Canada: The New Subsection 46(2.1) of The Personal Property Security Act

Last Updated: January 14 2011

Article by Aaron Collins1

Introduction

In the June 2010 issue of Collateral Matters, I detailed some of the proposed amendments to the Personal Property Security Act (Ontario) (the "PPSA") that were contained in Ontario's "Open for Business Act" ("Bill 68"). Bill 68 has now received Royal Assent on October 25, 2010, and the amendments to the PPSA which are now in force include: (i) narrowing the definition of a purchase-money security interest ("PMSI") to exclude sale-leaseback transactions; (ii) extending the length of time a creditor has to register a PMSI from 10 to 15 days; (iii) providing for additional situations in which a debtor can demand a financing change statement from a creditor to remove or limit collateral classification; and (iv) providing that the description of collateral on a financing statement or financing change statement will limit the scope of a check-box classification.

For a further discussion of the amendments to the PPSA enacted by Bill 68, please see the June 2010 issue of Collateral Matters which can be found here. In this article I will delve a little deeper into the amendment to the PPSA which re-introduces the concept of limiting collateral classifications.

New Subsection 46(2.1)

In my June 2010 article, it was noted that a 2007 amendment to the PPSA2 removed the prior subsection 46(3) which stated that the general collateral description (line 12 on a financing statement) which purports to limit the scope of the collateral would do just that: it would narrow the collateral classification indicated by the check box on line 10 of that financing statement. This meant that, for example, a PPSA registration that checked only the "Inventory" box in line 10 but had general collateral description in line 12 that went on to limit the classification of "Inventory" to a specified line of goods would only perfect a security interest in that specific line.

As a result of the 2007 amendment, a general collateral description could not be relied upon to limit the scope of perfection of a collateral classification check box.3 Given the uncertainty, the general practice became that a creditor seeking a security interest in certain collateral required an estoppel or waiver letter indicating precisely the scope of the security interest of any prior secured party who has checked off the applicable collateral classification boxes.4

Bill 68 re-introduced language of the prior subsection 46(3) in subsection 46(2.1) to provide once again that the "general collateral description" on line 12 of PPSA financing statements narrows the scope of category boxes checked on line 10 in the collateral classification:

(2.1) 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.

However, it should be noted that, despite new subsection 46(2.1), the practice of obtaining a PPSA estoppel or waiver letter may still be more common in Ontario than other jurisdictions because ambiguity still exists.

The new provision states that unless otherwise indicated in a financing statement or financing change statement, a description that limits the scope of a collateral classification will "limit the scope of the classification" and that the security interest is perfected by registration "only in the class as limited." This language implies that there could be a situation where a collateral description does not limit all of the classes of collateral that have been checked off in the financing statement.

Consider a situation where a secured party files a financing statement that includes "Inventory," "Equipment," "Accounts," "Other" and "Motor Vehicles," but has added a collateral description that lists specific pieces of the debtor's equipment. In such a case, has the secured party limited the perfection of its security interest to only those specific pieces of equipment? Or has the secured party only limited the perfection of its security interest in the assets of the debtor that constitute "Equipment" to those specific pieces described in the financing statement, leaving all other collateral classifications unlimited? The language of new subsection 46(2.1) would seem to suggest that it is only the secured party's interest in "Equipment" that is limited to the specific pieces described, because the secured party can claim a security interest only "in the class as limited." One would expect that, if the intent of the Ontario Legislature were to limit the perfection of the entire security interest to only those pieces of equipment, the PPSA would provide a much clearer statement5, but that is by no means evident.

Jurisprudence under the Prior Subsection 46(3)

Courts in Ontario have considered these questions in a few instances under the old subsection 46(3)6, but have, unfortunately, come to different conclusions that leave some difficulty in making any pronouncements as to best practices.

In Adelaide Capital Corp. v. Integrated Transportation Finance7 ("Adelaide"), the Ontario Court (General Division) dealt with a case where a secured creditor held a debenture granting a fixed charge over specific trailers and a floating charge over all assets of the debtor. The secured party registered a financing statement that checked off "Inventory," "Equipment," "Accounts" and "Other," but also added a collateral description which went on to describe 50 trailers by serial number. In Adelaide, Justice Blair held that the perfection of secured party's interest was limited to the 50 trailers, despite the fact that the financing statement indicated a security interest in all collateral classifications, noting that:

Filling in the general collateral description portion of the financing statement is optional under the PPSA. Having chosen to fill in that portion, however, the secured creditor risks limiting the collateral that is protected by perfection through registration to something less than what may, in fact, be encompassed by the security instrument, if words are used which fail to make it clear that something other than what is described on lines 13 to 15 is also caught by the registration. Here, the general description appears to limit the scope of the registration to the collateral delineated — 50 Roussy trailers specifically set out by serial number.8

The line of reasoning in Adelaide, that a collateral description limits the scope of an entire financing statement, was followed by the Ontario Superior Court of Justice in the more recent case of Re Tiger Lease Inc.9 The above quote from Adelaide would seem to suggest that any collateral description in a financing statement will necessarily limit the collateral classifications which have been checked.

