Canada: Parliament Seeks To Clarify Priority Between Bank Act And PPSA Security Interests

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.

Footnotes

^{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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