COMMERCIAL LAW SUMMARY—Johnson
Governing Principle: a person cannot give another a greater interest in property than the transferor herself
has ("nemo dat quod non habet" or "nemo dat qui non habet").
Commercial Law = law that facilitates trade—covers matters like sale of goods, sale/financing,
transportation of goods, insurance, banking etc.
SECURED TRANSACTIONS IN PERSONAL PROPERTY
Car dealership: to start up car dealership either rent or buy land.
o If rented, the relationship is with a landlord in the form of a commercial lease. In a commercial
lease, insurance companies will finance in real estate.
o Banks tend not to lend on commercial land; banks will provide short term financing for
purchases of inventory and purchases of supplies partly because not allowed to finance
commercial leases based on their charter. There is also a relationship with the crown in the
form of taxes, utility costs, etc.
Lead lender: a bank will cover overhead and lend money up front to cover the start-up costs and
monitor the loan. The debtor has two objectives: (a) finance its operations and its acquisitions it
makes at the lowest possible interest rate for duration of loan (b) over the course of the loan, get rid of
Profit = gross sales - costs of doing business.
Principle objectives of the commercial creditor: (a) obtain the largest return under the prevailing
market conditions from the loan (b) be assured of repayment of the principle plus interest and all costs
of doing business (administrative fees). The costs to debtor must be reasonable in relation to the risk
the creditor assumes.
Small Business Financing: methods of financing smaller businesses; typical form of financing is
short term financing (i.e. 90 days) primarily for inventory and accounts receivable (A/R).
Rule: when you incorporate a business, legally the business is separate from its owners—separate
legal entities (Solomon v. Solomon)
o Therefore when creditors have a relationship with the corporation, they only have a
relationship with the corporation, not the owner personally, i.e. in case of bad debt cannot
chase the owner but only the corporation.
Assessment and assumption of risk by the creditor:
o Risk of non-payment during the course of the loan. Examine the history of the debtor (if
no credit history, i.e. student loan, government steps in as guarantor) and assess viability of
the enterprise (is it a good business in this time and market?)
o Default risk: in the event that this person goes broke, what is the likelihood of repayment?
Personal property lending:
o Secured lending: if default, arrange to surrender some property in lieu of loan repayment;
judgement against some or all of your property. There is usually a collateral term in the
contract (ie. mortgages).
o Unsecured lending: if default, no agreement to surrender property; no property is identified
in link to the loan. Only recourse is through the courts.
If debtor goes bankrupt, all creditors may get together to sell assets: proceeds of disposition of assets
are shared in a fair manner (absent any rules to the contrary: two exceptions (i) secured creditors (ii)
preferred creditors). The Bankruptcy and Insolvency Act is a federal statute to be applied uniformly.
Property vests in the trustee in bankruptcy and trustee pools and sells assets in order for proceeds of
disposition to be paid to creditors.
Credit: is the agreed deferred payment of a debt.
S.136(1) of the Bankruptcy and Insolvency Act sets up a priority of ordering among categories of
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Secured: tend to get back approximately 60-80% of what they lent. The PPSA sets up a scheme
of distribution among this class.
Preferred: within this class there is no ability to bargain so they go ahead of unsecured. Only in
big bankruptcies does this class get attention (ie. funeral services).
Unsecured: hardly get anything. Usually get about 5¢ for every $1 lent. Take in proportion to what
they lend. Prima facie at common law, all unsecured creditors must share fairly and equitably (not
Two categories of provincially governed creditors:
(a) Personal property creditors: governed by the Personal Property Security Act
(b) Real property creditors: deal with Mortgages Act, Land Titles Act and Registry Act.
For the debtor's perspective, it is good for creditors to be considered secured lenders because it has
the consequence of lowering risk and therefore interest in a competitive system of lending. Since
return follows risk, the higher up the hierarchy, the lower the interest rate will be. For this reason,
credit cards, which are unsecured creditors have a very high interest rate.
System is set up so that within the class, each party knows their position relative to one-another and
will adjust their rates accordingly.
