A recent decision of the Ontario Superior Court of Justice
serves as a reminder for secured lenders of the importance of
perfecting a security interest by registration. Absent perfection,
collateral is at risk of seizure by judgment creditors of the
borrower. Perfection, however, insures that a creditor has a
priority interest in collateral over any subsequent judgment
creditor. The decision also shows the importance to vendors of
conducting continuous diligence on customers when credit is being
extended on a regular basis.
In 1889072 Ontario Limited v Globealive Wireless Management
Corp,1 1889072 Ontario Limited financed Selectore
Ltd. The loan agreement was subject to a general security agreement
providing for a security interest in all of Selectore's assets,
including its receivables. The security interest was perfected by
registration in 2013.
At the end of 2014, one of Selectore's vendors, Globealive
Wireless Management Corp., obtained a judgment against Selectore
for $1 million. Globealive then sought to enforce the judgment by
issuing a notice of garnishment to the City of Toronto relating to
a receivable of approximately $80,000 owing to Selectore by the
City for certain goods and services.
188 learned of the garnishment and sought to block it, claiming
to have a security interest in the receivable that trumped
Globealive's right to garnishment.
Before Justice Newbould, 188 sought a declaration that the
receivable owing to Selector by the City was subject to a security
interest standing in priority to any interest of Globealive. In
response, Globealive argued that at the time of its notice of
garnishment, and at the time the receivable was due to be paid,
Selectore was not in default on any loan from 188 and so 188 did
not have any right in the receivable.
Justice Newbould agreed that the relevant section of the
Personal Property Security Act was 20(1)(a)(ii) which
provides that: "until perfected, a security interest in
collateral is subordinate to the interest of a person who causes
the collateral to be seized through...garnishment." After
reviewing the authorities, His Honour accepted that "the
purport of section 20(1)(a)(ii) of the PPSA [is] that once
perfected, the security of a lender takes priority over a later
notice of garnishment."
The consequence of this interpretation was that even though
there was no default under the loan to Selectore, the garnishment
by Globealive served on the City was ineffective to require the
payment of that receivable to Globealive. 188 had a security
interest in the receivable ranking in priority to Globealive's
interest and was entitled to the declaration it sought.
A Reminder to Business Extending Credit to Customers Too
Aside from serving as a reminder for secured creditors of the
importance of perfection, the result in Globealive shows the
importance of obtaining and reviewing a PPSA search in respect of
customers to whom credit is extended on a regular basis.
Globealive had done business with Selectore since 2010.
Selectore kept its account current through 2013, around the time
188's security interest was perfected by registration.
Globealive, however, then continued to supply Selectore on credit
until August 2014, perhaps unaware that its potential for recovery
had been impacted by 188's PPSA registration the year before.
The oversight appears to have cost Globealive at least $80,000.
So while the decision confirms the importance for secured
creditors to perfect their security interests by registration, it
also demonstrates that regular reviews of PPSA searches on
customers to whom material credit is extended is a sound business
The foregoing provides only an overview and does not
constitute legal advice. Readers are cautioned against making any
decisions based on this material alone. Rather, specific legal
advice should be obtained.
The British Columbia Court of Appeal has recently considered whether the doctrine of unconscionability can be invoked to set aside a contractual clause providing for the payment by one party to the other...
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