On November 23, 2011, the federal government proposed amendments
to the Bank Act (the
"Amendments") which effectively overturn
two Supreme Court of Canada ("SCC")
decisions in the area of banking and financial services law. These
decisions relate to the priority between security taken under
Section 427 of the federal Bank Act (a "Bank
Act Security Interest") and security taken under one
of the provincial Personal Property Security Act regimes
(a "PPSA Security Interest").
In two concurrent decisions released in November 2010,1 the SCC
ruled that a prior (i.e. first in time) but unperfected PPSA
Security Interest had priority over a subsequent, but registered,
Bank Act Security Interest. In its reasoning, the SCC cited the
common law rules of "first in time" and "nemo
dat quod non habet" (no one gives what they do not have).
These decisions came as a surprise to many in the banking and legal
communities because, when determining priority within each of the
respective Bank Act and PPSA regimes, a registered
security interest will always rank ahead of an unperfected or
unregistered security interest.
The Amendments provide that a Bank Act Security Interest will
have priority over any interest which is unperfected at the time
the Bank Act Security Interest is acquired, regardless of whether
such interest is acquired prior to the Bank Act Security Interest.
While many believe this creates a more sensible approach for
determining the interplay between both regimes, the absence of
comprehensive statutory rules remains.
The Amendments also create an exception where a bank has
knowledge of the existing unperfected interest. While the various
provincial PPSA regimes generally define what constitutes
"knowledge," the Amendments are silent on this issue.
This inconsistency creates the potential for ambiguity and
divergent interpretation under the Bank Act and the
various provincial PPSA regimes. Furthermore, since an unregistered
security interest will not appear in standard debtor searches,
banks should be mindful of how and when they may acquire such
"knowledge" during the course of negotiating a financing
or otherwise. As a result of these issues, it remains prudent
practice for banks to register under both the Bank Act and
the applicable PPSA where appropriate to do so.
Bill S-5, also known as the Financial System Review
Act, passed third reading in the Senate on December 16, 2011.
It is currently awaiting first reading in the House of Commons.
1 Bank of Montreal v. Innovation Credit Union,
2010 SCC 47 and Royal Bank of Canada v. Radius Credit Union
Ltd., 2010 SCC 48.
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