When someone is put into bankruptcy, all property of the bankrupt is vested with a trustee (generally
an accountant with a special license), puts out a notice, collects names of creditors and distributes
funds from proceeds of sale of property—but they need to be paid therefore paid before employees,
o Trustee does not have jurisdiction over secured creditors only unsecured creditors.
o Directors of corporations are directly liable for wages—s. 120-121.
o Order of priority in a non-bankruptcy:
o Mix of Federal and Provincial legislation depending upon power at issue
E.g. Bank Act: Federal
Income Tax Act: Federal
Personal Property Security Act (PPSA): Provincial
o Financial Implications for the small business:
o Secured credit is less expensive
o Why? Interest rate (return) is linked with risk—higher the risk, higher the interest; lower
risk = lower return; when secured less risk therefore give credit at a lower interest rate.
o Two risks for the lender:
Cash flow—lenders’ concerns—debt equity rations, ability to service the loan
Default risk—lenders’ concerns—need security device to cover risk of not
recovering on bankruptcy or insolvency—i.e. if you default on your loan, how does
the creditor get its principal back, if secured then take the asset that the credit
was given against, but unsecured then need to go to court.
o Risk and the interest rate
o Secured loans usually have a lower interest rate than unsecured
o On default, secured lenders take from debtor’s pool of assets first
o Note: the classes of creditors take in a different manner
Each secured creditor takes in order of priority, to the full extent of the
outstanding debt—sequential list.
Same for preferred
In contrast, unsecured share pro rata (not sequentially)—i.e. paid dividendly
depending on total amount owed—ranked ratably.
When entering into a financing relationship, both parties must consider the fact that the business
may go bust, and the lender must take such risk into determining the requirement of security
Creditors need to worry about where they stand vis-à-vis other creditors in terms of priority—as
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lawyers job to show the creditors where they stand, and how to climb the ladder of priority while
Taking a security interest does not automatically give a secured creditor priority, but rather puts
them in a pool of secured creditors, where priority may be based amount lent to debtor, and who
registered the debt first.
Some creditors may have covenants as part of the agreement i.e. debtor cannot grant an interest
in the asset to anyone that takes priority over them
Why do we have secured credit? If we didn’t have secured credit, the lending base would shrink
considerably, because then the lenders would not take the risk and only lend to the people they
know i.e. becomes elitist.
Reasons For Security Devices:
1. There is a risk of bankruptcy and an unsecured creditor will only receive a small dividend. A
secured creditor is first in line to collect with an average of 70% of claims realized.
2. If the debtor does not pay and doesn't become insolvent, it is a hassle to sue for the debt.
However, a secured creditor may simply seize collateral and dispose of it without judicial
3. If there is no security device, there is a danger that another creditor will take security and gain
priority on collection.
4. A secured creditor is often given the power in the security agreement to monitor the debtor's
Whether a creditor can obtain security depends on: strength of bargaining position, size of debt,
period of payment.
Security devices worked on a split between title and possession.
The objectives re: credit where lower risk to creditor means lower interest rate for debtor.
Issue: how to lower risk
o Absent secured credit, risk is lowered by lending to a small base i.e. known debtors.
Secured credit increases lending base:
o Creditor looks to stats, not personality to assess risk.
o Government requires banks/insurance companies to maintain certain ratio of
o Protects depositors/insured.
i. Judicial: created by a judge to seize collateral.
ii. Statutory: created by statute to seize collateral.
iii. Consensual lien: binding because of its nature and terms; also binding against third
For example, a lead lender/secured creditor is given publicity on a bankruptcy.
The lead lender has first chance and any unsecured creditors will go after the
lead lender to get the surplus. Prior to the PPSA, had to go to court for
enforcement. Now you can sell items without judicial permission.
Bankruptcy and Insolvency Act
Definitions s. 2(1):
Bankruptcy: means the state of being bankrupt or the fact of becoming bankrupt.
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Insolvent: different from being bankrupt--insolvent means that you are unable to meet your
liabilities as they become due or you cease to meet you current obligations.
Minister: means the minister of Industry.
Property: includes money, goods, things in action, land, and every description of property, whether
real or personal--looks at whether the debtor has a proprietor's interest.
Secured creditor: person holding a mortgage, lien or privilege on or against the property of the
debtor or any part thereof.
Trustee: person who is licensed or appointed under the Act--typically accountants not lawyers.
Acts of bankruptcy s. 42
when an individual or business knows they are in state of insolvency and assign their rights to a
trustee on behalf all their creditors = act of bankruptcy.
people who know they are headed for bankruptcy may transfer assets to others, i.e. conveyance
of the property where the intention is to deprive creditors of their rights, therefore called fraudulent
Provisions in act which conveys such transactions to be void--generally if transfer done within in
12 months of bankruptcy, and onus on debtor to prove otherwise, i.e. done in the normal course
if arms length transaction then 3 months.
leave canada with the intention to defeat one's creditors.
if ceases to meet his liabilities generally as they become due--committed an act of bankruptcy but
may not be bankrupt yet.
