Canada: Why You Want to Avoid Mistakes in Your PPSA Financing Statements

Copyright 2010, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Financial Services, September 2010

A recent decision of the Ontario Court of Appeal has again reinforced the need for a secured party to avoid mistakes in its financing statements.

In Fairbanx Corp. v. Royal Bank of Canada, the Ontario Court of Appeal considered a contest between two PPSA registrations: a registration made by Fairbanx to perfect its purchase of accounts receivable from the bankrupt debtor and a registration made by Royal Bank of Canada (RBC) in respect of security for a loan to the debtor. While Fairbanx filed first and would therefore normally have ranked ahead of RBC, it made a mistake in recording the debtor's name in its PPSA financing statement. The debtor's correct legal name was "Friction Tecnology Consultants Inc.", spelling "Tec[h]nology" without the "h". Instead, Fairbanx made its PPSA filing against the name that the debtor used to carry on its business and that also appeared on its letterhead and invoices; that is, "Friction Technology Consultants Inc.". This latter name was an incorrect spelling of its correct legal name.

RBC had registered against the correct legal name and argued that the failure by Fairbanx to use the debtor's legal name invalidated the Fairbanx filing, giving RBC prior rights even though it had registered later in time. Fairbanx made several arguments in response, but its main argument was that any mistake in its filing was cured by virtue of section 46(4) of the Personal Property Security Act (Ontario) (PPSA) (known as the "curative provision"). Section 46(4) provides that a financing statement or a financing change statement is "not invalidated nor is its effect impaired by reason only of an error or omission therein or in its execution or registration unless a reasonable person is likely to be misled materially by the error or omission."

The Court affirmed the trial decision and held that the curative provision does not apply to this type of error. In effect, their view was that the "reasonable person" contemplated by section 46(4) would always search against the debtor's legal name, and since Fairbanx's filing did not have the debtor's legal name, a reasonable person would be misled. As such, RBC's perfected security interest was given priority over Fairbanx's unperfected interest in the accounts.

Prior to Fairbanx, the leading case on section 46(4) was the Court's 1994 decision in Re Lambert (to see a previous Blakes Report on this decision, click here). In that case, the Court noted that a searcher's subjective knowledge of the existence of a PPSA filing was irrelevant; the curative provision utilizes an objective test. On that basis, the Court upheld a filing against an incorrect debtor name on the basis that the filing related to a security interest in a motor vehicle and, even though the debtor name was wrong, the filing contained the correct vehicle identification number. The Court concluded that, where the collateral is a motor vehicle, a reasonable person would (subject to certain exceptions) search against both the debtor name and the vehicle identification number. As a result, even if a search against the debtor name would not have revealed the secured party's filing, the second search against the vehicle identification number would have and, therefore, the filing was saved under section 46(4). That reasoning, however, was not helpful to Fairbanx in the current case, and the Court's reasoning makes it clear that the curative provision will not normally protect an incorrect debtor name outside a consumer motor vehicle context.

In addition to the Court's findings on section 46(4), there are several other interesting conclusions in the decision:

  • the Court dealt with the fact that PPSA searches will often pick up similar names, but said that, even if it turned out that a PPSA search against the legal name would reveal the incorrectly spelled name, a reasonable person would ignore a filing against the incorrectly spelled name and, therefore, section 46(4) would still not protect the registrant
  • the evidence showed that RBC in fact knew that Fairbanx was factoring the debtor's receivables, but held that RBC's actual knowledge was irrelevanta PPSA search against the incorrect spelling of the debtor's name and found Fairbanx's registration, but again the actual knowledge of RBC was not relevant, because a reasonable searcher may not be able to know whether the misspelled name is an error or the proper spelling of the name of another similarly named debtor
  • Fairbanx (somewhat creatively) tried to rely on much older pre-PPSA law to argue that a sale of receivables was not even caught by the PPSA in the first place, but the Court made swift work of that argument, looking to both section 2(b) which expressly states that the PPSA applies to a transfer of accounts, and to section 73 which deals with conflicts between the PPSA and other laws. (The application of the PPSA to a sale of accounts receivable (and a sale of chattel paper) can be a trap for the unwary, so this case provides a useful reminder of the need to perfect factoring and most other arrangements involving the purchase of accounts and chattel paper.)

Overall, the clear message is that mistakes in financing statements can be fatal. While some mistakes can be cured under section 46(4) of the PPSA, secured parties should not count on the Ontario curative provision helping them, especially if the error relates to the debtor's name. In particular, procedures should be reviewed to make sure that the necessary due diligence is performed to get the debtor's name correct. The steps to follow will vary depending on whether the debtor is an individual or a corporation, partnership, limited partnership, trust or another type of organization. With the increasing use of different types of business organizations in commercial transactions, it is extremely important to consult a lawyer to ensure that the correct procedures are used.

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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