The Ontario government has recently proclaimed 31 December 2015 as the effective date for amendments to the Personal Property Security Act (PPSA) of Ontario that affect the definition of the location of a debtor.1 The location of the debtor is important under the PPSA for determining the jurisdiction whose law will govern key issues relating to some security interests, including where a financing statement relating to the security interest must be registered.
These issues are referred to in sections 7(1) and 7.1(5) of the PPSA, which provide as follows:
7. (1) The validity, the perfection, the effect of perfection or non-perfection, and the priority,
(a) of a security interest in,
(i) an intangible, or
(ii) goods that are of a type that are normally used in more than one jurisdiction, if the goods are equipment or inventory leased or held for lease by a debtor to others; and
(b) of a non-possessory security interest in an instrument, a negotiable document of title, money and chattel paper, shall be governed by the law of the jurisdiction where the debtor is located at the time the security interest attaches.
7.1 (5) The law of the jurisdiction in which the debtor is located governs,
(a) perfection of a security interest in investment property by registration;
(b) perfection of a security interest in investment property granted by a broker or securities intermediary where the secured party relies on attachment of the security interest as perfection; and
(c) perfection of a security interest in a futures contract or futures account granted by a futures intermediary where the secured party relies on attachment of the security interest as perfection.
Under the PPSA, the term "intangible" covers a wide range of property, including accounts receivable, contract rights and intellectual property. The term "investment property" includes securities and rights relating to securities accounts.
Under the existing section 7(3) of the PPSA, the location of a debtor is often determined based on the location of its "chief executive office," a term that is not defined in the PPSA. The amendments will result in the existing section 7(3) being repealed and replaced by new sections 7(3), (4) and (5) and sections 7.2 and 7.3 being added to the PPSA. Under the new section 7(3), the location of the debtor will be deemed to be:
(a) if the debtor is an individual, in the jurisdiction where the debtor's principal residence is located;
(b) if the debtor is a partnership, other than a limited partnership, and the partnership agreement governing the partnership states that the agreement is governed by the laws of a province or territory of Canada, in that province or territory;
(c) if the debtor is a corporation, a limited partnership or an organization and is incorporated, continued, amalgamated or otherwise organized under a law of a province or territory of Canada that requires the incorporation, continuance, amalgamation or organization to be disclosed in a public record, in that province or territory;
(d) if the debtor is a corporation incorporated, continued or amalgamated under a law of Canada that requires the incorporation, continuance or amalgamation to be disclosed in a public record, in the jurisdiction where the registered office or head office of the debtor is located,
(i) as set out in the special Act, letters patent, articles or other constating instrument under which the debtor was incorporated, continued or amalgamated, or
(ii) as set out in the debtor's by-laws, if subclause (i) does not apply;
(e) if the debtor is a registered organization that is organized under the law of a U.S. State, in that U.S. State;
(f) if the debtor is a registered organization that is organized under the law of the United States of America,
(i) in the U.S. State that the law of the United States of America designates, if the law designates a U.S. State of location,
(ii) in the U.S. State that the registered organization designates, if the law of the United States of America authorizes the registered organization to designate its U.S. State of location, or
(iii) in the District of Columbia in the United States of America, if subclauses (i) and (ii) do not apply;
(g) if the debtor is one or more trustees acting for a trust,
(i) if the trust instrument governing the trust states that the instrument is governed by the laws of a province or territory of Canada, in that province or territory, or
(ii) in the jurisdiction in which the administration of the trust by the trustees is principally carried out, if subclause (i) does not apply;
(h) if none of clauses (a) to (g) apply, in the jurisdiction where the chief executive office of the debtor is located.
The lack of a definition of chief executive office in the current PPSA has sometimes led to financing statements being filed in several jurisdictions to which the debtor is connected, in order to address the possibility of the chief executive office being located in any one of them. The new sections 7(3), (4) and (5) introduce more certainty for determining the location of a debtor, particularly in the case of partnerships, trusts and U.S. organizations. As an example, consider a Canadian subsidiary of a U.S. corporation that is incorporated for tax planning purposes as an unlimited liability corporation (ULC) under British Columbia law, but has its place(s) of business in Ontario, which doesn't allow for the incorporation of ULC's but would almost certainly be found to be the location of its chief executive office. Under the new section 7(3), the subsidiary is deemed to be located in BC, rather than Ontario, so a financing statement relating to a general security agreement given by the subsidiary would need to be registered in BC. However, as a practical matter, a registration in Ontario will still be needed if there is tangible collateral at the place of business in Ontario and, out of caution, because BC's PPSA still points to the chief executive office as determining the location of the debtor.
The new sections 7.2 and 7.3 introduce transitional rules, under which currently existing rules regarding the location of a debtor may apply until up to 31 December 2020 in the case of security agreements existing before 31 December 2015.
These changes don't reflect a complete move to the approach taken by the Uniform Commercial Code in the United States of only requiring registration of a financing statement in, for example, the state of incorporation of a corporate debtor, irrespective of the location of collateral and other indicia of the location of the debtor. While these changes, if followed by other provinces, will introduce more certainty concerning the location of the debtor, as noted above, rules such as section 5 of the PPSA that require registration based on the location of some types of collateral, rather than the location of the debtor, remain applicable, so filing requirements won't be as straight-forward as might be possible.
As a result of these amendments, secured parties and their advisors need to consider the following:
- following the amended location of debtor rules in connection with security agreements entered into on or after 31 December 2015, taking into account that caution may dictate that the inconsistency with the PPSA's of other provinces in effect requires also following the original rules for the time being.
- reviewing security agreements entered into before 31 December 2015 to identify those for which application of the amended location of debtor rules would result in a new jurisdiction becoming applicable, then taking steps to comply with the amended location of debtor rules in accordance with the transitional rules, which may require that steps be taken before 31 December 2020, even though existing PPSA registrations may not expire before then.
- reviewing existing credit agreements and security agreements to identify covenants that require a debtor to notify or obtain the consent of a secured party before changing the location of its chief executive office and amending those covenants to reflect new factors that govern the location of the debtor for PPSA purposes.
1 The amendments were passed in 2006. Proclamation of the amendments was initially deferred in the hope that other provinces would introduce conforming amendments to their respective PPSA's but, as that hasn't happened, the government has apparently decided to forge ahead on its own.
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.