Petitions and assignments: ss. 43(1); 49
2 methods to claim bankruptcy:
1. creditor files a petition with the court--involuntary
2. assignment into bankruptcy by t he debtor-voluntary
Vesting of property in trustee: s. 71(2);
when you are judged as bankrupt, a receiving order is issued, the debtor ceases to have the
capacity to deal with their property/assets and all property/assets are vested with a trustee on
behalf of the debtor, compiles a list of creditor, send out a notice, creditors come forward and
prove their claim, secured creditors take the assets they have claim over and leave since trustee
has no jurisdiction over the secured creditors.
"Property" - exceptions: s. 67
trust property is exempt from being undertaken by the bankruptcy trustee, but may still fall under
the 12 month rule.
Scheme of distribution: s. 136(1)
guide a trustee as to the distribution priority.
Role of the trustee
gather assets and list of creditors;
Dispose of assets;
Distribute proceeds of disposition in accordance with s. 136(1)
o Discharge and fresh start—at this point the bankrupt is discharged from bankruptcy and
gets a fresh start in the economic cycle.
o All general debts are erased—usually 7 years before most credits will grant credit to a
o Judge decides whether the bankrupt will be discharged from bankruptcy—if bankrupt
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committed fraud or something, the judge may find him to be liable for the debts i.e. won’t
permit him to walk away from family obligations ex spousal support.
Secured creditors outside trustee's jurisdiction: s. 71(2)
"...subject...to the rights of secured creditors..."
Overview of PPSA
Before PPSA had to go through 6 different registry systems, correlate them, this was
PPSA created one charge over personal property--no more a fragmented charge.
Assume loan, and lender wants security interest:
PPSA – created a consensual lien s.9
Consensual because a security agreement is effective according to its terms
between the parties to it and against 3rd parties--makes the lien between parties
binding against 3rd parties - i.e. privy to a contract binding [other liens: statute i.e.
created by statute; tax lien i.e. created when you don't pay your taxes therefore
lien put against your property; judicial lien--courts put a lien.]):
o Scheme for creating a unitary charge over personal property of the debtor;
o charge created by contract between the parties, and is binding according to its terms;
o through appropriate form of publicity, charge becomes binding on third parties--2 forms of
publicity s. 22 & 23--22 = creditor taking possession of the goods (pawnbroker); non-
possessory, where debtor keeps possession of goods, register the good on a
registry...give notice of security interest.
o priority scheme is included in the Act--s. 30--generally;
generally if give notice--then priority given in order of registration (with exception)-
-priority scheme included in act.
o non-judicial remedies created--s. 58
if there is a default here, the secured party does not have to go to court to seize
the goods, as a result of the agreement, can simply seize the goods without going
S. 59(2)--secured party may enforce a security interest by any means possible,
creditor also has a right to dispose of goods (s. 63 & 64) by any means they
choose--there is a standard they must adhere to, but can sell privately or auction
Pre-PPSA: distribution on a Bankruptcy/insolvency:
Common Law Position
absent any legislation to the contrary, all assets of debtor available to creditors equally
BIA--creates categories of creditors
bill of sale: contract between parties with their names and addresses, terms of loan, security
assets, covenants (ex. debtor must keep items insured), plus affidavit--had to renew registration
every 3 years, w/o renewal security interest was void.
o Company debentures--in a corporations act had this, which gave rights to create a
security interest through company debentures.
o conditional sales act and
Earlier common law devices to create priorities:
o based on proprietary interest
o through a bill of sale, conditional assignment, if loan repaid, title reassigned to debtor.
o if loan not repaid, title vests absolutely in the creditor as part of the agreement--mortgages
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used to work this way, both personal and real.
o secured creditors did through vested title--conceptual split between title and possession.
