Canada: Whose Proceeds Are They?

Last Updated: January 14 2011

Another recent Ontario Superior Court of Justice case, Bank of Nova Scotia v. IPS Invoice Payment System Corporations et al.1, reviews the scope of a security interest over proceeds and discusses whether the amount of the indebtedness secured by a security interest in both collateral and its proceeds is limited to the amount of the secured debt or the value of the collateral.


In August 2008, The Bank of Nova Scotia (the "Bank") provided 1429030 Ontario Inc. ("Blooming Rose") with a revolving line of credit, margined against inventory and accounts receivable. The loan was secured by an existing general security agreement which was registered in March 2007.

In September 2007, IPS Invoice Payment System Corporations ("IPS") and Blooming Rose entered a factoring agreement pursuing to which Blooming Rose assigned various invoices to IPS. Under the factoring agreement, Blooming Rose had an obligation to re-purchase invoices if IPS could not collect. To secure this obligation, Blooming Rose granted security over its accounts receivable to IPS. IPS registered a financing statement in September 2007. Pursuant to the factoring agreement, IPS advanced a total of $1,700,000 which was approximately $100,000 more than IPS collected from the assigned receivables.

In January 2009, the Bank discovered that Blooming Rose was factoring its accounts receivable and issued a notice of default. The Bank sought the appointment of an interim receiver and recovery of the amounts collected by IPS from customers to the full amount of the outstanding indebtedness of Blooming Rose to the Bank.


The first issue touched on by the court in this case was whether the accounts receivable collected by IPS were subject to the Bank's prior ranking security interest. The court confirmed that it was clear that the factoring agreement was subject to the Personal Property Security Act (Ontario) (the "PPSA")2. Pursuant to Section 2(b) of the PPSA, the PPSA applies "to a transfer of an account or chattel paper even though the transfer may not secure payment or performance of an obligation." Since the Bank registered first, the Bank's general security agreement had priority over IPS' security agreement.

However, IPS argued that the Bank had authorized the factoring agreement. Pursuant to Section 25(1)(a) of the PPSA, "where collateral gives rights to proceeds, the security interest therein, (a) continues as to the collateral, unless the secured party expressly or impliedly authorized the dealing with the collateral free of the security interest." As a result, if the factoring agreement and thus the sale of receivables was authorized, the Bank would have no claim to the proceeds. The court however found that the Bank did not authorize the factoring agreement and so did not authorize the sale of the collateral by Blooming Rose to IPS. As well, Section 39 of the PPSA states that:

"The rights of a debtor in collateral may be transferred voluntarily or involuntarily despite a provision in the security agreement prohibiting transfer or declaring a transfer to be a default, but no transfer prejudices the rights of a secured party under the security agreement or otherwise."

This section does not authorize the transfer of collateral, but merely provides some protection to the transferee in the event of an unauthorized transfer. As a result, IPS could not rely on Section 25(1)(a) to argue that the Bank did not have a security interest in the collateral.

A second issue was what constituted the proceeds in this case. IPS argued that the proceeds from the sale of collateral were the moneys paid by IPS to Blooming Rose for the purchase of the accounts receivable, which proceeds were paid to the Bank to reduce the indebtedness of Blooming Rose to the Bank. The Bank argued that the proceeds were the moneys collected on factored receivables from the underlying account debtors.

The court stated that collateral can give rise to more than one set of proceeds. The definition of proceeds in the PPSA is sufficiently broad to cover both.3 The purpose of section 25 of the PPSA is to maintain security over both the collateral and the proceeds where the secured party does not authorize the sale of such collateral. Here the money paid by IPS to Blooming Rose was proceeds of the sale of the accounts. This money was paid to the Bank to reduce indebtedness. Although IPS argued that giving the Bank a security interest over the proceeds from the collateral collections (i.e. the receivables) as well as the proceeds of the sale of the collateral would be giving them double recovery, the court did not agree and in fact concluded that if the proceeds were limited only to monies paid by IPS, this would be unfair to the Bank since this amount was based on a discounted value of the receivables.

