirements as much as possible.

As we know, over the last 30 years, data storage costs have dropped sharply. Because the current registration system imposes real costs on completing transactions in Ontario that do not exist in other jurisdictions, the Ontario Government has indicated its willingness over the next couple of years to replace the "check-box" collateral classification system with a system that requires the secured party to describe the collateral by item or type. It is not known at this time whether the special collateral description rules found in the other PPSA jurisdictions – some of which are a trap for the unwary – will be adopted in Ontario. It is also not known how these new rules will be made public, because these rules will made by orders of the Minister and not by Regulation.

A number of PPSA provisions are being amended for clarification and/or harmonization purposes.

The definition of "debtor" will be clarified to include not only the person who owes payment or performance of an obligation secured, but also a person who owns or has rights in the collateral and makes the collateral available as security without assuming any obligations under the security. (A similar definition of "debtor" is found in the other PPSA jurisdictions.) This clarification will permit, for example, a pledgor of shares to be a debtor under the PPSA even though the pledgor did not give the secured party a guarantee. Such arrangements are particularly common in the United States and are occasionally utilized in cross-border financings. However, notwithstanding this clarification, it is still considered to be "best" practice to obtain a guarantee as well from the pledgor.

Prior to Bill 152, section 9(2) of the PPSA provided that a security agreement is enforceable against a third party despite a defect, irregularity, omission or error therein or in the execution thereof, unless the third party is actually misled. In the 1998 Submission of the Personal Property Security Law Committee of the Ontario Bar Association (the 1998 Submission), the PPSL Committee recommended that this provision be deleted because it believed that this provision was seriously defective for two reasons. (A similar recommendation had been made by the Minister’s Advisory Committee in its Supplementary Report of 1985.) The first problem with this section is that it was based on a curative provision that was used in pre-PPSA statutes to deal with errors in the security agreement and supporting affidavits of bona fides and execution, all of which had to be registered and, therefore, became part of the public record. Under the PPSA, affidavits requirements have been abolished and only the financing statement is required to be registered. For errors in a financing statment, section 46(4) of the PPSA is the curative provision that applies to such errors.

The second problem with this section is that it potentially conflicts with section 11(2)(a) of the PPSA. That section requires security agreements to be in writing and contain a description of the collateral that is sufficient to identify it. If read literally, section 9(2) could totally undermine the writing requirement in section 11(2)(a) by excusing even substantial errors or omissions. However, the worst fears of the PPSL Committee have not been realized. In Astral Communications v. 825536 Ontario Inc. (Trustee of) (2000), the Ontario Court of Appeal held that an unsigned agreement failed to meet the writing requirement of section 11(2) and such omission was not cured by section 9(2). The court also said that where there is a conflict between section 9(2) and section 11(2)(a), the latter section should prevail.

Pursuant to section 65(2) of the PPSA, a secured party must serve notice on certain parties if it proposes to "foreclose" on its collateral in full satisfaction of the obligation secured thereby. The period by which a person entitled to notification under section 65(2) must deliver to the secured party a written objection to such proposal has been reduced from 30 days to 15 days. This change means that the objection period is the same in the other PPSA jurisdictions.

Unfortunately, Bill 152 does not include all of the items on our PPSA wish list. Two of the more significant omissions from this latest PPSA reform process are (i) the failure to expressly include governmental licenses and quotas as property under the PPSA and (ii) the failure to create a permanent advisory committee to work with Ministry staff to continue the process of modernizing the PPSA in an organized and principled manner.

Since 1987, there has been a great deal of uncertainty on whether the PPSA applies to certain types of governmental licenses and quotas. The issue came to the forefront when the Ontario Court of Appeal held, in Re National Trust Co. and Bouckhuyt (1987), that a "basic production quota" to grow tobacco granted under the Ontario Farm Products Marketing Act only amounted to a license or permission to do that which would otherwise be unlawful. Because the tobacco quota was so "transitory and ephemeral in its nature" and was subject to such discretionary control by the Tobacco Growers’ Marketing Board, it did not qualify as personal property and, therefore, could not be the subject of a security interest. The fact that the tobacco quota could be exchanged, sold, pledged or leased in limited circumstances, such as to another licensed producer of tobacco, was not sufficient to make it property.

Subsequent Ontario court decisions – including a few by the Ontario Court of Appeal – have generally attempted to soften the harshness of this ruling, without reversing it. These cases indicate a greater willingness on the part of Ontario courts to consider the commercial realities of the underlying value of licenses and quotas in a regulated business. Serious gaps, however, remain in the viability of governmental licenses and quotas as a commercial form of collateral.

Because of the uncertainty caused by these gaps, the 1998 Submission recommended to the Ontario Government that the definition of "intangible" in the PPSA be amended to include "a license" and that a broad definition of "license" be added to the PPSA. A similar approach has been taken in Saskatchewan and in certain other PPSA jurisdictions. The effect of such amendments would be to make all licenses, howsoever created, personal property for the purpose of the PPSA. The broad definition of license would have been qualified, however, by the express recognition in the PPSA that all contractual or statutory restrictions pertaining to such license would continue to apply. The PPSL Committee concluded that it should be up to the secured party, as a matter of commercial judgment, to determine whether a particular license or quota is suitable collateral having regard to the contractual or statutory restrictions that are applicable to such license or quota. The PPSL Committee’s recommendation has not been adopted by the Ontario Government, because the recommendation continues to be rejected by representatives of the Ontario Federation of Agriculture and by some Ontario agricultural marketing boards.

It is possible, however, that in the next year or so this gap could be reduced further without a legislative amendment. Late in 2006, the Supreme Court of Canada in Royal Bank v. Saulnier granted leave to appeal from a decision of the Nova Scotia Court of Appeal. The Supreme Court of Canada will be considering whether a federal fishing license constitutes personal property under the Nova Scotia PPSA.

It is clear that the old way of relying on the recommendations of a committee of the Ontario Bar Association, which is made up of volunteers and which has limited financial and other resources, is no longer appropriate. In earlier times, changes to the PPSA were discrete and were often being made to fix by statute problems that arose out of the case law. It is apparent that this approach is and will continue to be inadequate given the pace, scope and complexity of the recent and expected changes in personal property security-related laws, both within and outside Canada. Ontario needs a process that is more organized and that actively encourages the participation of stakeholders.

In connection with this second phase of reform, the PPSL Committee recommended that the PPSA provide for the creation of a permanent advisory committee, which would work with the Ministry staff to continue the modernization process. The establishment of such an advisory committee would signal to the rest of Canada that Ontario intends to once again take an active role in reforming personal property security law in the common law jurisdictions of Canada.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.