Pre-PPSA Security Devices:
"Possessory" vs. "Non-possessory" is always from the perspective of the creditor
o Pledge (possessory)
when the goods are given to the creditor for the period of the loan—pawnbroker
title lies with the debtor; possession with the creditor
Problem with Pledge: Debtor needs goods to display and sell--ex. car dealership
can't give cars to get loan, cuz then have nothing to sell.
so, other legal forms developed—played on title / possession split i.e. Possession
is valid against all third parties, except titleholder
o Chattel Mortgage (non-possessory):
debtor owns goods and sells title to creditor; money is exchanged so that creditor
has title and debtor has a loan. If the loan is repaid, creditor is required to transfer
title back to debtor. If there is a default, the obligation to reconvey title is cancelled
and creditor has absolute title with the debtor being estopped from claiming title.
Chattel Mortgagee - creditor
Chattel Mortgagor - debtor
o Conditional Sale (non-possessory):
in situations where a retailer is purchasing stock. A manufacturer will agree to put
cars on the floor and forgo payment. Creditor has both title and possession; when
instalments have been paid, creditor retains title and debtor gets possession.
At the end of the payments, debtor has both title and possession. However, in
case of default, seller takes title and possession
o Assignment of Book debts (non-possessory):
Can use Accounts receivable as a security interest in case something goes
I.e. if car dealership cannot pay, then the consumer may get letter to deposit their
payments into the banks account because of this.
Assignment is a sale to lead lender, typically, a bank.
Accounts receivable are a very valuable security that banks have liked in the past
and continue to like—because in a balance sheet of any business, A/R is the next
form closest to cash in terms of liquidity under current assets, therefore banks
like them as security because if retailer goes bankrupt then banks can take the
cash, and have to sell the equipment/supplies to access cash but with A/R
merchandise already sold, only have to take in the payments.
Another reason they like A/R is because have to look at has the retailer
been successful in the past, and more than the retailer’s ability to pay,
more interested in the consumers’ ability to pay—i.e. can predict with
some degree of accuracy the likelihood of payments and the likelihood of
default—predictable based on general payment stats
Summary, banks like A/R because of their liquidity and predictability of
Noted that these security devices worked on the basis of transfer or retention of proprietary
Pre-PPSA: if you were a creditor, and you wanted to take a security interest in debtor's assets,
how would you proceed?
o early form of security interest relied on conceptual split between title and possession
problem is fraud. Debtor can mislead and get more money and put on another charge. Bills of
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Sales Act stipulated that to be a valid transaction, it had to be publicized. Twyne's Case (1601):
court ruled that one cannot have secret conveyances and cannot transfer title without either
transferring possession or registering. Goods purchased and left with the vendor are
presumptively available to the vendor's creditors upon bankruptcy.
PPSA, you have no right against the
seller and the transaction is void.
Nemo dat principle—can only grant interest that you have; if you odn’t have title, cannot grant a
proprietary interest to a 3 party.
BIA s 71(2) - modern example of proprietary concept
o If bankrupt did not have "property" (i.e. title) in the assets, the assets did not form part of
the pool of assets available to the trustee in bankruptcy (preferred and general creditors)
title transferred to creditor, on condition that, upon repayment, title reconveyed to debtor
Agreement is in the form of a bill of sale - much like a modern security agreement
o in case take of default, creditor takes goods.
o 2nd creditor uses same goods as security...therefore 2 creditors have title to goods but
the first one has priority.
Problem: required publicity
o solution - Bills of Sale Act
Bill of sale void if not registered--forced creditors to register the transaction for their own
protection thereby giving publicity to the transaction.
o therefore the 2nd creditor can either walk, take other goods as security or charge a higher
Note the "assignment" of the assets - transfer of title (debtor assignment is really a sale of title in
(Rc: in bill of sale, debtor has possession and title)
Very important in commercial law; PPSA only works against another PPSA, Bill of Sale still widely
Only when you have 2 creditors with competing PPSA’s that PPSA works—but otherwise need to
know bill of sale etc.
Reverse of chattel mortgage, and occurs in different circumstances
Seller and title holder are one and the same (the lender)
Compare bill of sale, where title and possession are in the debtor, at the outset
o They start out with possession and title, now debtor has possession, but creditor has title
until paid in full, and have deferred payment.
o Register conditional sales.
Selling goods as against selling title per se
Bill of Sale / chattel mortgage: Repayment
Initially debtor has both title and possession; upon lending, lender has title and debtor has
possession; upon repayment, title is transferred back to the debtor.
In a conditional sale, the seller is extending a credit through deferred payment; therefore seller
has both title and possession initially; during lending, buyer has possession but seller maintains
title; at end of payment(s), buyer has possession and title.
