Originally published in Blakes Bulletin on Financial Services, December, 2007
As many of you know, on August 1, 2007, the Ontario government accidentally repealed section 46(3) of the Ontario Personal Property Security Act (the PPSA). There had been some hope that the Ontario government would move quickly to correct this error; however, the latest word we have received is that this is unlikely. Our understanding is that the error will only be fixed as part of some omnibus red tape reduction or good government bill passed at some convenient point in the future. Even more troubling, it is still very much uncertain whether the correction will be made retroactive. Therefore, we will all have to live with the consequences of the repeal of section 46(3) for the foreseeable future.
By way of background, the PPSA permits a secured party to include a general collateral description in a financing statement, which is intended to provide additional details on the nature of the collateral classifications that had been marked. Section 46(3) provided that words entered into the collateral description area of a financing statement (i.e., lines 13 to 15) could limit the scope of collateral that would be perfected by such financing statement. Now that section 46(3) has been repealed and until it is re-enacted, one can no longer safely assume that such collateral description will limit the scope of the collateral classifications marked by the secured party.
For example, if a secured party marks "Equipment" in its PPSA registration, then, absent anything further, one must assume that the secured party has a security interest in all equipment of the debtor. As such, if you are taking a security interest in or purchasing equipment (whether some or all), you would want to get an estoppel letter or other comfort from the prior secured party confirming the scope of its security interest. However, prior to the repeal of section 46(3), if there was a collateral description referring, for example, to only one type of equipment (e.g., one photocopier serial number 12345), one could rely on the fact that the financing statement would only perfect a security interest in that particular item of equipment and not other items of equipment. Based on that general collateral description, you could conclude that an estoppel letter was not required.
As a result of the repeal of section 46(3), this may no longer be a safe course of action to take. Each situation will need to be reviewed in the light of applicable facts to assess the risk of proceeding without an estoppel letter. In some situations, counsel may be able to provide strong comfort that an estoppel letter is not necessary, but other situations may be much more uncertain.
This was not the only error made by the Ontario government, although it was the most serious one. The Ontario government also made an error in the amendments to the definition of "purchase-money security interest". (In fairness, the error was initially contained in a report prepared by a PPSA working group of the Uniform Law Conference of Canada, which had proposed consequential amendments to the PPSA as part of the introduction of the Uniform Securities Transfer Act. That report had been used by the Ontario government when it made changes to the PPSA in connection with its introduction of the Ontario Securities Transfer Act, 2006 (the STA). Previously, the definition of a "purchase-money security interest" expressly excluded sale leaseback transactions. That express exclusion has been deleted (since January 1, 2007 when the STA came into force), again unintentionally. Therefore, while previously it was clear that a sale leaseback could not create a purchase-money security interest, there may now be some room to argue that it might. We understand that this error will be fixed at the same time that section 46(3) is added back into the PPSA.
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