On August 1, 2007, a package of amendments to the
Personal Property Security Act (Ontario)
(PPSA) came into force. One of the amendments was
the repeal of then section 46(3). That section provided as
Except with respect to rights to proceeds, where a financing
statement or financing change statement sets out a classification
of collateral and also contains words that appear to limit the
scope of the classification, then, unless otherwise indicated in
the financing statement or financing change statement, the secured
party may claim a security interest perfected by registration only
in the class as limited.
Section 46(3) had often been relied upon by lenders prior to
making loans to their borrowers. When registering a financing
statement under the PPSA, one must describe the collateral by
checking off certain collateral classifications (e.g. inventory,
equipment, accounts, etc). One can also describe the collateral in
words. In cases where a prior registered financing statement
described the collateral in words, in addition to checked-off
collateral classifications, former section 46(3) allowed lenders to
rely on the word description to limit the broader collateral
classifications. In many cases, this avoided the need to obtain
estoppel letters from third-party creditors in which they
acknowledged to what their collateral was limited.
The 2007 amendments were originally intended to have included
the removal of the check-the-box registration system. That change
would have brought the PPSA registration system in Ontario into
line with those in other provinces. If the check-the-box system
were no longer in place, there would be no need for section 46(3).
However, the government's PPSA computer system needed certain
upgrades before the check-the-box system could be changed to a pure
word description system, and so the check-the-box system remained
(and continues to remain) in place. Section 46(3), however, was
inadvertently repealed. This led to some uncertainty. After the
section was repealed on August 1, 2007, word descriptions of
collateral could not technically be relied upon to limit the scope
of a prior registered financing statement.
The Ontario government has now reinstated former section 46(3).
The Open for Business Act, 2010 received Royal Assent on
October 25, 2010. The Act includes new section 46(2.1) to
the PPSA, which reinstates former section 46(3), and the
legislation deems the amendment to be effective as of August 1,
As long as the check-the-box system remains in place in Ontario,
this amendment will restore some certainty to the effect under the
PPSA of a word collateral description in a financing statement.
Where appropriate, lenders will, once again, be able to rely on
limiting word descriptions in financing statements, rather than
have to obtain estoppel letters from third-party creditors.
The British Columbia Court of Appeal has recently considered whether the doctrine of unconscionability can be invoked to set aside a contractual clause providing for the payment by one party to the other...
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