Canada: When Less Is Not More – PPSA Pitfalls For The Unwary

The Takeaway

A recent Alberta decision highlights potential pitfalls for lenders registering against equipment outside of Ontario; Alberta legislation requires a lender to describe "serial numbered" equipment against which a purchase money security interest (PMSI) will be asserted by year, make, model and VIN/serial number in a schedule to the registration, or by "type and kind" in the general collateral description box. The court held that "type and kind" requires a lender to provide sufficient detail, including the VIN/serial number, so that each piece of equipment secured is readily identified from similar equipment against which no interest is claimed. Failure to include this information can defeat a lender's equipment PMSI interest and result in its loss of expected super-priority. The legislative provisions relied upon by the Alberta court are mirrored in all other Canadian provinces¹, except for Ontario.

In Ontario, when registering a PMSI interest in equipment, it is not mandatory to describe the "type and kind" when using the "general collateral description" on your financing statement. In insolvency situations, the decision not to include the serial number/VIN of your equipment may not impact your equipment PMSI rights as against a trustee or receiver. However, your PMSI interest may be defeated in the context of secured party enforcement proceedings or a sale to a third party purchaser having no notice of your equipment PMSI.

The Case

Skyreach² filed a CCAA application in 2003, and entered into a plan of arrangement with its creditors. The plan was supported by Skyreach's two primary lenders, each of whom were paid in full. Transportaction, an equipment lessor, having filed a proof of claim as "true lessor", appealed the Monitor's notice of disallowance of its claim. The appeal was adjourned for the purpose of effecting the plan, which was completed in 2004. Post-completion, Transportaction commenced a series of actions against each of the primary lenders and other parties involved in the construction of the plan, claiming entitlement to funds paid to secured creditors on the basis that Transportaction was either a true lessor, or alternatively, held a valid equipment PMSI in the proceeds of sale.

Both claims were rejected.

The court held that Transportaction's equipment PMSI argument failed as it chose not to include a schedule of vehicles but instead described the collateral it financed through use of the "general collateral description" box. In doing so, Transportaction described the vehicles in general terms with reference to its master lease agreement with Skyreach, and did not describe the "type and kind" of equipment secured.

For equipment PMSI rights in Ontario, this would have been sufficient to meet the "general collateral description" requirements (although it would not necessarily protect a PMSI creditor from all competing interests).

In Alberta, it was not sufficient. To have properly effected its equipment PMSI, Transportaction should have included the "type and kind" of its collateral, that is, a description that would enable the type or kind of collateral taken to be distinguished from the types or kinds of collateral not taken. This would include the VIN/serial number.

For PMSI interests in personal property other than equipment, a different standard may apply. For more information on this and what information you should be including to protect your interest in equipment across Canada, please contact us at either our office in Toronto, or our new office in Vancouver (opening April 16, 2012).

Footnotes

1. Being common law provinces, excluding Quebec.

2. 843504 Alberta Ltd., 2011 ABQB 448

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.