The Government of Canada is amending the Bank Act and
other associated statutes. The amending legislation (the
Financial System Review Act
("FSRA")) received royal assent on March
Clearer Priority Provisions for Secured Creditors
The amendments clarify the order of priority where multiple
secured parties have a security interest in the same collateral,
particularly where there are competing interests under the Bank
Act and a provincial Personal Property Security Act
("PPSA"). The amendments overrule two
companion Supreme Court of Canada decisions, Bank of Montreal
v. Innovation Credit Union1 and Royal Bank of
Canada v. Radius Credit Union.2 Both cases involved
priority disputes between the credit union's prior unregistered
security interest under a provincial PPSA, and the bank's
subsequent security interest taken and registered under the
Bank Act. The Court found that the credit union's
"first-in-time" unperfected PPSA security interest took
priority over the bank's subsequently registered Bank
Act interest, noting that the "commercially absurd
results" of the decision indicate a need for legislative
The FSRA responds to this need by providing that a security
interest under the Bank Act has priority over the rights
of "any person who had a security interest in that property
that was unperfected at the time the bank acquired its security in
the property."4 In addition, a general definition
of "unperfected" is added to the Bank Act, which
refers broadly to the law under which the security interest is
However, a prior unperfected security interest would still take
priority where the bank has "knowledge" of such
unperfected security interest.6 This exception may prove
to be problematic. "Knowledge" is an undefined and
ambiguous term and may give rise to arguments based on
"constructive knowledge". Given the size of Canadian
chartered banks, this possibility may undermine Parliament's
quest for certainty. As a result, banks should continue to take
PPSA security and/or security under the Quebec Civil Code
in addition to security under the Bank Act until the
ambiguities are resolved.
Although the amendments to the Bank Act provide a
greater degree of certainty about priority, there remain a number
of outstanding issues. Commentators have noted in particular that
the FSRA fails to rise to the level of introducing a
first-to-register or first-to-perfect priority rule, which would
better clarify the relationship between the Bank Act and
the PPSAs. In addition, the amendments are silent on priority as
between a prior perfected interest and a subsequent Bank
Act interest. Presumably, the common-law first-in-time
principle still applies to such a scenario.
1. Bank of Montreal v. Innovation Credit Union,
2010 SCC 47,  3 SCR 3.
2. Royal Bank of Canada v. Radius Credit Union,
2010 SCC 48,  3 SCR 38.
3. Innovation, supra note 1 at para
4. Financial System Review Act, Section 38
5. FSRA, s. 36.
6. FSRA, s. 37.
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