However, in Re Linotext Digital Printing Inc. ("Linotext")10, the Ontario Court of Justice (General Division) dealt with somewhat similar circumstances, but came to a different conclusion. In Linotext, two secured creditors checked off "Inventory," "Equipment," "Accounts" and "Other" in their financing statements, but then added a collateral description stating "re: Lease 11518" and "re: Lease 90048." Justice Epstein distinguished Linotext from Adelaide, stating that in Adelaide:

[T]he description was so specific that it clearly appeared to limit the scope of the registration to the collateral delineated. In my opinion, the present case is different in that the description "re: Lease ..." is not so specific as to signal a limitation. [...]

In the present case, [the secured creditors] checked off all classes of collateral, and referred to their respective lease in the general collateral description of the financing statement. Having checked off all classes of collateral, it is reasonable to conclude that [the secured creditors] had security interest in all forms of collateral, and that the referenced lease consisted of interest in some or all those classes. In my opinion, this would not convey a limitation. At most, it would lead a reasonable person to make further inquiries into the security interest of the registrant.11

Justice Epstein went on to discuss the fact that the purpose of the PPSA registration system is "to alert people using the system to interests being asserted and to provide such persons with sufficient information to facilitate further inquiry."12 Having found that the collateral description of "re: Lease ..." where all collateral classifications are checked would not have materially misled a reasonable person and only would have prompted such person to make further enquiries, Justice Epstein held that the security interest of the secured creditors in Linotext was not limited by their respective collateral descriptions.

Conclusion

While it is clear that there is quite a difference between the collateral description in Adelaide and those in Linotext, what remains unclear is when a collateral description will actually cross the line and limit all collateral classifications in a financing statement. Is that point reached when serial numbers are added to a collateral description, as was the case in Adelaide? Or will something less than serial numbers serve to limit all collateral classifications?

These questions may seem academic, but, as in Adelaide and Linotext, the results can be troublesome. The practical effect of these cases is twofold. First, potential lenders would be wise to make further enquiries and seek PPSA estoppel letters from a prior secured creditor who has registered a financing statement that includes classifications of collateral which overlap with that lender's security interest, regardless of whether there is a collateral description in such financing statement. Second, secured creditors who add a collateral description to their financing statement run the risk of limiting the classifications of collateral that are protected by perfection to something less than what may, in fact, be encompassed by the security document.

The changes to the PPSA in Bill 68 are welcome changes that provide clarity to certain sections which were amended as a result of hastily-enacted previous legislation. However, in the case of subsection 46(2.1), a further amendment to provide clarity on the issue of when a collateral description will limit the collateral classifications in a financing statement would have been appreciated.

Footnotes

1.The author wishes to thank Jesse Rosensweet for his assistance in researching and writing the predecessor to this article, entitled "Proposed Changes to the Personal Property Security Act", which appeared in the June 2010 edition of Collateral Matters, and Alyssa Keon for her assistance in the research used in this article.

2.Enacted pursuant to the Ministry of Government Services Consumer Protection and Service Modernization Act, 2006, S.O. 2006, c.34.

3.This was a result of plans by the Ministry of Government Services to modernize the Ontario financing statement and financing change statement forms by removing the check boxes altogether. However, this plan was delayed to allow for updates to the Ontario registry computer systems.

4.Richard H. McLaren, The 2010 Annotated Ontario Personal Property Security Act (Toronto: Carswell, 2009) at 347.

5.For example: "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 as limited by such words contained in such financing statement or financing change statement."

6.As noted above, the prior subsection 46(3) was identical to the new subsection 46(2.1).

7.(1994) 16 O.R. (3d) 414.

8.Adelaide, at para. 65.

9.(2006) C.B.R. (5th) 7.

10.(1997) 48 C.B.R. (3d) 21.

11.Linotext at paras. 28-29.

12.Linotext at para. 31

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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