Canada: Personal Property Security Act Amended – Access To Credit Made Easier For Business Owners With Transferable Licences

Last Updated: September 9 2013
Article by Mandy K. Cheema

On September 1, 2012, the Personal Property Security Amendment Act, 2011 (the "Act") came into force, amending the Personal Property Security Act ("PPSA"). Specifically, by broadening the definition of licences in the PPSA, the Act allows borrowers to use transferrable licences regarding personal property as collateral to secure loans, and allows lenders to register a security interest in such a licence in the B.C. Personal Property Registry.

The changes to the PPSA embodied in the Act originated with the 2008 Supreme Court of Canada decision, Royal Bank of Canada v. Saulnier, in which the court held that fishing licences were "property" for the purposes of the federal Bankruptcy and Insolvency Act and Nova Scotia's Personal Property Security Act. This allowed fishing licences to be pledged as security, which allowed fishermen in Nova Scotia easier access to loans and to expand their businesses. In British Columbia, the changes to the PPSA should increase access to credit for business owners with transferrable licences, reduce the time and cost associated with credit transactions, and in turn help grow business in the province.

First and foremost, the Act amended the definition of "licence" in the PPSA, which definition now includes a broad class of instruments that confer rights to acquire, manufacture, produce, sell, transport, grow, harvest, or otherwise deal with personal property; provide services; or harvest timber. The amended definition of "licence" will apply to and benefit business owners that have a wide variety of licences, such as retail liquor, commercial fishing, forestry, security business and guide outfitter licences, and other types of transferable licences.

However, it is important to recognize that the use of licences as collateral is subject to several limitations and restrictions. Some of these arise from the nature of licences themselves, such as express contractual terms precluding the use of a licence as collateral, while others are imposed by the framework of the PPSA as it applies to licences.

In the latter case, the Act imposes three critical restrictions on the use of licences as collateral under the PPSA framework: a limitation on seizure, a limitation on disposition, and a limitation on retention.

If a secured party elects to seize and dispose of a licence due to breach of a security agreement, the Act provides for some special rules for secured parties that apply specifically to licences, and not to other forms of collateral. To seize a licence, a secured party must provide a notice of seizure to both the debtor and the supervising government minister or grantor of the licence. In the case of licences granted under statute, a secured party must send a copy of the notice of seizure to the minister responsible for the statute under which the licence was issued. If a license was not granted under statute, a secured party must provide a copy of the notice to the grantor of the licence, or the successor to the grantor, if applicable.

To dispose of the licence, the Act requires a secured party to dispose of the licence pursuant to its terms and conditions, and the terms and conditions that, by law or contract, apply to that licence.

If the secured party elects to take the collateral in satisfaction of the debt, it is subject to the same restrictions as in the case of a seizure and disposal: namely, it may only retain, hold or dispose of the licence in accordance with the terms and conditions of the licence itself, and the terms and conditions that, by law or contract, apply to the license. In the case of forest licences, the secured party must obtain the consent of the minister responsible prior to retaining, holding, or disposing of the licence.

The above noted restrictions may limit the use of licences as collateral. The origin of a licence may give cause a potential creditor to hesitate when considering whether to accept the licence as collateral. In the case of statutory licences, the creditor may be confident in both the security and value of the licence due to the involvement of the provincial government. However, government involvement may also deter potential creditors who do not wish to involve the provincial government in the enforcement of their security interest in the event of default. In the case of non-statutory licences, in addition to concerns about the security and valuation of the licence, potential creditors may also be deterred by the prospect of assignments or transfers of the licence by the original grantor, and may be hesitant to involve themselves with parties they do not know.

In any case, the involvement of a third party, whether governmental or private, in the seizure and/or disposition of a licence may decrease the attractiveness of a licence as collateral to a potential secured party.

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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Mandy K. Cheema
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