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The Personal Property Security Act (Ontario) (the PPSA)
provides for a particular type of security interest known as a
purchase-money security interest or "PMSI" which allows
for "super-priority" relative to other security interests
in the same collateral. A PMSI may arise where a secured party
provides funding for all or part of the purchase of goods or
supplies goods where all or part of the purchase price remains
outstanding. The PPSA also provides for a PMSI to be obtained over
equipment. A PMSI over equipment involves a different set of
requirements and we will cover these requirements in another
Lessons Learned e-LERT.
In recent matters where our firm has been involved, many
suppliers and lessors failed to follow the procedures required to
obtain a valid PMSI in inventory. The result being that these
secured creditors lost the super-priority which they would
otherwise have. This lesson is to remind creditors of the steps
that need to be followed to ensure a PMSI in inventory is
achieved.
In Ontario, inventory is comprised of goods that are held by a
debtor for sale, lease, that have been leased, that are to be
furnished or have been furnished under a contract of service, or
that are raw materials, work in process or materials used or
consumed in a business.
As discussed in Lesson Six, if a lessee has the right to
sublease the goods at the onset, then such goods are inventory in
the hands of the lessee.
Perfection
To obtain a PMSI in inventory, the PMSI must attach to the
collateral and a financing statement must be registered at the time
(i) the debtor obtained possession of the inventory, or (ii) a
third party (at the request of the debtor) obtained or held
possession of the inventory, whichever is earlier.
Attachment: The PMSI will attach to the collateral once
(a) value is given, (b) the debtor has rights in the collateral and
(c) the debtor has signed a security agreement that contains a
description of the collateral sufficient to enable it to be
identified.
Registration: The PMSI secured party must also register
a financing statement. Where the Ontario PPSA applies, the PMSI
secured party must ensure that the appropriate collateral
classification boxes are checked, which will generally be the
"inventory," "equipment," "accounts"
and "other" boxes. In Ontario, a general collateral
description is not required but the appropriate collateral
classification boxes must be checked.
Notice Requirements
A PPSA search against the debtor should be ordered and reviewed,
and notice must be delivered to every other party who has, before
the date of registration of the financing statement by the PMSI
secured party, registered a financing statement that describes the
collateral as, or as including: (i) items or types of inventory,
all or some of which are the same as the items or types of
inventory that will be subject to the PMSI, (ii) inventory, or
(iii) accounts. Notice need not be delivered to a secured party who
has included a general collateral description that clearly does not
extend to the collateral that will be subject to the PMSI. For
example, notice need not be sent to a prior secured party where
such registration has a general collateral description detailing an
office copier with a listed serial number and the collateral over
which the PMSI will be obtained consists of motor vehicles with
listed VINs.
The notice must state that the person giving it has or expects
to acquire a PMSI in inventory of the debtor and describe such
inventory by item or type.
The notice must be given to the other secured parties
before the debtor receives possession of
the inventory.
Notice to be given to a secured party named in a registered
financing statement may be (i) served by personal service, (ii)
delivered by prepaid courier, or sent by registered mail, to the
most recent address of the secured party as shown in the financing
statement, or (iii) sent by fax or email. It is important to ensure
that post office receipts, return receipts or other evidence of
receipt are obtained and kept with the relevant PPSA search in the
account file as proof that the prior secured party actually
received the PMSI notice may be required.
Lesson
Learned: Care should be taken to ensure all requirements
under the PPSA are met for a valid PMSI in inventory to be
obtained. The following must occur before
the debtor obtains possession of the collateral: (1) attachment of
the PMSI and registration of the financing statement under the PPSA
and (2) PMSI notices must be given to all prior secured creditors.
Failure to follow this process may be fatal to the super-priority
position afforded to a valid PMSI in inventory.
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.
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