Copyright 2010, Blake, Cassels & Graydon LLP
Originally published in Blakes Bulletin on Financial Services, November 2010
On August 1, 2007, the Ontario government inadvertently repealed the section of the Ontario Personal Property Security Act (the PPSA) that provided that a collateral description could limit the scope of a collateral classification in a financing statement to perfect a security interest only in the collateral described. The repeal of this subsection (section 46(3)) led to uncertainty as to whether a subsequent secured party could rely on a collateral description in a financing statement and led to many secured parties requiring estoppel letters or other comfort on filings that would not have been an issue previously.
Former section 46(3) has thankfully now been reinstated. Ontario Bill 68 (An Act to promote Ontario as open for business by amending or repealing certain Acts) (the Act) received Royal Assent on October 25, 2010. New section 46(2.1) of the PPSA (which reinstates former section 46(3)), is deemed to be effective as of August 1, 2007, and reads as follows:
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.
This amendment will restore some certainty regarding the effect of a collateral description in a financing statement.
By way of background, the PPSA permits a secured party to include a general collateral description in a financing statement, which is intended to provide additional details on the nature of the collateral classifications that had been marked.
New section 46(2.1) provides that words entered into the collateral description area of a financing statement (i.e., lines 13 to 15) could limit the scope of collateral that would be perfected by such financing statement. For example, if a secured party marks "Equipment" in its PPSA registration, then, absent anything further, one must assume that the secured party has a security interest in all equipment of the debtor. As such, if you are taking a security interest in or purchasing equipment (whether some or all), you would want to get an estoppel letter or other comfort from the prior secured party confirming the scope of its security interest.
If, however, there is a collateral description referring, for example, to only one type of equipment (e.g., one photocopier serial number 12345), one can now again rely on the fact that the financing statement would only perfect a security interest in that particular item of equipment and not other items of equipment. Based on that general collateral description, you could conclude that an estoppel letter is not required.
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.