The BC Court of Appeal has ruled that equitable principles
cannot be used to avoid the priority scheme contained in the
In KBA, Inc. v. Supreme Graphics
Limited, 2014 BCCA 117, the Court overturned a BC Supreme
Court decision that altered the priority scheme under the
Personal Property Security Act ("PPSA")
by granting an "equitable priority" to a secured
creditor, KBA, Inc. ("KBA").
KBA's financing statement in respect of its purchase money
security interest in a printing press was discharged by a third
party, without KBA's knowledge or consent. By the time KBA
became aware of the discharge and re-registered a financing
statement, it had lost priority over other perfected security
interests, including a General Security Agreement registered in
favour of Supreme Graphics Limited ("Supreme"). KBA
applied to a judge of the Supreme Court to reinstate the priority
of its security interest, relying upon PPSA sections 68
and 70, and the doctrine of unjust enrichment.
Sections 68 and 70 of the PPSA provide as follows:
68 (1) The principles of the
common law, equity and the law merchant, except insofar as they are
inconsistent with the provisions of this Act, supplement this Act
and continue to apply.
(2) All rights, duties or obligations arising under a security
agreement, this Act or any other law applicable to security
agreements or security interests must be exercised or discharged in
good faith and in a commercially reasonable manner.
(3) A person does not act in bad faith merely because the person
acts with knowledge of the interest of some other person.
70 On application of an
interested person, a court may
(a) make an order determining questions of priority or entitlement
to collateral, or
(b) direct an action to be brought or an issue to be tried.
The chambers judge found that the court had equitable
jurisdiction to grant the relief sought, both under ss. 68 and 70
of the PPSA and the doctrine of unjust enrichment, and
gave KBA's interest priority over the interests of two other
creditors, including Supreme.
Supreme appealed, arguing that the priority scheme set out in s.
35(1) of the PPSA is a complete code, designed to provide
necessary commercial certainty, and that it could not be altered by
the application of equitable principles.
The BCCA agreed, observing that "...the overriding goal of
the PPSA is to provide commercial certainty and
predictability to personal property financing. The statute includes
clear rules for registration of financing statements in respect of
security interests and for priorities among secured creditors.
Courts have been very reluctant to circumvent or modify the
explicit statutory provisions through the use of extra statutory
principles of common law or equity" [paragraph 20].
PPSA sections 68 and 70, the BCCA ruled, allow
"...principles of common law, equity, and the law merchant to
be applied only to fill interstices in the statute, or to cover
areas that are beyond the scope of the legislation...[but do] not
allow the court to apply such principles instead of the clear
statutory precepts" [paragraph 26]. The court therefore
concluded that ss. 68 and 70 do not permit the application of
equitable principles in preference to the residual priorities
scheme established in s. 35.
The BCCA similarly rejected the chambers judge's application
of unjust enrichment principles to avoid the PPSA priority
rules. The court noted, rather logically, that valid legislation
(including in particular the priority scheme set out in the
PPSA) provides a juristic reason for any enrichment
resulting from the very application of that legislation, and
concluded that the judge "...erred in finding that the
doctrine of unjust enrichment could be used to navigate around the
clear statutory provisions" [paragraph 42].
This decision reverses the recent trend in BC toward the
judicial alteration of legislated priorities*, and reinforces the
concept that certainty and predictability, fostered by the strict
application of commercial statutes, should prevail. This is a
development that will undoubtedly be welcomed by lenders and their
*See, for example, Pacific Shores Resort & Spa Ltd.
(Re), 2013 BCSC 480 (CanLII), and CFI Trust v.
Royal Bank of Canada, 2013 BCSC 1715 (CanLII).
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.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
The Canadian bankruptcy regime was designed with two key purposes in mind – provide options to ‘honest but unfortunate' debtors struggling with an unmanageable financial load and create an orderly means for creditors to recover amounts owed them.
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).