Simpler Rules On Where To Register

Ontario is following the lead taken by the United States by simplifying the rules on where to register security interests in certain types of collateral. These new rules will reduce expenses, avoid duplicate registrations for these types of collateral, and lessen the likelihood that secured parties will fail to meet the applicable registration requirements; however, the Ontario Government does not intend to bring these changes into force until a critical mass of other Canadian jurisdictions agree to introduce the same rules in their jurisdictions.

The Ontario Personal Property Security Act (the PPSA) contains conflict of laws rules which point to the "location of the debtor" to determine the validity, perfection and priority of security interests in intangibles (including accounts), goods normally used in more than one jurisdiction if the goods are equipment or inventory leased or held for lease by a debtor to others (often called mobile goods), and non-possessory security interests in instruments, negotiable documents of title, money and chattel paper. Under these rules, a debtor is deemed to be located at the debtor’s place of business. A debtor who has no place of business is deemed to be located at his or her principal residence. If a business debtor has more than one place of business, it is deemed to be located at its chief executive office.

The term "chief executive office" is not defined in the PPSA and, to date, no Canadian cases have interpreted this phrase. U.S. courts, however, have interpreted the term "chief executive office" to mean the place from which the debtor manages the main part of its business operations or other affairs. Despite this guidance, in practice, it may be difficult for a lawyer to determine the location of a debtor’s chief executive office, particularly when the debtor is a business trust or a partnership.

For example, if an Alberta corporation has its registered or head office in Toronto, has offices in five Canadian provinces, including executive offices in Montreal and Vancouver, and is controlled from the head office of its parent corporation in the U.S., such corporation may have a chief executive office in any number of jurisdictions. To avoid registering in the wrong place, this results in additional expenses being incurred to ensure that a security interest is perfected in every jurisdiction where the debtor’s chief executive office may be located. In addition, since the Canadian tests are different from those in the U.S., if there is a U.S. element to the transaction (for example, account debtors in the U.S.), there may be further uncertainty on exactly where to register.

Bill 152 Ministry of Government Services Consumer Protection and Service Modernization Act, 2006 (Bill 152) simplifies the rules on where to perfect security interests in these types of assets. The applicable sections of the PPSA will be amended so that the location of a business debtor is no longer defined by reference to the debtor’s place of business or chief executive office. Rather, the location of the debtor will be determined by much simpler and more straightforward deeming rules. The new definition of a debtor’s location will make it easier in practice to determine the location of business debtors. This new approach is also closer to the amendments contained in Revised Article 9 of the Uniform Commercial Code of the United States (RA9) and therefore should reduce confusion on where to register for cross-border transactions.

For example, if the debtor is a corporation organized under provincial or territorial law (for example, the Ontario Business Corporations Act (the OBCA), the debtor will be deemed to be located in that province or territory. Therefore, an OBCA company will always be deemed to be located in Ontario, no matter where it may have operations.

If, however, the debtor is a Canadian federal corporation, such debtor will be deemed to be located in the jurisdiction where its registered or head office is located as specified in its constating documents. This rule recognizes that the location of the debtor must point to a particular province. The Canada Business Corporations Act (the CBCA) requires that a corporation’s articles specify the province in which its registered office is located. Therefore, a CBCA company that has its head office in Toronto, Ontario will be deemed to be located in Ontario.

The rules for individuals have also been simplified. For example, under the new rules, an individual debtor is deemed to be located in the jurisdiction where his or her principal residence is located. For individuals carrying on business as a sole proprietorship, this marks a change from the current law and tracks RA9. Currently, a sole proprietor is located at his or her place of business.

Bill 152 also contains rules which specify the location of the debtor for partnerships and trusts, and for corporations and other entities existing under U.S. state and federal laws. The location of such debtors will be determined by the following deeming rules:

Note that for security interests in goods and possessory security interests in instruments, negotiable documents of title, money and chattel paper, perfection will continue to be governed by the law of the jurisdiction where the collateral is situated at the time the security interest attaches. Bill 152 does not amend these rules, unlike the U.S., where RA9 applies its new rules to most forms of collateral.

These new rules do not apply to investment property. Such property is already subject to new conflict of laws rules under the amendments to the PPSA implemented by Ontario’s new Securities Transfer Act, 2006. That Act, which came into force on January 1, 2007, sets out the conflict of laws rules applicable to investment property, a new class of collateral that includes, among other items, certificated and uncertificated securities. These rules are discussed in the December 2006 Blakes Bulletin on Financial Services: The Securities Transfer Act: Arriving January 1st.

Bill 152 contains provisions that transition and integrate the pre-amendment conflict of laws provisions of the PPSA with the post-amendment PPSA and help to clarify various conflicting scenarios. The transitional rules are necessary to allow secured parties time to adjust to the new rules for perfection. Otherwise, when the new rules come into force, security interests might immediately cease to be perfected if the new rules pointed to a new debtor location. Generally speaking, secured parties will have five years from the date on which the amendments come into force to make any necessary registrations to maintain perfection of their security interests under the new conflicts of laws rules.

The conflict of laws provisions and the related transitional rules have not yet been proclaimed into force. These new rules will not be proclaimed in force until the other PPSA provinces make conforming changes to their personal property security legislation. This will provide consistency throughout most of Canada. Now that Ontario has led the way, hopefully the balance of the PPSA provinces will quickly follow suit with identical legislation that will simplify our rules and harmonize Canadian law in this area with that of the United States.

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.