The Ontario Court of Appeal has recently confirmed that the
protections established in the Ontario PPSA1 for secured
creditors who are unaware of asset transfers made by their debtors
prevail despite any loss incurred by a subsequent lender acquiring
a security interest in the transferred asset.
In Lisec America2, there was a priority dispute over
a piece of equipment (Machine A) between secured
creditors of two related debtor companies. The first debtor
(Barber Suffolk) had obtained financing for the
acquisition of Machine A from Lisec America Inc.
(Lisec). The second related debtor (Barber
Glass) had obtained financing for the acquisition of other
equipment (Machine B and Machine
C) from Lisec. Lisec properly perfected its purchase money
security interests with registrations against both Barber Suffolk
and Barber Glass. Neither registration included a general
collateral description on the financing statement.
Unfortunately Lisec was not aware that Barber Suffolk had sold
its interest in Machine A to Barber Glass on the day of the
Shortly thereafter, Barber Glass arranged for additional
financing from Roynat Capital Inc. (RCI). Prior to
advancing, RCI requested that Lisec either confirm the scope of its
security interest or, if the Lisec debt had been paid in full,
register a discharge. As Lisec was still unaware of the transfer of
Machine A from Barber Suffolk to Barber Glass, and wished to
facilitate the RCI financing, Lisec discharged its registration
against Barber Glass on the understanding that it would receive
payment for Machine B and Machine C out of the proceeds of the new
RCI financing. On the basis of the discharge, RCI advanced funds to
Barber Glass and registered its security interest against all
assets of Barber Glass, including Machine A.
Barber Glass subsequently went into receivership, and Machine A
was included on the list of assets of Barber Glass to be sold. Upon
receiving notice of this situation, Lisec filed a Financing Change
Statement reflecting the transfer by debtor within 30 days of its
learning of the transfer. Lisec brought an application to settle
the priority dispute and to prevent Machine A from being sold in
the receivership. Lisec argued that its original registration
against Barber Suffolk continued to perfect its security interest
in Machine A. On the other hand, RCI claimed that Lisec's
registration against Barber Glass was broad enough to cover Machine
A such that the discharge filed by Lisec caused Lisec's
security interest in Machine A to become unperfected. The
applications judge found in favour of RCI and Lisec appealed.
The Court of Appeal allowed the appeal and found in favour of
Lisec. It confirmed that pursuant to Section 48(2) of the Ontario
PPSA, the unknown transfer from Barber Suffolk to Barber Glass did
not unperfect Lisec's PMSI in Machine A because Lisec had
properly registered a financing change statement against Barber
Glass within 30 days of learning of the transfer.3 In a
very technical judgment, the Court examined the Ontario PPSA
fundamentals of the granting of a security interest, attachment and
perfection, and determined that Barber Glass had never granted a
security interest to Lisec in Machine A that could have attached
and been perfected by Lisec's registration against Barber
Glass. The fact that Barber Glass ultimately became the owner of
Machine A did not alter this result4. Rather,
Lisec's security interest in Machine A was only perfected by
its registration against Barber Suffolk. The Court found that the
discharge of Lisec's registration against Barber Glass could
not therefore adversely impact the operation of Section 48(2) in
preserving the priority of Lisec's security interest in Machine
The Court also held that Lisec's registration against Barber
Suffolk was a stand-alone registration that was not subsumed in its
Barber Glass registration. The discharge of the Barber Glass
registration did not take with it the discharge of the Barber
Suffolk registration, and that discharge was found to be a red
herring in the analysis.5 The Court observed that RCI
was really in no worse position than it would have been if there
had never been an intervening Lisec/Barber Glass registration
revealed by its search.
1.Personal Property Security Act,
R.S.O. 1990, c. P. 10, as amended.
PPSA"]. 2.Lisec America, Inc. v. Barber Suffolk
Ltd., 2012 ONCA 235, 347 D.L.R. (4th) 678
["Lisec America"]. 3.Lisec America, at page [D.L.R.
685]. 4.Lisec America, at page [D.L.R.
688]. 5.Lisec America, at page [D.L.R.
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