Canada: Ontario PPSA Creditor Protections Prevail In Cases Of Unauthorized Asset Transfers

Last Updated: January 2 2013
Article by Richard Dusome

Most Read Contributor in Canada, October 2018

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 original financing.

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 A.

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.

Footnotes

1. Personal Property Security Act, R.S.O. 1990, c. P. 10, as amended. ["Ontario 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. 688].

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