A Reminder of the Transition Deadline: New Year, New Debtor Location Rules Under Alberta’s PPSA

Secured lenders want certainty over how to determine a borrower’s location because that location dictates which rules they must follow when creating and perfecting a security interest. Section 7 of Alberta’s Personal Property Security Act (“PPSA”) was amended, effective June 1, 2024, to incorporate a number of changes aimed at reducing the ambiguity in determining a debtor’s location (the “Amendments”). These Amendments, initially proposed by the Canadian Conference on Personal Property Security Law and later endorsed by the Alberta Law Reform Institute, will bring Alberta’s PPSA in line with those of other Canadian provinces such as Ontario, British Columbia and Saskatchewan.

The Amendments are part of a broader initiative by the Alberta government to reduce red tape, which involves, among other things, improving legislative clarity. Indeed, the PPSA is one of fourteen statutes amended by the Red Tape Reduction Statutes Act, 2023 (formerly, Bill 9), introduced by the Ministry of Service Alberta and Red Tape Reduction in 2023.

There is a six-month transition period applicable to existing security interests perfected before June 1, 2024 under the Former Debtor Location Rules (as defined below). Secured lenders should we aware that pre-existing PPSA registrations may no longer be perfected on December 31, 2024 (or sooner if perfection would have lapsed for other reasons).

The Former Approach to Determining Debtor Location

Prior to June 1, 2024, for the purposes of determining the law governing the validity, perfection and effect of perfection or non-perfection of (a) a security interest in intangibles and certain mobile goods, and (b) a non-possessory security interest in chattel paper, negotiable documents of title, instruments or money under Section 7 of the PPSA, a debtor was deemed to be located in the jurisdiction of (i) the debtor’s principal place of business, (ii) the debtor’s chief executive office, if the debtor had multiple places of business, or (iii) the debtor’s principal residence, if the debtor had no place of business (collectively, the “Former Debtor Location Rules”).

Although the Former Debtor Location Rules may seem straightforward, identifying a debtor’s place of business or chief executive office in practice is not a simple task. Secured lenders and their counsel cannot simply refer to business registries or apply an established legal test to pinpoint a debtor’s chief executive office; rather, they must engage in a case-by-case analysis and come to a determination based on the facts and surrounding context, which can lead to uncertainty and increased transaction costs. Additionally, for individual debtors (natural persons) who have a place of business or multiple places of business, secured lenders and their counsel must assess whether the place or places of business are located in a jurisdiction different than the jurisdiction of the debtor’s principal residence, as well as engage in the same fact-specific analysis to determine the chief executive office in the case where the debtor has more than one place of business.

The Shift to Simpler Debtor Location Rules

The Amendments simplify determining a debtor’s location by substantially eliminating the need for secured lenders or their counsel to engage in a fact-specific analysis of a debtor’s place of business or chief executive office. Instead, most Canadian and U.S. corporations and organizations are now deemed for the purpose of Section 7 to be located in the province, territory or state in which they are incorporated, amalgamated, continued or otherwise legally organized. In addition, determining an individual debtor’s location no longer depends on whether the individual operates a place of business.

On or after June 1, 2024, to determine the applicable law governing the validity, perfection and effect of perfection or non-perfection of (a) a security interest in intangibles and certain mobile goods, and (b) a non-possessory security interest in chattel paper, negotiable documents of title, instruments or money, the following rules apply (collectively, the “New Debtor Location Rules”):

Individuals

All individuals, including those who operate a place of business, are deemed to be located in the jurisdiction in which their principal residence is located.

Corporations (Provincial or Territorial)

A corporation incorporated, continued, amalgamated or otherwise organized under the law of a province or territory of Canada is deemed to be located in that province or territory.

Corporations (Federal)

A corporation incorporated, continued or amalgamated under the federal law of Canada is deemed to be located in the jurisdiction in which the corporation’s registered or head office is located as designated by the legislation under which the corporation was formed. If the legislation does not specify the registered or head office, the location is determined by the corporation’s articles or other constating documents. If both the legislation and constating documents are silent, the designation is based on the corporation’s by-laws.

U.S. Registered Organizations (State)

An organization registered under the law of a state in the U.S. is deemed to be located in that state.

U.S. Registered Organizations (Federal)

An organization registered under the law of the U.S. is deemed to be located in (a) the state that the law of the U.S. designates, if the law designates a state of location, (b) the state that the registered organization designates, if the law of the U.S. authorizes the registered organization to designate its state of location, or (c) the District of Columbia if the first two options do not apply.

Trusts with Only One Trustee

In respect of a trust that has only one trustee: (a) if the trustee is an individual with a principal residence located in Canada, the trustee is deemed to be located in that province or territory, and (b) if the trustee is a corporation or organization organized under the provincial, territorial or federal laws of Canada, in the jurisdiction determined by applicable rules governing such corporations or organizations, as discussed above.

All Other Debtors

Where none of the above rules apply to a particular debtor, then the jurisdiction of a debtor is determined as follows: (a) if a debtor has only one place of business, the debtor is deemed to be located at that place of business, and (b) if a debtor has more than one place of business, the debtor is deemed to be located at the debtor’s “chief executive office” – which the PPSA defines as the place from which the debtor manages the main part of its affairs.

Navigating the Path Forward: Ensuring Priority

In light of the Amendments, secured lenders, in consultation with their counsel, should review their existing PPSA registrations to determine whether pre-existing security interests that were perfected under the Former Debtor Location Rules are considered perfected under the New Debtor Location Rules. For pre-existing security interests that are not perfected in the correct jurisdictions under the New Debtor Location Rules, secured lenders and their counsel should take steps to register these pre-existing security interests in the correct jurisdictions prior to the earlier of (a) the expiry date of the pre-existing security interest perfected under the Former Debtor Location Rules, and (b) December 31, 2024, in order to avoid their pre-existing security interests becoming unperfected and jeopardizing their priority.

In addition, secured lenders and their counsel need to be aware that the Former Debtor Location Rules continue to apply for the purposes of establishing the location of a debtor in order to determine:

1. the law governing the validity of a pre-existing security interest; and
2. the law governing the priority of a pre-existing security interest perfected under the Former Debtor Location Rules in relation to any other pre-existing security interest perfected under the Former Debtor Location Rules.

If you have any questions about the foregoing Amendments and how they may affect your lending and borrowing needs, please contact Rachel Manno at [email protected], Krystle Formhals at [email protected] or any other member of our Debt Products practice group. The authors gratefully acknowledge the assistance of articling student Sepehr Yousef Pour in the preparation of this update.

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.