Canada: Easing The Rules For Receivables-Based Financing And Securitization

Last Updated: June 17 2007

Article by Mark Selick, © 2007, Blake, Cassels & Graydon LLP

Originally published in Blakes Bulletin on Financial Services, May 2007

The upcoming amendments to the Ontario Personal Property Security Act (PPSA) address, at least in part, three separate issues that receivables financiers face in Ontario: (i) the nonassignability of certain types of receivables, which are therefore not available as collateral; (ii) the conflict between the rights of receivables financiers and inventory financiers; and (iii) certain technical concerns relating to the rights of an account debtor against an assignee of a receivable. This article discusses what the amendments achieve, what they don’t achieve, and how borrowers and financiers can best react to the new rules.

Non-assignable receivables

The general rule in Canada – and in the U.K. and the U.S. as well – is that, with few exceptions, any contract can be assigned. This is a basic legal underpinning of receivables financing. It means that companies can, in most circumstances, sell receivables – for example, in a securitization or factoring arrangement – or secure them as collateral in a lending arrangement.

There are, however, exceptions to this general rule. Most are not usually relevant to financing arrangements, but two of them are. First, most receivables owing by the Canadian federal government – and certain other governments – cannot be sold or secured without government consent. Most receivables financiers are well aware of this rule and, therefore, it is quite common for government receivables to either be classified as completely ineligible under receivables financings, or to have additional conditions apply to them before they can be included as eligible.

Secondly, Ontario law respects "anti-assignment clauses" – clauses in contracts that restrict or prohibit the assignment of the contract or rights under the contract. As a result, financiers in Ontario typically do not give credit for contracts with antiassignment clauses. A common part of the due diligence for many receivables transactions is to check the forms of contracts under which the receivables arise to ensure they do not contain anti-assignment clauses. This is easy to do where standard forms are used. However, that type of due diligence is much harder for a company which sells its products or services under negotiated agreements or in response to standard forms provided by its customers. There may be numerous contracts to review, and these contracts may well have anti-assignment clauses in them. If they do, it can be a serious impediment to financing a company’s business.

Under Article 9 of the Uniform Commercial Code, which is the corresponding legislation in the U.S. to our PPSA, antiassignment clauses are generally ineffective to prevent the assignment of receivables. This approach has been followed by every province and territory in Canada, with the exception, until now, of Ontario and Quebec. Ontario has now adopted the same approach. Once these PPSA amendments become effective on August 1, 2007, contractual restrictions on the assignment of a receivable, whether arising under a normal account, a lease or a conditional sale contract, will no longer be enforceable against purchasers or secured parties. Therefore, third party financiers will be able to more safely advance money on the security of contracts with antiassignment clauses. This should give many companies more flexibility on how to raise capital.

Here is what the legislation does not do, however:

  • The changes to the PPSA only address contractual restrictions on assignment – legal restrictions, such as those that prohibit the assignment of government receivables, are still effective.
  • The new PPSA only applies to the assignment of "the whole of the account or chattel paper". It is common, particularly in securitizations, to sell interests in receivables, rather than selling the whole receivables. A sale of an interest in a receivable will still be subject to any anti-assignment clause. This approach was taken purposively by the drafters of the amendments, on the basis that allowing the assignment of a partial interest could cause undue hardship to the account debtor. It was concluded that the issue warranted more study. The expectation is that this will be addressed when the PPSA is ultimately conformed with the UNCITRAL Convention on the assignment of international receivables, once that Convention is ratified by Canada.
  • There is an interesting difference between the language in the new Ontario provision and the corresponding language in the PPSAs of the other jurisdictions in Canada. The other PPSAs state that an anti-assignment clause "is binding on the assignor only to the extent of making the assignor liable in damages for breach of contract …" (emphasis added). Since, in many cases, there will not be any damages, this gives some real comfort. The new Ontario provision, however, does not refer to damages. It says that such a clause "is binding on the assignor only to the extent of making the assignor liable to the account debtor for breach of their contract". Does the difference matter? It does seem to leave a door open for some interesting arguments. One question is whether it could allow the other party to such a contract to terminate for breach or seek an injunction to prevent the assignment. It seems unlikely that a court would allow a termination to prejudice the assignee, given the express statement that these clauses are "unenforceable against third parties". Even to allow such a right against the assignor would potentially render the whole provision of very little use. As such, a court should strive to avoid that result. However, there may be some interesting arguments being made until this omission is corrected. Again, we understand that the Ontario government will likely address this as part of the next round of changes to the PPSA once the UNCITRAL Convention is ratified by Canada.

