In February 2012, we
reported that the Saskatchewan Court of Queen's Bench ruled
that an unsecured party could not shelter its unsecured debt by
purchasing or receiving an assignment of a secured party's
debt.1 The Saskatchewan Court of Appeal (the "Court
of Appeal") has upheld this decision.2 However, the
reasoning of the Court of Appeal was slightly different than that
of the lower court. The lower court was very broad in its
prohibition of securing prior unsecured debt while the Court of
Appeal limited its decision to the specific facts in this case. As
a result, there still remains uncertainty as to whether sheltering
debt under a secured party's security would be permitted with a
different set of facts.
In Eagle Eye, an unsecured creditor ("Eagle
Eye") obtained an assignment of a secured creditor's debt
and related general security agreement (the "GSA").
Eagle Eye then claimed that its prior unsecured debt was
transformed into secured debt as a result of the "all
obligations" clause contained in the assigned GSA, which
stated that the GSA secured all obligations owing to the secured
creditor under the GSA, whether such obligations were incurred
prior to, at the time of or after the GSA was signed.
The debtor took the position that the GSA only secured
liabilities that may have arisen between the original secured party
and the debtor and argued that Eagle Eye was not acting in good
faith or in a commercially reasonable manner.
Eagle Eye argued that, as a result of the assignment, it stepped
into the shoes of the original secured creditor with the result
that the assigned GSA covered all debts owing by the debtor to
Eagle Eye, including the prior unsecured debt.
Without providing an indication of which reasons were primarily
relied upon, the lower court cited several reasons for ruling that
the assigned security did not extend to cover the prior unsecured
loan between Eagle Eye and the debtor, including unfairness to the
debtor and the destructive impact that accepting Eagle Eye's
argument would have on the principle of pro rata sharing in
bankruptcy law and the Personal Property Security Act
(Saskatchewan) (the "PPSA") priority regime.
In upholding the decision of the lower court, the Court of
Appeal chose to limit its analysis to the specific facts of this
case and leave open the possibility that a different set of facts
might result in an unsecured party being allowed to shelter its
prior unsecured debt by purchasing debt and related security from a
secured party. The Court of Appeal placed an emphasis on the
intention of the parties, noting that although the GSA permitted an
assignment by the original secured party without notice to the
debtor, it did not state that upon assignment the GSA would act to
secure any and all unsecured debts previously owed to the assignee.
As a result, the Court of Appeal held that the debtor and the
original secured party did not intend that the GSA would cover the
unsecured debts owed by the debtor to a third party upon
Although the Court of Appeal held that on the specific facts of
this case sheltering unsecured debt by purchasing a security
agreement was not permitted, it went on to suggest that this
practice may be interpreted differently on different facts. The
Court of Appeal suggested that a prior unsecured party may be able
to shelter its debt by purchasing debt and security from an
existing secured creditor, provided that:
the priority system in bankruptcy and the PPSA are not
the assignee behaves in a commercially reasonable manner;
at the time the security was originally provided, the parties
intended that the debt and security could be assigned with the
result that the security would then also cover any unsecured debt
of the assignee. To evidence such an intention, parties should
consider including a specific statement in the underlying security
agreement that addresses this scenario.
As a result, although the decision of the lower court has been
affirmed, there still exists uncertainty and a possibility that
this practice may be acceptable on facts different from those in
Eagle Eye. It is difficult, however, to imagine a set of
facts where the court's criteria could be met. It should also
be noted that the court did not discuss whether future advances
made by an assignee to a debtor after an assignment of security
could be sheltered under the assigned security.
1 Note CPC Networks Corp. v. Eagle Eye
Investments Inc., 2011 SKQB 436.
2 Eagle Eye Investments Inc. v. CPC
Networks, 2012 SKCA 118[Eagle
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guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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