Recent Amendments to the Personal Property Security Act Benefit Both Lenders and Borrowers
Bill 68 in effect as of October 25, 2010 amends Ontario’s Personal Property Security Act (“PPSA”) in a way which increases transparency in the government registry system (pursuant to which a lender secures its claim to a borrower’s asset(s) pledged as collateral for the loan) and improves, as a result, the strategic position of both lenders and borrowers.The amendments require the government registry to more clearly explicate the extent of a lender’s security over the borrower’s assets. Section 46 subsection (2.1) states:
Classification of collateral
(2.1) Except with respect to rights to proceeds, where a financing statement or financing change statement sets out a classification of collateral and also contains words that appear to limit the scope of the classification, then, unless otherwise indicated in the financing statement or financing change statement, the secured party may claim a security interest perfected by registration only in the class as limited. 2010, c. 16, Sched. 5, s. 4 (3).
Further consider section 56 and, in particular, subsections (2.2) and (2.3) which state:
Removal of collateral classifications
(2.2) If a financing statement is registered under this Act and the person named in the financing statement as the secured party has not acquired a security interest in any property within one or more of the collateral classifications indicated on the financing statement, the person named in the financing statement as the debtor may deliver a written notice to the person named as the secured party demanding registration of a financing change statement referred to in section 49 to correct the collateral classifications by removing any collateral classification in which the person named as the secured party has not acquired a security interest, and the person named as the secured party shall register the financing change statement. 2010, c. 16, Sched. 5, s. 4 (4).
Limiting collateral classification
(2.3) If a financing statement is registered under this Act and the person named in the financing statement as the secured party has not included words limiting the scope of the collateral classification within the meaning of subsection 46 (2.1) and has acquired a security interest only in particular property within the classification, the person named in the financing statement as the debtor may deliver a written notice to the person named as the secured party demanding registration of a financing change statement referred to in section 49 to add words limiting the scope of the collateral classification, and the person named as the secured party shall register the financing change statement. 2010, c. 16, Sched. 5, s. 4 (4).
Having regard to the foregoing, one immediately appreciates the benefits associated with moving away from relying purely on the broadly defined categories of collateral checked off on the PPSA registration form in order to secure a lender’s loan. Absent these amendments, it would be impossible for a party to determine which assets in, for example, the broad category of equipment were secured to an existing secured creditor whose registered status under the PPSA merely indicates an interest in the equipment category. Accordingly, a lender may very well have been discouraged from lending against the personal property of a borrower simply because another lender enjoyed priority ranking and because obtaining a satisfactory security interest in the desired assets would have required the prior ranking creditor to subordinate its claim or waive an interest in the particular assets in question.
In addition, both prospective lenders and borrowers benefit from the increased rights afforded borrowers against existing creditors. The above subsections of section 56 give debtors the right to demand a financing change statement to be registered at the secured party’s expense in order that:
- any one or more categories of collateral be removed due to the fact that a secured party has not acquired a security interest in any property within a category of collateral previously secured to the creditor via the existing registration; or
- a collateral description be provided in order to limit the scope of the collateral within any one or more categories.
The PPSA goes on to prescribe a penalty against secured parties failing to comply with the requirement to file a financing change statement. Subsection 56(4) states:
Failure to deliver
(2.4) Where the secured party, without reasonable excuse, fails to register the financing change statement, or certificate of discharge or partial discharge, or all of them, as the case may be, required under subsection (1), (2), (2.1), (2.2) or (2.3) within 10 days after receiving a demand for it, the secured party shall pay $500 to the person making the demand and any damages resulting from the failure; the sum and damages are recoverable in any court of competent jurisdiction. 2006, c. 34, Sched. E, s. 18 (4); 2010, c. 16, Sched. 5, s. 4 (5).
From a business efficacy perspective these amendments to the PPSA should be applauded as they achieve a great deal of added clarity previously lacking under the check box paradigm. With added clarity comes an increase in lender confidence which will inevitably result in a greater number of commercial transactions being financed many of which would otherwise have depended on creditors agreeing to postpone or outright waive their security over certain assets.