Bill of Sale / chattel mortgage: Default
Initially debtor has both title and possession; upon lending, lender has title and debtor has
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possession; upon default, lender takes possession of the asset therefore has both title and
In case of default, at default, seller takes title and possession.
Bill of sale: sample
Agreement that sets out who the agreement is between, the terms, consideration given (what
qualifies), amount that will be lent, assignment of security, when payments will start, and where
will the payments made—generic agreement but then attach a schedule with specifics of security
taken at the end.
P.2 “but if default be made in payment when it becomes due…”—acceleration clause, put in there
because if you’re paying in monthly instalments, all you are obliged to pay each month is the
amount of payment—so technically the bank can only sue for the amount owed to them in that
o Acceleration clause is an agreement term allows the bank to make the full amount owed
to them due in full in case of default of one payment—triggered by default.
o “Demand debenture”—we can determine when the default will occur, because you did
something that made us nervous, so we can demand the full amount back i.e. call back
the loan in full
o Other terms of repairs i.e. bank can come in make repairs, and then charge the debtor—
also mandate that the asset cannot be parted from.
o Really trying to cover as many “what ifs” as possible—covenant that won’t go into
bankruptcy without informing the bank.
o If anything was wrong with any of these documents—they were in void, so they did not
have a security interest.
Not a security device although it is becoming one, especially with respect to cars.
Lessor begins with title & possession; during lease lessor has title, and lessee has possession, at
the end of the term, lessor regains title and possession both. In a bankruptcy, in a lease, the
proprietor interest kicks in and lessor takes possession of the asset before the secured creditors.
Title and possession are supposed to return to the lessor. However, lawyers have started to draft
conditional sales in the form of a lease called "rent to own." After the lease expires, the lessee has
the option to purchase the goods.
Often used as a form of conditional sale.
During the time debtor has possession, conditional sale and lease resemble each other—but
lease is on the other side of the “title” boundary, even if lease is in the form of hire – purchase
(“lease with an option”)
Why describe the transaction as a lease, rather than conditional sale?
Generally lease most large equipments such as aircrafts, construction machines, etc.
– Off-balance sheet transaction—doesn’t appear on the balance sheet as an asset & payments
don’t appear as a liability—keeps their debt ratios on line;
– Tax advantage—if purchase, then can only depreciate the equipment at a prescribed rate, but
with a lease can write off the payment amount as an expense, i.e. write off more as an expense;
– Lack of equity or credit to purchase—i.e. to purchase over time because the payments over a
longer period of time;
– Property not property of debtor – proprietary interest lies with the lessor—leases are outside the
Therefore, lessor stands outside the bankruptcy with respect to the leased assets
Heldy & Matthews case:
o Lease with an option to purchase at the end of the lease of a piano
o Issue: is the lessee obliged to purchase at the end of the lease or not? If so, then it’s a
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conditional sale, but if not, then it’s a lease.
o HL: under option clause, the lessee was not obliged to purchase, and therefore not
– if no obligation to purchase asset during the lease;
– then no transfer of title intended;
– then not the property of the debtor
Assignment of Accounts Receivables (Book Debts):
capacity for a debtor to assign accounts receivable to another party so that creditors would buy
them. For example, monthly instalments from cars are a form of accounts receivable -- all going
to the debtor who sells the right to receive the instalments to the creditor, receiving money in
Attractive form of collateral because of its liquid character. When the debtor goes bankrupt, there
is an Assignment of Accounts Receivables Act. The strategy is to take a security interest and
disqualify the creditors ahead of you.
publicity: security device could, absent any publicity system, create fraud on other creditors. This
arises because security devices played on the split between title and possession. Thus, a system
of public notices were introduced.
o There has always been a concern about secret encumbrances, and secret transfers of
title (secret conveyances)—the concern is that with the fraud that might be committed
with the other creditors.
s. 2 of the PPSA: The Act applies to every transaction without regard to its form and without
regard to the person who has title to the collateral that in substance creates a security interest.
This Act states that it will not look at form if it in substance creates a security interest.
Until late 19 century, there was a lot of difficulty assigning future property—you couldn’t assign
property not in existence and a/r, by definition, is not in existence.
o P – assets worth 300 pounds
o Two creditors - T for 400 pounds; C for 200 pounds
o C brought action against P, to seize his goods
o During the action, P made settlement with T, to extinguish T’s debt—and transferred title
to T for all the goods, but possession of goods with P.
o Secret conveyances (title transferred but not possession) prima facie fraudulent
o Goods purchased and left with vendor are presumptively available to the vendor’s
creditors upon a bankruptcy.
o Secret encumbrances prima facie void
Note: this is codified in s25 of the Sale of Goods Act (SGA) – see SGA (Provincial Legislation)
o Registration systems sprang up in 19 century to avoid secret encumbrances
o Prima facie, unregistered transfers of title were void
o Some statutory regimes: void absolutely
Others: void as against third parties
Note: two concepts concerning publicity:
Public notice of transfer fulfilled through registration requirement or possession by creditor—i.e.
created registry systems.
Absent this notice, a transaction is presumptively fraudulent, and therefore void
o Note: historically, throughout the late eighteenth to the mid nineteenth centuries, courts
developed an abhorrence of secret conveyances, as they struggled to create a “free
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market”—i.e. liberal concept of market
Thus, registration (publicity) is invoked as a cure for problems relating to deceit or fraud on
creditors, resulting from the possibility of a title / possession split in property law
Company Debentures--floating charge:
for example, a charge on vehicles was a problem for creditors as accounts receivables would
revolve as items were constantly changing.
It used to be that future goods could not be charged because they were unrealized. Thus, floating
charges developed at equity.
A floating charge did not fasten or attach to any specific assets of the debtor until the charge
crystallized. The floating charge gives the debtor the right to deal with those goods free of
interference from the lender i.e. could sell off those goods free of the interest of the creditor “in
the ordinary course of business”—at a certain moment in time, where there is a triggering
event such as default.
Once the debtor defaults, or another charge is applied to the assets, the floating charge
crystallized into a fixed charge that attaches to everything within that class. ("Crystallization" -
event occurs where a debtor ceases to carry on his business or when a receiver is appointed at
the secured party's request). Crystallization does not require re-registration since no new security
is created, and terminates the debtor’s authority to deal with the goods free of creditor’s consent.
Crystallization can be triggered without intervention by the creditor, other than to give notice—this
simply terminates debtor’s authority to deal with the goods free of creditor’s consent.
o Cessation of trade – liquidation or cessation of trading
o Intervention by creditor to take control of the assets;
o Crystallization by notice, and automatic crystallization, where security is granted to
Benefit: it gives the debtor the licence to manage these items free from creditor. If it is a fixed
charge, debtor would need creditor's permission to sell that good. Under s.2(a)(i) of the PPSA, the
fact security is in the form of a floating charge is irrelevant, only that it creates a security device.
A fixed charge: (ie. chattel mortgage where title is transferred) allows a lender to take an interest
in (for example) a vehicle (courtesy shuttle bus). In the debtor’s view, the vehicle cannot be sold
and would have to ask lender permission to sell the vehicle free of the security interest (the fixed
charge). Lender would say yes but buyer has to put money in an escrow fund that must be paid
to lender first. This type of charge could not work for inventory because it is not feasible for a
Dearle v. Hall (1823): where there are competing assignments of a debt, priority goes to the
assignee who first gives notice to the account debtor. But notice of assignment is usually not
given by the secured party until there is a default.
s.427 charge: old form of charge, created in the Bank Act; available only to scehdule A banks. It is
a charge only for tangible items (not accounts receivables). When there is a default, Bank has the
power to retake possession of that property (security interests given by consumers are excluded --
only for retailers, wholesalers, etc.).
s.428 of the Bank Act: gives banks priority over all subsequent charges (usually because they are
the lead lender). Due to the PPSA and s.427 of the Bank Act, banks get full satisfaction of their
Common Problem/misunderstanding regarding these issues:
creditors competing over the same assets and there is not enough to go around—it is a finite
group of assets and there is not enough to go around and satisfy all the claims (that is a definition
of an event which will trigger a bankruptcy; assets are less than liabilities/claims)
in order to deal with these, the creditors use the laws to boost themselves up in the “creditor
chain” so they are paid first.
Strategy? Recall the 3 categories in the bankruptcy process and the legal consequences of being
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in each category i.e. unsecured, preferred and secured creditor.
Modern Security Device—Article 9, Uniform Commercial Code (UCC) and PPSA
Does not abolish existing security devices
o Article 9 is equivalent to our PPSA—state jurisdiction.
o In Canada, computerized registry system, most provinces have it now—roughly same.
An umbrella legislation, achieving the following 3 goals:
o Simple, economic and efficient (SEE) method for registering security interests;
o SEE method for ascertaining priorities; and
o SEE method for enforcing remedies.
Significance of functionality with each section—priorities not based on proprietorship as far as
transfer of title is concerned, but concerned about giving same priorities as under old proprietary
Pre-PPSA: lead lender would have a asset debenture and have it registered, as well a manufacturer may
have a conditional sale registered; clash between the two creditors at time of bankruptcy; pre-PPSA
manufacturer would have priority over inventory because retailer doesn’t have title to inventory,
manufacturer still holds it
PPSA: instead of focusing on proprietorship interest, s.33 exception to general rule—where general rule is
the chronology of registration; if they are a PMSI lender they have a super-priority interest notwithstanding
other parties’ interest—under s. 2 title doesn’t matter anymore, and therefore classified manufacturer as a
special category and give them a super priority interest, giving them the same priority as Pre-PPSA without
focusing on title; contracts still in the form of conditional sale, but the legal reasoning for this has changed.
GENERAL INFORMATIONS RE: PPSA
PPSA overrides all other provincial statutes except s.73 of the Consumer Protection Act.
PPSA only applies to personal not real property.
PPSA takes what would be a personal right (only enforceable between the parties through
privity) and through publicity, turn it into a real right enforceable against a 3rd party.
TERMINOLOGY, most are defined in s.1
credit: agreement for deferred payment on money owed.
security interest: the charge in property regardless of form.
security: share or bond or some other interest.
security agreement: the contract that creates the charge.
secured party: debtor who has interests in secured assets (party who has the charge).
collateral: personal property that is subject to the security interest.
attachment: abstract linkage between security agreement and the collateral; must meet 3
requirements (see s.11).
perfection: under s.19: a secured interest is perfected when: (a) it has attached and (b) all steps
required under the Act have been completed. These steps must be taken to make attached
agreement impossible to 3rd parties; also used as a status
perfected security interest: imposeable against most 3rd parties.
after acquired property (AAP): property that comes in subsequent to the creation of the security
o For example, a car dealer has 3 cars on a lot supplied by GM who signs a security
agreement with the enterprise which attaches, perfects to and becomes a security
interest in those 3 vehicles. Prima facie there is a security interest is in the 3 vehicles. But
to GM once sold, these cars will not be replaced. Thus, GM will put an AAP clause in the
agreement: "all vehicles sitting in the lot and any after acquired property." There need not
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be a relationship between the original charge and the after acquired property.
purchase money security interest (PMSI): a security interest for which there is money provided
for an identifiable item of collateral. Usually arise in situations of conditional sales.
o For example, 2 creditors (i) lead lender and (ii) GM, who puts cars on the lot and
stipulates that the debtor does not have to pay right away; typically the lead lender would
go ahead of GM but s.133 of the PPSA puts GM ahead of the lead lender for the money
that it put up to finance the business. The Act give super priority to subsequent creditors
in very specific circumstances.
bill of lading: shipping contract used in sales; can be endorsed and then the endorsee has
ownership. For example, a party in Toronto consigns goods to a bank; bank wires to a branch in
Vancouver; party in Vancouver pays the bank; bank hands over documents to Vancouver party
who has ownership; then the party takes the bill of lading to the shipping company to get the
o s.427: Banks took bills of lading from debtor and held it until the debtor defaulted;
produced the bill of lading and then got the goods for themselves.
a. structural integration: single system in place of the conflicting structures of common law, equity
and statutory law;
b. conceptual unity: common law and equity prevented the consistent and rational development of
personal property security law;
c. comprehensiveness: loss of priority to persons claiming interests in the collateral was a
consequence of non-compliance with public disclosure requirements and priority issues were to
be resolved using common law;
d. legal predictability: decisions as whether or not to grant credit had to be made with much legal
uncertainty and the PPSA ensures a more greater consistency in court decisions dealing with
priority disputes and facilitates more accurate assessment of the legal risks involved in granting
e. accommodation of modern business financing: more was required to bring the law abreast of the
needs of modern business financing and
f. regulation of default rights and remedies: under prior law, relative rights of the secured party and
the debtor depended on the type of security agreement involved and the terms whereas the PPSA
provides a detailed system for the regulation of default rights.
STRUCTURE OF THE PPSA (7 parts, although only first 5 are examined)
PART I (ss.2-8): "Application and Conflict of Laws"
deals with the scope of the Act and conflict of laws rules (ie. jurisdictional disputes when goods
move across borders).
