Legal Updates

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Update

Thursday, December 17, 2015

By: Steve Vasilevski & Rebecca Cochrane

Introduction

Effective December 31, 2015 (the “Effective Date”), the Personal Property Security Act (Ontario) (the “PPSA”) will be amended to change, among other things, the “location of the debtor” rules governing the validity, perfection and priority of the personal property collateral described in Section 7(1) of the PPSA (the “Amendments”). For secured creditors, determining the “location of the debtor” is important because it determines where to register a PPSA financing statement and where to conduct PPSA searches in respect of a debtor. The Amendments will change the rules governing where a debtor is deemed to be located for the purposes of conflict of laws principles under the PPSA, with various implications for secured creditors.

Section 7(1) of the PPSA

Section 7(1) of the PPSA sets out that, at the time a security interest attaches, the validity, perfection, effect of perfection or non-perfection and priority of (a) security interests in intangible goods (such as accounts receivable, contract rights and intellectual property); (b) security interests in mobile goods (leased equipment or inventory which are normally used in more than one jurisdiction); and (c) non-possessory security interests in instruments, negotiable documents of title, money and chattel paper (collectively, “Section 7(1) Collateral”) are governed by the law of the jurisdiction where the debtor is located.

Under the current Section 7(1), the location of a debtor for an individual debtor is deemed to be the individual’s principal residence, and deemed to be the “place of business” of a business debtor with a single location or the “chief executive office” of a business debtor with more than one location. However, the terms “place of business” and “chief executive office” are not defined in the PPSA, which can cause confusion about where a debtor is located for purposes of the PPSA. This uncertainty typically causes creditors to opt to perform searches and file financing statements in all jurisdictions where a business debtor’s “chief executive office” may be located. This problem is compounded for entities such as trusts that may be administered by trustees in different locations, or businesses that do not operate from a physical “place of business”. The filing of financing statements in every jurisdiction having some nexus or connection to the debtor leads to increased costs and time delays.

The Amendments

Under the Amendments, the validity and perfection of a security interest in Section 7(1) Collateral of an individual debtor would continue to be governed by the jurisdiction of the individual’s principal residence. Business debtors, however, will be deemed to be located where they are “organized” according to publicly available documents in accordance with the following simplified regime:

(a)     a federally incorporated company will be located in the province or territory where the debtor’s registered or head office is located;

(b)    a provincially incorporated company, limited partnership or other organization will be located in the province or territory of incorporation or organization;

(c)     a trust or general partnership will be located in the province or territory whose laws govern the trust or partnership agreement or by reference to the jurisdiction in which the administration of the trust is principally carried out;

(d)    a debtor organized under US federal law will be located (i) in the state designated by US federal law or the US state designated by the organization or (ii) the District of Columbia in the USA if subclause (i) does not apply;

(e)    a debtor organized under the law of a US State will be located in the state of organization; and

(f)      if none of the above applies, the jurisdiction where the chief executive office of the debtor is located.

By linking the location of a debtor to information readily available to the public, the Amendments aim to allow for a debtor’s location to be easily and objectively verifiable, thereby eliminating the need to file financing statements or conduct searches in multiple jurisdictions, as is currently done.

Transitional Rules

The Amendments include transitional provisions which are intended to allow secured creditors to take steps to perfect (or continuously perfect) their security interests as required under the Amendments. Generally speaking, there are three important takeaways for secured creditors:

  1. a secured creditor may rely on the old rules when amending, renewing or extending a security agreement that was entered into before the Effective Date, so long as the amended security agreement does not include additional collateral (otherwise the new rules apply);
  2. a security interest that was perfected under the old rules will continue as perfected until the earlier of the day the registration expires or December 31, 2020; and
  3. a security interest perfected under the old rules will be deemed continuously perfected where steps are taken to register under the new rules before December 31, 2020.

Accordingly, secured creditors should keep the following in mind going forward:

(a)     if entering into a new security agreement prior to the Effective Date, file in both the registered office and chief executive office jurisdictions of a business debtor; and

(b)    for existing security agreements, well in advance of December 31, 2020, identify if any business debtors have registered offices outside of Ontario and, if so, register in those jurisdictions and perform the requisite searches to determine what your priority is in the new jurisdiction of filing.

Conflicts of Law

While the Amendments bring greater certainty about determining a debtor’s location for perfection of security interests in Section 7(1) Collateral, secured creditors will continue to face challenges owing to the lack of harmony among the provinces and territories in this regard. No other province or territory has announced an intention to make the same changes to their respective personal property security statutes, meaning that, as a practical matter, secured creditors will continue to incur the time and expense of taking steps to perfect in multiple jurisdictions so long as conflict of laws rules do not align. An example would be a business debtor formed under the laws of British Columbia having a chief executive office in Ontario with intangible or mobile collateral of the type covered by Section 7(1) of the PPSA: under the Amendments, British Columbia law would govern perfection, whereas the British Columbia personal property security regime specifies that Ontario law governs. The PPSA addresses this problem of each of the two provinces endlessly directing the issue back to the other by providing that a reference to the laws of a jurisdiction is a reference to the internal laws of that jurisdiction, excluding the conflicts of law rules. However, multiple common law provinces and territories do not expressly contain a comparable provision, and there is little judicial guidance on this topic. Consequently, secured creditors will continue to take the cautionary route of perfecting in multiple jurisdictions if the common law provinces and territories are not harmonized on this topic.

Conclusion

The Amendments bring clarity to the location of the debtor under the PPSA, but, ultimately, practical complications will remain during the transitional period and beyond if Canadian common law provinces and territories are not harmonized on this aspect of the law. The hope of secured creditors and legal practitioners alike is that the other common law provinces and territories will follow Ontario’s lead in amending their personal property security statutes to eliminate these conflict of laws concerns.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.

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