How Priority Is Determined Between Interests Exempt From The PPSA

Priority disputes among creditors with an interest in the debtor's personal property are ordinarily determined by the various priority rules in the applicable Personal Property Security Act ("PPSA"). However, the PPSAs exclude various interests from their scope. What priority rules apply to them?

In Waygar Capital Inc. v. The Very Good Food Company Inc.,¹ the British Columbia Supreme Court recently provided guidance on the rules to be applied to determine priority disputes between interests that are exempt from the PPSA (Do the PPSA priority rules still apply? The answer is no). The decision provides some key takeaways for lenders with an exempt interest (such as an interest in unearned insurance premiums) to ensure that their interests are protected.

Background: Very Good Food Goes Bad

Waygar Capital Inc. ("Waygar") provided two loan facilities to The Very Good Food Company Inc. ("Debtor"). Debtor granted a security interest to Waygar in all of its present and after-acquired property including all unearned insurance premiums. Waygar perfected its security interest under the PPSA by registration.

CAFO Inc. ("CAFO") advanced funds to pay the premiums under three D&O insurance policies for Debtor. Debtor assigned to CAFO all unearned insurance premiums which became payable under the policies. CAFO sent notices to each of the insurers that Debtor had assigned any unearned insurance premiums to CAFO. CAFO did not provide notice to Waygar and did not make any registration under the PPSA.

Debtor defaulted on its payment obligations under the Waygar and CAFO facilities. Waygar obtained the appointment of a receiver. The insurance policies were cancelled and unearned premiums of approximately USD $896,000 were refunded by the insurers and either paid to CAFO or paid to the receiver's counsel in trust pending determination of entitlement to them.

What are Unearned Insurance Premiums?

Unearned insurance premiums are the portion of insurance premiums that have been paid but not yet earned by the insurer because coverage for that period has not been provided yet. For example, if you paid $120 in premiums in advance for a year of insurance and cancel after 3 months, there would be $90 of unearned insurance premiums which may be returned depending on the policy terms.

PPSA Exclusion for Interests in Insurance Policies

Each of the PPSAs excludes interests and claims in insurance policies from the scope of the Act with the exception of proceeds for loss or damage to collateral. For example, the BC PPSA reads:

The reason for the various exclusions in section 4 of the PPSAs is either that (i) they are addressed under a different statutory regime (such as mortgages or insurance), or (ii) they are not consensual transactions (such as deemed trusts or liens given by statute).

Priority of Interests in Insurance Policies

The priority of interests in insurance policies is addressed in the Insurance Acts in each jurisdiction. For example, section 19 of the Insurance Act (British Columbia) (the "BC Insurance Act") provides that if the insured assigns its right to a refund of premiums and notice of the assignment is given to the insurer, the insurer must pay any refund to the assignee. As a result, insurers serve a similar function as the PPSA registry, keeping track of the parties that have been assigned rights under an insurance policy (although it is not a public register as the PPSA registry is).

The PPSA Priority Regime Does Not Apply Where Excluded Interests are Subject to a Different Priority Regime

The Court indicated that this was the first decided case involving a priority competition between a creditor with a security interest under the PPSA and a creditor with an interest exempted from the PPSA.

Waygar and the Receiver essentially argued that the "first in time" priority rules under the PPSA should continue to apply notwithstanding that one of the interests was excluded from the scope of the Act. CFO's interest being excluded from scope of the PPSA only meant that they needed to follow the relevant statutory rule (in this case, section 19 of the BC Insurance Act) to determine whether and when they were perfected. CFO was "perfected" when they sent their notice to the insurer. Waygar's security interest was subject to the PPSA, so it was perfected when Waygar registered. Since Waygar perfected before CFO "perfected" – so the argument went – Waygar had priority to the unearned insurance premiums by virtue of the "first in time" priority rules under the PPSA.

Justice Masuhara of the British Columbia Supreme Court disagreed. He held that the PPSA priority rules did not apply because interests and claims under insurance policies were excluded from the scope of the Act and there was a separate priority regime provided by the BC Insurance Act. CAFO had complied with the requirements under section 19 of the BC Insurance Act by sending notice to the insurer and Waygar had not.² The Court stated that, as a result, CAFO was "perfected" and Waygar was "unperfected" and the "first in time" principle applied to give CAFO priority.

The reference to their interests being "perfected" and "unperfected" is unfortunate as the provincial Insurance Acts do not contemplate interests being "perfected" – that is PPSA terminology. Similarly, the reference to the "first in time" principle applying is unfortunate as the "first in time" principle only applies to contests between two or more perfected security interests or two or more unperfected security interests. The proper analogy to the PPSA priority rules would be to the priority rule where a perfected security interest has priority over an unperfected security interest.

The better analytical framework is that the PPSA priority regime did not apply because both of the interests at issue are excluded from the scope of the PPSA. Waygar's security interest in the unearned insurance premiums – like CAFO's – was outside the scope of the PPSA. Waygar could not perfect its security interest in the unearned insurance premiums by filing a PPSA registration because the PPSA does not apply to that interest. So it was not actually a priority competition between a creditor with a PPSA-perfected security interest and a PPSA-exempt interest, it was a competition between two PPSA-exempt interests.

Those two PPSA-exempt interests are subject to the different priority regime in the BC Insurance Act. CAFO provided the notice required by the BC Insurance Act, Waygar did not. So pursuant to the BC Insurance Act, CAFO was entitled to the unearned insurance premiums.

Takeaways

• The PPSA priority regime will not apply to interests that are excluded from the scope of the PPSA and subject to a different priority regime.
• Where a lender's intended security package includes an interest that is excluded from the scope of the PPSA, it is important for the lender to ensure that the relevant steps for protecting that interest are carried out.
• Lenders are advised to keep the PPSA exclusions in mind and seek assistance if they have questions about how to protect their interests if one of those exclusions may apply. They may not be able to just rely on a registration in order to protect their interest.

Footnotes

1 Waygar Capital Inc. v The Very Good Food Company Inc., 2025 BCSC 2077: https://canlii.ca/t/kg3ch.

2 The Court also noted that Waygar did not take an assignment of Debtor's right to the unearned premiums in any event, only a security interest in them, so they may have not qualified under section 19 of the BC Insurance Act even if they had sent the notice.

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