The basic rule of priority for security interests under modern
personal property security laws is that the first to register has
priority. Of course, this rule has exceptions which arise through
the application of other priority rules under the applicable
Personal Property Security Act
("PPSA") or under other laws. Further,
other factors, such as priority agreements among secured creditors,
may alter the priority of these registrations. However, before
priority even becomes an issue, one must have a valid registration.
Without a valid registration, one loses priority.
One reason why a registration may not be valid is that the
underlying instrument in respect of which the registration was made
does not constitute a valid security agreement under the PPSA. In a
relatively recent case in Alberta, one such security agreement fell
under the scrutiny of the courts. The judge's decision provided
some lessons in respect of what constitutes a valid security
agreement and why it is important to ensure that a secured lending
transaction has or will occur with some degree of certainty.
In Matco Capital Ltd. v. Ramparts Energy Ltd., the
registrations of financing statements at the Personal Property
Registry by holders of special warrant certificates had been
ordered to be discharged for failing to prove that a valid security
agreement existed to support the registrations. The registering
parties held special warrant certificates that were eventually
converted into preferred shares that were both retractable and
convertible. The key feature of these preferred shares was that the
holders could request that the corporation redeem the shares at a
certain date in the future. If the corporation could not repurchase
those preferred shares on that future date, the price of any
unredeemed shares was to become a debt. On becoming a debt, and
only from that point on, the corporation granted the shareholders
(now creditors) a security interest in its personal property.
The key issue was whether this future debt transaction and the
future granting of this security interest constituted a security
agreement which could justify the registration of a financing
statement prior to that future date.
In the end, the special warrant certificates/preferred shares
did not constitute security agreements under the PPSA of Alberta.
Lenders (or, more appropriately, future lenders) are not allowed to
register financing statements in anticipation of a future secured
debt transaction that is subject to future uncertain events.
Unfortunately, the court did not comment further to indicate what
level of certainty is required.
The PPSA of Alberta, like in other jurisdictions, allows lenders
to register financing statements in advance of the signing of
documents or the advance of a loan. This is typically seen as a
practical and efficient solution to facilitate lending
transactions. If the deal does not go through, the registration can
Registering a financing statement in advance of a secured
transaction that may or may not occur in the future is considered
an abuse of this privilege. Consider what would have happened if
the shareholders had retained their registrations and another
lender had registered a financing statement later in time and held
a perfected security interest prior to the retraction/conversion
date. The shareholders would have been the first to register, but
the other lender would have perfected its security interest first.
Yet, the first to register would have priority. The shareholders
would have leap-frogged the subsequent lender with a security
interest that may or may not come to fruition.
Registrations are not always as they seem. Every now and then,
they may be challenged and priority may be at issue. Priority is
not necessarily determined by the date of registration. If the
underlying interests do not support the registration that is
sought, the registration may be discharged and priority may be
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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