ARTICLE
8 April 2012

Update On Bank Act vs. Unregistered PPSA Security Interest

AB
Aird & Berlis LLP

Contributor

Aird & Berlis LLP is a leading Canadian law firm, serving clients across Canada and globally. With strong national and international expertise, the firm’s lawyers and business advisors provide strategic legal advice across all areas of business law to clients ranging from entrepreneurs to multinational corporations.
In our newsletter dated December 2010, we reported on two decisions rendered by the Supreme Court of Canada concurrently on November 5, 2010
Canada Finance and Banking

In our newsletter dated December 2010, we reported on two decisions rendered by the Supreme Court of Canada concurrently on November 5, 20101, wherein the Supreme Court concluded that, as between a security interest registered under Section 427 of the Bank Act2 (the "Bank Act") and a prior but unregistered, or unperfected, security interest secured under the Personal Property Security Act (Ontario) ("PPSA"), the latter has priority. The Supreme Court's rationale can be summarized as follows:

  1. Registration, or perfection, is a different concept than the security interest that is created under the PPSA, and the order in which the creditors obtained a security interest, whether or not that interest is registered, is the determining factor in deciding a priority dispute between a creditor secured under the Bank Act and a creditor secured under the PPSA.
  2. The requirement of perfecting a security interest in order to achieve priority over another security interest only comes into play when determining the priorities as between PPSA security holders, not when determining the priorities between Bank Act security interests and PPSA security interests.
  3. Bank Act security conveys no more than a debtor's legal interest in the assigned property at the time Bank Act security is taken. Where prior PPSA security interests exist, they will take priority over Bank Act security, even where such security interests are unregistered or unperfected and, therefore, not discoverable by other secured parties.

As a result of this decision, the Honourable Jim Flaherty, Minister of Finance, introduced Senate Bill S-5, entitled the Financial System Review Act, in November 2011. The effect of the Bill would be to overturn the result in Bank of Montreal v. Innovation Credit Union and Royal Bank of Canada v. Radius Credit Union Ltd. by specifically providing that registered Bank Act security will have priority over all prior but unperfected PPSA security interests. As of the date hereof, the Bill has passed three readings in the Senate, two readings in the House of Commons, and has been referred to the Standing Committee on Finance for review.

Footnotes

1 Bank of Montreal v. Innovation Credit Union., 2010 SCC 47 and Royal Bank of Canada v. Radius Credit Union Ltd., 2010 SCC 28

2 Bank Act, S.C. 1991, c. 46

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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