Types of Security
The type of security taken in any given set of circumstances will depend on a number of factors, often relating to the specific borrower, the nature of its assets or structure of the transaction. Personal property security can be taken over items specifically identified in the security document, or can cover all present and future personal property of a debtor. Types of security agreements include, but are not limited to:
- • General Security Agreements (GSAs), which provide creditors with a security interest in the debtor’s personal property, including its undertaking (or business), inventory, equipment, accounts receivable and other property. While a GSA normally charges all present and after-acquired personal property, a GSA can easily be modified to charge or exclude specific items of personal property. The equivalent of the GSA in Quebec is the hypothec on a universality of movable property.
- • Debentures are frequently used to obtain security over real and personal property of debtors. Much like GSAs, debentures usually include security over all present and after-acquire property of the debtor. However, unlike GSAs, debentures are in a form which can readily be modified to be registered in real property title registry offices. In Quebec, security over real property (or “immovable property”) is taken by way of a notarial hypothec over immovable property.
- • Assignments of Accounts Receivable or Book Debts can be either general in nature or specific to a particular receivable. In Quebec, security over accounts receivable is taken by way of a movable hypothec.
- • Pledges require debtors to deliver specific assets to the creditor, such as securities (shares, bonds and other securities), or negotiable instruments, such as promissory notes. The creditor will ensure that the items pledged are negotiable and properly endorsed or accompanied by any necessary power of attorney to transfer. The creditor will retain possession of the pledged items for as long as the security is required, to the extent that the pledged securities are certificated.
- • Chattel mortgages, conditional sales contracts and leases are examples of specific security agreements.
- • In 2007, the Securities Transfer Act (Ontario) (the “STA”) came into effect in Ontario. Since then, most other provinces in Canada (including British Columbia, Alberta and Quebec) have adopted similar legislation. The STA is modeled after Article 8 of the Uniform Commercial Code (the “UCC”). The STA has modernized commercial practices regarding pledging of investment collateral as security for loan obligations. Although there are differences between the STA and the UCC, one of the main objectives of the STA was to make the laws regarding the pledging of investment collateral similar to comparable laws in the U.S., and other countries with advanced legislation regarding a pledging of investment collateral. At the same time as the implementation of the STA in Ontario and other provinces, various amendments were made to the PPSA in applicable provinces, so that the PPSA in such provinces would mesh with terms and concepts implemented by the STA.
The PPSA - Application
Subject to specific exclusions, PPSAs apply to every transaction that, in substance, creates a security interest. A transaction will be within the scope of the PPSAs if it meets certain requirements: the transaction must create a security interest or an interest in personal property and, in most provinces, the grant of a security interest secures the payment or performance of an obligation. The substance, not the form of the transaction, will determine whether a PPSA applies. Recent changes to the Ontario PPSA provide that it applies to a personal property lease for a term of more than one year (many of the PPSAs in other provinces already contain a comparable provision). The definition of debtor in the Ontario PPSA has also been amended so that such term includes not only a person who owes payment or other performance of an obligation, but also a person who owns or has rights in collateral, and makes the collateral available as security without assuming any obligation for the principal borrower’s obligations.
Perfection and Attachment of Security Interests
Each PPSA requires the “attachment” of a security interest to the collateral, in order for a security interest to be enforceable against a third party. There are specific provisions in the PPSAs that enumerate the requirements of attachment and determine when attachment occurs. Once a security interest has “attached”, a creditor must ensure that its security interest is “perfected”, either by registration of a financing statement or with certain types of collateral, or by possession or “control” of the collateral. Similarly, in Quebec, security by way of an hypothec is “perfected”: (i) by “publishing” (i.e. filing) a notice at the Personal and Movable Real Rights Registry Office maintained in the Province of Quebec, in the case of security over movable property without possession; (ii) by publishing the hypothec at the land register in the jurisdiction where the immovable property is located, in the case of security over immovable property; or (iii) by possession of the collateral, in the case of movable property that is tangible (i.e. “corporeal”) or representative in nature, as the case may be.
Personal Property Security Registration (PPSR)
Each PPSA jurisdiction maintains a separate central security registry, which requires registration (and searches) to be conducted in each province or territory in which the borrower has assets, or in which a debtor may be “deemed to be located” (i.e. chief executive office location). A “financing statement” is registered in respect of the security agreement. The information is then recorded and maintained in a database, which is available for searching by potential lenders, other creditors or purchasers. Strict rules govern the contents of a financing statement. Secured creditors are also required in a timely fashion to correct any errors in a registration, or file notices of changes to the essential elements of the registration. The registry system in Quebec is very similar to the PPSA jurisdictions in this regard.
Priorities within the PPSAs
The general rule under each PPSA is that the “first to perfect” will usually have priority over other security interests. This “first to perfect” rule, however, is subject to specific exceptions and super-priority for certain types of collateral in specified circumstances for a “purchase-money security interest” or “PMSI” or, in the majority of provinces, for perfection of a security interest by “control” in investment collateral. A PMSI is a security interest taken or reserved in collateral to secure payment of all or part of its price, or taken by a creditor who gives value for the purpose of enabling the debtor to acquire rights in or to the collateral, to the extent that the value is applied to acquire the rights. If a PMSI creditor strictly adheres to the rules set out in the applicable PPSA, the creditor will achieve priority over any other security interest in the same collateral granted by the same debtor, even though it is already registered in favour of another creditor. PMSI’s, however, may not have priority over Bank Act security. The “first to perfect” rule is also applicable in Quebec. Similar to the PPSAs, the CCQ also provides for certain exceptions to the rule.
Rights and Remedies upon Default
The PPSAs and the CCQ also contain comprehensive rules dealing with rights and remedies of creditors following default by their debtors. The rights of a secured party include, but are not limited to, the right to take possession of the collateral, the right to retain the collateral or the right to dispose of the collateral.
The PPSAs also enumerate rights and remedies of the debtor. These include, but are not limited to, the right to redeem the collateral or a right to reinstate the security agreement, and the right to receive notice of the creditors’ intentions upon default.
Each PPSA also specifies that in addition to the rights and remedies enumerated in the PPSA, the principles of law and equity continue to apply, unless they are inconsistent with the express provisions of the legislation.
The PPSAs have been in place in several jurisdictions in Canada for at least twenty-five years. There is considerably more certainty and consistency in commercial transactions, now that all jurisdictions (with the exception of Quebec) are using essentially the same statutory provisions and principles. Despite the differences in terminology, practices and procedures between Quebec and the PPSA provinces, in most cases, substantially the same or similar rights and remedies are available to creditors in Quebec, as those that apply in PPSA jurisdictions.
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