Overall, while this change should facilitate receivables financing, there are still some potential traps for the unwary. Companies that generate pools of receivables should continue to resist agreeing to anti-assignment clauses, or if they must agree to such clauses, include express carve-outs for the assignment of amounts owing under the contract. In many cases, the account debtor may not care about the assignment of the receivable, but only to whom it has to perform the balance of its obligations. Therefore, often it will not be difficult to negotiate this type of carve-out. In addition, financiers and borrowers should still do their due diligence to make sure any anti-assignment clauses are identified.

Inventory financiers vs. receivables financiers

Under the current PPSA, there is a potential conflict between an inventory financier and a receivables financier. A receivables financier with a first-ranking registered interest in receivables can be defeated by an inventory financier who comes along after the fact and obtains the super-priority associated with a purchase-money security interest (or PMSI) in inventory. That result follows from the fact that the PMSI in inventory extends to proceeds of the inventory – that is, to receivables and, therefore, the inventory financier’s superpriority in those proceeds can defeat the pre-existing interest of the receivables financier.

Often this issue is addressed practically, as the same entity finances both inventory and receivables, but this is not always the case, especially for factors and in securitizations. This problem was recognized in the U.S. many years ago, and Article 9 of the UCC addresses it. In the U.S., the accounts receivable financier is given express priority in the case of an overlap. The same approach was adopted in the western Canadian provinces and territories. The Atlantic provinces also address this problem, however, they have adopted a different solution. In the Atlantic provinces, a new purchase money inventory financier must give notice of their PMSI to anyone claiming an interest in accounts. Therefore, the accounts receivable financier will at least know about the potential threat to its security.

Ontario has been left as the only Canadian common law jurisdiction that does not expressly address this problem. Once the amendments to the PPSA come into effect, this will change. Ontario has now adopted the Atlantic provinces’ approach.

Therefore, the good news is that, going forward, receivables financiers will get notice before being exposed to this type of leapfrogging super-priority in favour of an inventory financier. Remember, however, that this does not solve the problem. Receivables financiers must build into their procedures and documentation a mechanism to respond if these notices are received. In many cases, that will be there already in the documentation through a combination of a covenant by the borrower not to grant any competing prior security in receivables and an event of default for any breach of covenant, but the documents should be checked to make sure that an appropriate course of action can be taken once these types of notices are received.

Rights of account debtor against assignee

At common law, the only right that an account debtor had against an assignee of a receivable was, in effect, the right to set-off against the receivable, certain claims against the assignor that arose before the account debtor received notice of the assignment of the receivable. The current PPSA repeats this concept but, in doing so, the language used suggests perhaps broader rights – specifically the right to hold the assignee personally responsible for breaches of the contract by the assignor. The amendments do away with this concern, so that we are more clearly back to the traditional common law position. An assignee may be met with a claim for set-off, but absent an agreement to the contrary, will not be sued for breaches of the underlying contract by the assignor.

Overall, the changes to the PPSA will help receivables financing. While we can hope the Ontario government will address the few gaps that still exist, even if they do not, the practice in Ontario should evolve relatively easily to ensure that there are practical solutions.

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

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
13 Dec 2017, Seminar, Toronto, Canada

Class actions across Canada continue to grow in volume and complexity, triggering significant policy and financial implications for businesses in Canada. With the Law Commission of Ontario’s recent announcement that it is reactivating its comprehensive review of class actions in Ontario, we may see important law reform on the horizon to evolve with the changing landscape.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
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).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions