LegalSpotlight Protecting Your Interests: Taking and Enforcing Security in Ontario

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Briana Harrington
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1 LegalSpotlight Protectig Your Iterests: Takig ad Eforcig Security i Otario Jim s factory i Toroto sells maufacturig equipmet to a customer uable to pay the etire purchase price o delivery. How ca he secure paymet of the balace? Susa, a US baker, leds moey to a US-based compay. She would like to take security from its Caadia subsidiary i case the compay is uable to repay the loa. SCOPE OF PPSA Agreemets that create a security iterest i persoal property i Otario are govered by the Persoal Property Security Act (PPSA). A security iterest is a iterest i persoal property that secures a paymet or the performace of a obligatio. For example, the iterest of a trasferee of a accout (where moey is owed the trasferor) or chattel paper (i.e. a promise to pay). It also icludes the iterest of persoal property? This is NOT determied simply by the legal title to the property or the form of the agreemet. You eed to look at the overall message of the agreemet ad the itetio of the parties. If your agreemet creates a security iterest i persoal property the the rules regardig the priorities amog competig creditors with a security iterest i the same collateral, ad the eforcemet of the respective security iterests, are set out i the PPSA. How ca you tell if your agreemet creates a security iterest i persoal property? This is NOT determied simply by the legal title to the property or the form of the agreemet. As a vedor or leder you wat to be sure you get paid. We offer this booklet as a overview of some of the questios you may face i these roles. 1 a ower of goods uder a lease for a term of more tha oe year, regardless of whether the lease secures a paymet or obligatio. How ca you tell if your agreemet creates a security iterest i The PPSA provides a registratio system for security iterests. With few exceptios, competig security iterests i the same collateral acquire priority by their order of registratio. Earlier registratios have priority over later registratios, A glossary of Key Terms Associated with Takig ad Eforcig Security appears o page 5. 1 Please ote that the focus of this booklet is persoal property, ot real estate or cosumer goods. The iformatio cotaied i this booklet reflects the laws of the Provice of Otario, ad is curret as of Jauary The cotet should ot be take as legal advice. It is ot exhaustive ad is subject to chage. 1

2 except for security iterests called Purchase-Moey Security Iterests (PMSI), which, provided you follow the procedures outlied i the PPSA, allows you to acquire a priority over existig registered security iterests i the same collateral. If you sell somethig ad do ot receive full paymet whe possessio passes to the buyer, you ca protect your claim for paymet of the purchase price of the goods ahead of already registered secured parties that have a security iterest i the same collateral. The PPSA does NOT apply to a absolute sale of persoal property (the purchase of owership of the persoal property), real estate ad various statutory lies. a descriptio of the parties; a descriptio of the collateral; the fiacial ad other obligatios of the debtor to the secured party, the rights of the secured party i case of default; ad the sigature of the debtor. Correctly idetify the debtor You must idetify the debtor correctly i a security agreemet. Errors i the debtor s ame ca ivalidate the registratio of a security iterest. If the debtor is a idividual you must idetify the perso by secured oly with specific additioal steps. Also, whe persoal property collateral is affixed to lad or a buildig it may become a fixture. If so, a otice of the security iterest must also be registered i the Lad Registry Office. ESTABLISHING YOUR PRIORITY Perfectio ad attachmet are techical terms referrig to the steps required to esure your security iterest is effective agaist subsequet secured parties with a iterest i the same collateral. Perfectio occurs as a result of registratio of the security iterest or by possessio of the If the debtor is a corporatio, you must cofirm the legal ame of the corporatio (as opposed to its busiess ame) i the jurisdictio of icorporatio ad cofirm its cotiued existece. Are leases govered by the PPSA? The PPSA applies to fiacig leases ad true leases of persoal property. A fiacig lease is a lease with istallmet paymets over time after the goods are delivered, ad a optio to buy at the ed of the lease for a purchase price less paymets already made. This is sometimes called a leaseto-purchase or hire purchase arragemet. A true lease is a arragemet for the use of persoal property without a elemet of purchase (for example, a equipmet retal agreemet). SECURITY AGREEMENTS A security agreemet must iclude the followig: first give ame, middle iitial ad last ame. It is importat to verify the ame by obtaiig a idetity documet, such as a birth certificate, driver s licese or passport. Noe of these idetity documets are ifallible i cofirmig the correct ame. If the debtor is a corporatio, you must cofirm the legal ame of the corporatio (as opposed to its busiess ame) i the jurisdictio of icorporatio ad cofirm its cotiued existece. Some Caadia corporatios have dual Eglish/Frech ames; registratio of a security iterest should iclude both. You may also wish to do a bakruptcy search sice bakrupts caot grat valid security iterests i their assets. Certai types of assets, such as govermet receivables, ca be collateral. Attachmet refers to the iteded creatio of the security iterest, typically as a result of the debtor sigig a security agreemet i favour of the secured party. Registratio meas filig a fiacig statemet to record a security iterest i the PPSA registratio system. How are creditors raked? Whe a debtor has more tha oe secured creditor, how are the creditors raked, i terms of the priority of their security iterests? The basic rules for determiig priority are: a perfected (registered or possessory) security iterest takes priority over a uperfected (uregistered opossessory) security iterest; 2

3 i a case of coflict betwee security iterests perfected by registratio, the first to register has priority. If the security iterest is perfected by possessio, priority by possessio will oly be subject to a prior perfectio by registratio; whe there is coflict betwee uperfected security iterests, priority goes to the first security iterest to attach to the collateral. I the case of a security iterest i tagible persoal property (such as equipmet or ivetory), you perfect a security iterest by possessio of the property rather tha by registratio of the security iterest. Purchase-Moey Security Iterests are a exceptio to these rules. Purchase-Moey Security Iterests A Purchase-Moey Security Iterest, or PMSI (proouced PIM-see ), is a security iterest to secure the upaid purchase price of persoal property or a third party loa to pay all or part of the purchase price of persoal property. The collateral is usually ivetory or equipmet. A sale of persoal property followed by a lease of the persoal property by the Purchaser back to the Vedor is ot a PMSI. A PMSI raks ahead of prior PPSAregistered creditors claimig a iterest i the same collateral. I the case of a PMSI i ivetory you must register ad give otice to ayoe who appears to have a prior registered security iterest i the same collateral, BEFORE the debtor or its aget takes possessio of the collateral. Also, i the case of a PMSI i ivetory, it is importat to ote that you ca lose your security iterest if the collateral is sold by the debtor i the ordiary course of busiess. Whe the collateral is equipmet that is ot ivetory, otice to other creditors is ot required. However, for your PMSI to be valid it must be perfected by registratio o later tha 15 days after the debtor or its aget takes possessio of the goods. Vedor PMSI s have priority over leder PMSI s. MAINTAINING YOUR PRIORITY To maitai your priority as a secured creditor, you eed to esure cotiuig perfectio of your security iterest. You should keep track of registratio expiry dates, ad make sure to register to exted/reew your registratio before it expires. Secured parties should also be alert for other evets which may require amedmets to their registratio. For example, if you become aware that your debtor has chaged its ame, you must amed your registratio or take possessio of the collateral withi 30 days. If your debtor s head office is moved to aother jurisdictio, you must register your security iterest i that jurisdictio. If your debtor moves tagible collateral to aother jurisdictio, you must register your security iterest there. If all or part of the collateral is sold with your prior kowledge ad coset, you must amed your registratio withi 15 days of learig of the sale. If all or part of the collateral is sold with your prior kowledge, but without your coset, you must amed your registratio withi 30 days of learig of the sale. These rules also apply if your debtor trasfers the collateral to someoe else. If the collateral was trasferred without your prior kowledge or coset, you must amed your registratio withi 30 days of your learig of the trasfer. You should also amed your registratio i the followig situatios: after a partial or full discharge; whe addig debtors; whe addig collateral; or whe your security iterest is trasferred or sold to a ew secured party. i the case of a PMSI i ivetory, it is importat to ote that you ca lose your security iterest if the collateral is sold by the debtor i the ordiary course of busiess. ENFORCEMENT As a secured party, if your debtor does ot pay you, you have a choice of three remedies. Self-help remedies: Usually employed i cosumer goods trasactios. Third-party assisted remedies: Where a secured party employs the services of a bailiff, a receiver, or a repossessio aget. These remedies may sometimes require a court order to obtai possessio of the collateral. Third-party assisted remedy rights are usually described i the security agreemet. A Geeral Security Agreemet usually gives the secured party the right to 3

