Canada: Dude, Where's My Debtor?: Changes To Ontario's Personal Property Security Act

On December 31, 2015, long-awaited1 amendments to the conflict of laws provisions of the Personal Property Security Act (Ontario) (the Ontario PPSA) came into force. The amendments are intended to bring clarity to the rules for determining the debtor's location under the Ontario PPSA—the singular test that decides the applicable provincial laws that govern the taking of security over certain classes of intangible assets (including accounts receivable, deposit accounts, and contractual rights) and certain mobile goods, and consequently, the appropriate jurisdictions in which secured parties should register financing statements.

What You Need To Know

  • As of December 31, 2015, secured parties need to consider new criteria when ascertaining the location of the debtor for purposes of determining where to register in order to perfect security over the affected classes of collateral. Under the new rules, a debtor's location may generally be determined by reviewing the debtor's organizational documents or by searching a public registry.
  • A security interest perfected prior to December 31, 2015 will continue to be perfected until December 31, 2020 or until the expiry of the registration if expiration is set to occur prior to December 31, 2020 . However, if between December 31, 2015 and December 31, 2020, the secured party takes the steps necessary to perfect under the new rules, the security interest will be deemed continuously perfected.    
  • Because the other provinces are not yet instituting corresponding amendments, secured parties may still be faced with searching and registering security in multiple jurisdictions in cases where, as a result of competing provincial conflict of laws rules, it remains uncertain which province's law governs.

The Old Rules

The Ontario PPSA provides that the laws of the jurisdiction where the debtor is located govern the validity, perfection and priority of (i) a security interest in intangibles and goods of the 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, (ii) a non-possessory security interest in an instrument, negotiable document of title, money and chattel paper and (iii) a security interest in investment property by registration.

Section 7(3) of the Ontario PPSA sets out the rules for determining where the debtor is located. Prior to December 31, 2015, the formulation of Section 7(3) provided that: "a debtor shall be deemed to be located at the debtor's place of business if there is one, at the debtor's chief executive office if there is more than one place of business, and otherwise at the debtor's principal place of residence." Unhelpfully, the terms "chief executive office" and "principal place of residence" are not defined and therefore necessitated a factual determination on the basis of the circumstances relating to each particular debtor. In many cases, this factual determination was not a straight-forward analysis, and the attendant uncertainty frequently led to secured parties conducting searches and registering financing statements in multiple jurisdictions in cases where the debtor had connections to multiple locations in order to address the possibility that the "chief executive office" may be found to be located in any one of them.

Consider, for instance, a limited partnership formed in Alberta (with a small office in Calgary) with senior management located in Toronto but whose principal asset is a power project in British Columbia.  In this scenario, under the old rules a prudent senior secured lender would likely have registered financing statements in all three provinces.

The New Rules

As a result of the amendments to Section 7(3), the debtor's location will now be determined as follows:

Organization Type

Location of Debtor

An individual

The jurisdiction of the individual's principal residence

A partnership (other than a limited partnership)

The jurisdiction of law governing the partnership agreement

A corporation, limited partnership or other organization organized2 under provincial or territorial law

The province or territory of incorporation, formation or organization, as applicable

A corporation organized under federal law

The jurisdiction where the registered office or head office is located3

An organization registered under U.S. state law

The state or territory in which the corporation has been registered

An organization registered under U.S. federal law

The (i) state designated by federal law, (ii) state designated by such organization, or (iii) if sub-clauses (i) and (ii) do not apply, the District of Columbia

Trustees of a trust

The jurisdiction (i) of the governing law of the trust agreement, or (ii) if sub-clause (i) does not apply, in which administration of the trust is principally carried out

If none of the above clauses apply

The jurisdiction where the chief executive office is located.

 

In many cases, the amendments will bring certainty to the determination of the debtor's location under the Ontario PPSA. Under the new and improved Section 7(3), in the example of the limited Alberta partnership given above, the relevant governing law for taking security in respect of the limited partnership debtor would be Alberta.

The amendments also include transitional rules, the most significant of which are described below.

(1) A secured party may continue to rely on the old (i.e., pre-December 31, 2015) rules in respect of security agreements entered into prior to December 31, 2015 (a Prior Security Agreement), including in respect of any amendment, renewal or extension of that Prior Security Agreement made on or after December 31, 2015 so long as the amendment does not include new classes of collateral not covered under the original collateral description.

(2) A security interest perfected under the rules prior to December 31, 2015 will continue perfected until the earlier of (i) the date of expiry of the registration, and (ii) December 31, 2020.

(3) A security interest perfected under the rules prior to December 31, 2015 will continue perfected beyond December 31, 2020 (to the extent perfection would not otherwise cease before such date) so long as the security interest is perfected under the new rules before December 31, 2020.

The Upshot

The new amendments to the Ontario PPSA take a big step forward in terms of remediating the uncertainty under the old rules for determining a debtor's location under the Act, and accordingly, which law governs the creation and enforcement of security interests in collateral. Unfortunately, given Canada's fractious provincial system where each jurisdiction has its own personal property security legislation,  the amendments are effectively swapping one brand of uncertainty for another. Looking back at our example, while the new rules make it clear under the Ontario PPSA that the debtor's location, and thus the applicable law, would be Alberta, the conflict of laws provisions of the Alberta PPSA still point to the jurisdiction where the debtor's chief executive office is located, leaving secured creditors with the same ambiguity the Ontario amendments were intended to remove. Until the other provinces catch up with Ontario and enact corresponding amendments, the issue of duelling conflict of laws provisions between provinces will remain, as will the less than optimum "shotgun" approach to searching and registering in all jurisdictions with a credible claim to the chief executive office.  

From a cross-border perspective, the amendments might be seen as an attempt to harmonize the Ontario PPSA rules with Article 9 of the Uniform Commercial Code in the U.S. under which the debtor location rules follow a truly "one-stop-shopping" approach.  In contrast, however, the new rules under the Ontario PPSA only apply to certain asset classes and the location of collateral will still be relevant for tangible assets such as inventory, equipment and other goods, and for possessory security interests in an instrument, a negotiable document of title, money and chattel paper.

What You Need To Do

(1) Because of potential competing conflicts of laws rules between two or more provinces, secured parties need to consider the applicable rules in each relevant jurisdiction when determining where to search and file registrations.

(2) In respect of Prior Security Agreements for which the security interest will continue beyond December 31, 2020, secured parties must use the period between now and December 31, 2020 to perfect under the new rules to ensure the security interest does not lapse by operation of the transitional rules.

(3) In the event a collateral description under a Prior Security Agreement is amended after December 31, 2015 to include new classes of collateral, the grandfathering provisions of the transitional rules will not apply and the post-amendment regime will need to be followed to ensure security is properly taken over any such new collateral.

(4) For security agreements entered into on or after December 31, 2015, secured parties should include covenants that require the debtor to give notice of any change of its location as determined in accordance with the new rules. Secured parties should also review Prior Security Agreements (and/or loan agreements to which they relate) to confirm they contain similar covenants—and where they do not, consider amending accordingly.   

Footnotes

1 The amendments were passed in 2006, but proclamation of their coming into force was delayed in hope that the other provinces would make the same changes to their PPSAs. Notwithstanding that the other provinces have failed to follow suit to date, the Ontario government has proceeded with issuing the proclamation as one component of a greater effort to make Ontario a more business-friendly jurisdiction and to modernize the laws dealing with commercial activity.

2 Organized meaning incorporated, formed, continued, amalgamated or otherwise organized.

3 Registered or head office location is identified as set out in its publicly filed constating documents or in its bylaws if not set out in constating documents.

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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