The more difficult issue considered by the court was whether a secured party could enforce its security against both the original collateral and the proceeds of that collateral in an amount that exceeded the value of the original collateral. In other words, whether recovery under Section 25 of the PPSA was limited by the full amount of the indebtedness secured by the general security agreement or the value of the collateral.4

The court commented that every province other than Ontario has a provision in its PPSA limiting recovery to the value on the date of dealing where the secured party enforces against both collateral and proceeds. For example, Section 28(1) of the British Columbia PPSA5 states the following:

"But if the secured party enforces a security interest against both the collateral and the proceeds, the amount secured by the security interest in the collateral and the proceeds is limited to the market value of the collateral at the date of the dealing."

In concluding that recovery under Section 25 of the PPSA should be limited to the value of the collateral on the date of dealing, the court looked at the premise behind the proceeds provisions. The court confirmed that the proceeds should stand in the place of the original collateral, and stated that the purpose of Section 25 is to maintain the security over both the collateral and the proceeds where a secured party does not directly or indirectly authorize the factoring of the account receivable.6 The court quoted Professor Ronald Cuming, who states the following:

"Although a secured party has the right to claim both the original collateral and the proceeds where there has been a wrongful dealing by the debtor, this was intended to protect the secured party against a post-disposition deterioration in the value of the original collateral or the proceeds and was not intended to give an unexpected windfall to the secured party at the expense of the debtor or the unsecured creditors of the debtor."7

By limiting recovery to the value of the receivable, greater certainty and predictability is provided. The parties are given what they bargained for, which is security over the value of the specific collateral. The court stated that the Bank's priority should not be prejudiced by the transaction. However, there is no compelling reason why it should be able to recover a windfall in the form of double recovery from the same collateral.8

As a result, the court found that recovery under Section 25 of the PPSA is limited to the value of the collateral on the date of dealing. The court felt that the value should not include the discount which was not authorized by the Bank in this case. As a result, the court held that the value of the collateral was the face value of the receivable. Here IPS had advanced $1,118,620.98 and US$517,708.60 to purchase the receivables, which funds were paid to the Bank to reduce its loan. The values of the receivables purchased were $1,229,883.43 and US$554,800.54. The difference between the face value and the discounted value was $111,262.45 and US$37,145. The court gave judgement to the Bank for these amounts, as these were additional proceeds over and above what had already been paid to the Bank. The court noted that these amounts did not exceed the total amount of Blooming Rose's indebtedness to the Bank and did not result in recovery of proceeds that exceeded the face value of the receivables.


This is a useful case in that it analyzes an issue in the PPSA which has apparently never been addressed by a court in Ontario before.9 By confirming that recovery of proceeds is limited to the value of the original collateral on the date of dealing, the court has ensured some certainty and predictability. As well, this decision makes the Ontario PPSA consistent with the other PPSAs across Canada, which makes lending across the country more seamless.


1.2010 ONSC 2101, [2010] 101 O.R. (3d), 352

2.R.S.O. 1990, c.P.10.

3."proceeds" means identifiable or traceable personal property in any form derived directly or indirectly from any dealing with collateral or the proceeds therefrom, and includes,

(a) any payment representing indemnity or compensation for loss of or damage to the collateral or proceeds therefrom,

(b) any payment made in total or partial discharge or redemption of an intangible, chattel paper, an instrument or investment property, and

(c) rights arising out of, or property collected on, or distributed on account of, collateral that is investment property;

4.Supra note 1 at para. 21.

5.R.S.B.C. 1996, c. 359

6.Supra note 1 at para. 20.

7.Supra note 1 at para. 27, as quoted from Personal Property Security Law (Toronto: Irwin Law, 2005) at p.461.

8.Supra note 1 at para. 32.

9.Supra note 1 at para. 2.

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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