4 appoit ad istruct a receiver. The receiver s role is to sell the debtor s assets to pay the secured party. Judicial remedies: Sought i situatios, such as where: owership is complicated; there are multiple secured parties with competig iterests; or a debtor is ucooperative ad a court order is eeded to obtai possessio assets. I some cases a secured party will apply to the court to appoit a receiver to seize ad sell the debtor s assets o behalf of a secured creditor or more tha oe secured creditor. Proceeds from the sale will be used to pay the receiver s costs ad claims that have priority to your claim as a Isolvecy Act before ay actio to eforce the security may be take. CROSS-BORDER ISSUES May America compaies have subsidiaries i Caada. Whe a US compay borrows, ofte its US leder will take security i the Caadia subsidiary s assets. I such cases, these are some importat poits to ote: 1 A foreig leder caot be i the busiess of ledig i Caada directly to Caadia busiesses uless it is qualified i Caada to do so. To comply with this law, foreig leders must be careful how they structure loas to Caadia borrowers. 4 Uder Otario s PPSA, a security iterest i accouts receivable is perfected i the jurisdictio where the debtor has its chief place of busiess. Therefore, if the debtor is based outside of Otario but is pledgig a receivable from a customer i Otario, the leder may ot have to perfect its security iterest i Otario. 5 For security agreemets govered by foreig laws ad dealig with collateral i Otario, Otario s PPSA provides guidelies for resolvig coflicts of laws issues. 6 America forms of security agreemets should be reviewed to esure they iclude remedies America forms of security agreemets should be reviewed to esure they iclude remedies typically used i Caada, like the appoitmet of a receiver. They should also be reviewed to esure they reflect Caada s applicable federal ad provicial persoal property security, isolvecy ad corporate reorgaizatio ad restructurig laws. secured creditor, such as certai govermet claims. If there is more tha oe secured creditor, secured creditors will be paid accordig to their priority. The PPSA sets out the rules that must be followed to seize ad sell assets. A otice of your itetio to sell the collateral must be give to the debtor ad other parties with a iterest i it, to give them a opportuity to redeem the collateral before it is sold. I additio, if the secured party iteds to eforce a security iterest i all or substatially all of the property of a debtor, a 10 day otice to the debtor of the itetio to eforce the security iterest is required uder the Bakruptcy ad 2 For Uited States tax purposes, sometimes a Caadia subsidiary is icorporated as a ulimited liability compay uder the laws of the Provice of Nova Scotia to hold the shares of the Caadia operatig subsidiary. Leders should avoid takig a pledge of shares i such compaies, sice they may have ulimited liability for the subsidiary s debts. 3 Tax laws i Caada are differet from the Uited States. I the US, for example, a leder will avoid takig a pledge of % or more of the votig shares i its borrower s Caadia subsidiary, because such a pledge would create a deemed divided. This cosideratio does ot apply i Caada for Caadia borrowers. typically used i Caada, like the appoitmet of a receiver. They should also be reviewed to esure they reflect Caada s applicable federal ad provicial persoal property security, isolvecy ad corporate reorgaizatio ad restructurig laws. 7 If a Caadia compay is liable to pay iterest to a America leder, those iterest paymets will probably be subject to Caadia withholdig tax. Oe solutio may be to require the Caadia compay to icrease its paymets by the amout of withholdig tax. 4

5 KEY TERMS ASSOCIATED WITH TAKING AND ENFORCING SECURITY attachmet attachmet of a security iterest to collateral happes whe the followig coditios are met: a security agreemet is siged; it cotais a descriptio of the collateral; value is give; the debtor has rights i the collateral; ad attachmet has ot bee postpoed collateral persoal property that is subject to a security iterest itagibles persoal property such as accouts receivable, stocks, ad itellectual property (like patets ad trade-marks) perfectio the highest protectio possible for the rights of a creditor, perfectio requires attachmet (see above) PLUS registratio (see far right) OR possessio of the collateral (i the case of tagible collateral oly) persoal property icludes goods, istrumets, certai fixtures i buildigs, moey, securities, documets of title, ad chattel paper (a promise to pay) Persoal Property Security Act or PPSA Otario law dealig with the creatio, rakig, ad eforcemet of security iterests i persoal property; similar to Article IX of the Uiform Commercial Code (UCC) i US law proceeds cash from the sale of collateral Purchase-Moey Security Iterest or PMSI (proouced PIM-see ) a security iterest to secure all or part of the price of the persoal property i questio (that is, a security iterest which is limited to the collateral itself); the collateral is usually ivetory or equipmet registratio occurs whe a otice (called a fiacig statemet) of a security iterest is recorded as required by the PPSA secured party or secured creditor, a perso holdig a security iterest, either for his or her ow beefit or for the beefit of aother perso (as i the case of a trustee or a aget) security agreemet a agreemet that creates or provides for a security iterest security iterest a iterest i persoal property that secures paymet or performace of a obligatio, icludig the iterest of a trasferee of a accout or chattel paper (a promise to pay) tagibles persoal property such as ivetory, equipmet or vehicles ABOUT HOUSER HENRY & SYRON LLP Your busiess grows. You expad ito ew markets, hire ew people, move ito larger facilities, lauch ew products or services ad face ew legal issues ad challeges. Sice 1934, Houser Hery & Syro LLP has provided legal services to private busiesses, helpig them deal with the complexity that comes with growth ad success. We uderstad the eeds of mid-sized busiesses ad their owers ad maagers ad we have the breadth of expertise ad the depth of experiece ecessary to meet those eeds. We offer this booklet as a hady referece ad as a overview of some of the questios you may face whe operatig a retail busiess i Otario. For more iformatio, please cotact oe of the lawyers with our firm. You may also wish to visit our website, for a overview of our team ad our services. CONTACT US If you would like more iformatio about this or ay area of corporate law, please cotact us: Houser Hery & Syro LLP Suite 2701, 145 Kig St. West Toroto, Otario Caada M5H 1J8 t: f: e: iquiries@houserhery.com This publicatio provides a outlie of issues for busiess professioals to cosider. The cotet should ot be take as legal advice. It is ot exhaustive ad is subject to chage. Please cosult with a HHS lawyer for iformatio or advice specific to your situatio. HHS

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