Canada: The Nuts And Bolts Of Collateral Descriptions In British Columbia

Introduction

To obtain effective security over personal property, a lender must describe the collateral subject to its security interest in both its security agreement with the debtor and in its registered financing statement. This article will focus on the requirements for proper description of collateral in financing statements in B.C. (and most jurisdictions in Canada other than Ontario), and is a reminder to those in Ontario that B.C .does not have a "check-the-box" system for describing collateral in financing statements. Instead, lenders in B.C. must comply with stringent requirements for describing collateral in the BCPPSA¹ and the regulations under that Act.

The B.C. Supreme Court judgment in Alda Wholesale ² states that one of the primary purposes of the BCPPSA is "to give notice of the nature of prior security to a ... creditor" so that it will know "whether the collateral is the same as the collateral over which it is also seeking security."³ It also states that the "integrity of the registration system is best promoted if those filing financing statements are accurate in their descriptions."⁴ If a lender fails to adequately describe collateral in its financing statement, its security interest will not be perfected against some or all of the collateral, resulting in a potential loss of priority against third parties such as other secured creditors, purchasers or trustees in bankruptcy.

How to Describe Collateral

The regulations to the BCPPSA provide numerous detailed rules on describing collateral in a financing statement. If a lender takes a security interest in all personal property in which the debtor has or may have an interest, the financing statement should describe the collateral as "All of the debtor's present and after-acquired personal property", sometimes referred to as "all PAAPP."⁵

Alternatively, if a lender takes a security interest in either a specific item of property (e.g., "100 shares in ABC Ltd."), or in a "kind" of property (e.g., "All shares and other investment property"), the lender must describe the collateral by item or kind in the financing statement.⁶ An "item or kind" description should also refer to after-acquired property if it is subject to the security interest (e.g., "All present and after-acquired shares and other investment property"). If after-acquired property is not referred to, it will not then be included in the collateral charged.⁷

Three categories of goods frequently used to describe collateral are inventory, equipment and consumer goods. An example of the minutiae of the BCPPSA is that describing collateral as "inventory" is acceptable, but only while the debtor actually holds the collateral as inventory.⁸ If the debtor's use of the collateral changes from being classified as its inventory, the lender will lose its security interest in that collateral unless the new use is already covered by the collateral description. By contrast, a description of collateral as "consumer goods" or "equipment" is inadequate without further reference to the kind of collateral (e.g., "computer equipment").⁹

For goods described in the regulations as "serial numbered goods", the lender should provide a description by serial number to obtain the highest priority for its security interest. In B.C., these goods are not limited to motor vehicles, but also include other mobile goods such as boats, aircraft, trailers and manufactured homes. However, they do not include other non-mobile goods simply because they have serial numbers.¹⁰

In any description that is not "all PAAPP", a lender must describe not only the original collateral, but also proceeds that may arise from dealing with that collateral. While a security interest automatically extends to any proceeds derived from dealing with the original collateral, to obtain the same priority status against the proceeds (except for certain limited categories of proceeds such as money or cheques) as the original collateral, a financing statement must contain a description of proceeds that would be sufficient to perfect a security interest in original collateral of the same kind.¹¹ Since a lender cannot predict what proceeds might arise from dealing with the original collateral, a generic proceeds description is most often included in the financing statement, essentially claiming an interest in any kind of personal property that may be proceeds.

Finally, it is important that the description of collateral in the financing statement be grammatically clear. In Alda Wholesale, a creditor lost priority because a misplaced modifier made it unclear whether the security extended to all of the debtor's vehicles or only those vehicles that were leased by the debtor from the creditor. This lack of precision made the entire description "seriously misleading" and invalid.¹²

Describing collateral in a B.C. financing statement may seem easy, but the rules are complicated and mistakes can be costly. So despite the rush that can accompany closing a transaction, care should be taken in what is often the final step in perfecting a lender's security interest. This will ensure that the lender achieves its expected priority position against the collateral given as security.

Footnotes

<sup>1. Personal Property Security Act, RSBC 1996, c 359 ["BCPPSA"].
2. Alda Wholesale Ltd. (Trustee of) ,2001 BCSC 921 ["Alda Wholesale"],
3. Alda Wholesale, at para 39.
4. Alda Wholesale, at para 40.
5. Personal Property Security Regulation, BC Reg 227/2002 ["Regulation"] 11(1)(b) and (c).
6. Regulation 11(1)(a).
7. Alda Wholesale, at para 27.
8. Regulation 11(2).
9. Regulation 11(3).
10. Regulation 10.
11. BCPPSA s. 28(2).
12. Alda Wholesale, at para 30 and 36.</sup>

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.