PART II (ss.9-18): "Validty and Security Agreements and Rights of Parties"
deals with the creation of the security interest (ie. kinds of interests, goods, etc.).
PART III (ss.19-40): "Perfection and Priorities"
deals with the steps required to make a security interest effective against 3rd party and priority
rules among competing security interests or between a security interest and a 3rd party (turning
the interest from a personal right to a real right).
PART IV (ss.41-57): "Registration"
provides for a province-wide unified system for the registration of financing statements.
PART V (ss..58-66): "Default Rights and Remedies"
sets out the secured party's rights and remedies upon the debtor's default.
CLASSIFICATION OF COLLATERAL
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priority regimes vary according to the type of collateral.
Collateral can be fixtures, goods, chattel paper, instrument, security, document of title, and
as you move through the flow-chart, the collateral moves from tangible to intangible.
collateral that starts out as collateral may change into proceeds (ie. cash from proceeds of a
trade-in car). Thus collateral includes proceeds from the sale of that collateral.
cash is neither real property not personal property.
1. FIXTURES: test as to whether they are part of personal property or real property; can it be removed
without too much damage to the real property?
Include work bench, board, etc.
2. GOODS: 3 categories: generally tangible and are classified on the basis of the use that the debtor puts
to not the category that the creditor fits them in.
(i) consumer goods: goods intended for personal use by the debtor. When the car dealer sells a
vehicle for personal use, then it is a consumer good.
(ii) inventory: goods held by sale or lease by the debtor.
(iii) equipment: a residual category; anything that is not consumer goods or inventory is
equipment (for example, items that are more long-term or used in a business, ie. courtesy van: an
item not held for sale or lease).
3. CHATTEL PAPER:
2 components (i) must be evidenced in writing of monetary obligation (promissory note) and (ii)
the creation of a security interest that goes with that obligation. Once satisfied, one has chattel
For example, if a dealership wants to sell a car to a consumer, consumer will execute a
promissory note saying: "I promise to pay over x years for x amount" but the dealer may want a
security interest as well to secure their loan to consumer. A security agreement will be drawn with
the two components to act as a creditor to the consumer. Typically, the dealer will sell the chattel
paper to a financial institution. In return, the financial institution gives the dealership money. The
institution is now the creditor to the consumer and institution holds the promissory note.
Therefore chattel paper can be sold to financing companies.
usually a banking instrument; if it is an instrument it is governed under the federal Bills of
Exchange Act. A bill of exchange is a negotiable instrument; promissory note or a cheque.
5. SECURITY: a right in a corporation; bond; debenture; shares.
6. DOCUMENT OF TITLE: 2 types dealt with by the Act:
(i) bill of lading: a contract that evidences a shipping arrangement.
(ii) warehouse receipts: evidences that grain houses are storing grain for the owner; the owner
has the right to pick up the grain any time. Banks will take documents of title as security.
7. INTANGIBLE: a catch-all category; most common is accounts receivables. Once here, all previous
types of collateral have been exhausted.
SCOPE OF THE ACT
important in bankruptcy situations where there is a competition between the trustee in bankruptcy
(who represents the unsecured creditors) and the specific party who is claiming that they are not
covered by the PPSA (usually a purported lessee, a true owner of the goods) who claims that they
are not covered). If so, they can take their goods and walk away.
general strategy: the trustee in bankruptcy attacks the security interest of a party; usually the
party does not have a valid security interest attached or they have not perfected the security
interest enforceable against 3rd parties.
debtors are put into bankruptcy by the rules of the Bankruptcy and Insolvency Act: s.42 lists
occasions which constitute an act of bankruptcy: ie. fail to meet liabilities; liabilities outweigh
assets; must have debts of more than $1000 to declare bankruptcy. When this occurs, creditors
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petition the debtor into bankruptcy. At the moment of filing the petition (s.70(1) of the Bankruptcy
and Insolvency Act) that is the moment of bankruptcy and property vests in the trustee in
bankruptcy. The trustee acts on behalf of the unsecured creditors and seizes all assets and sells
them in order to be divided into proceeds.
trustee has a fiduciary obligation to unsecured creditors. Trustee cannot interfere with valid
perfected security interests.
rationale: if trustee in bankruptcy can attack a secured creditor's interest and show it is not a valid
security interest or that it was not properly registered (perfected), then secured creditor drops out
of that category and becomes subject to the powers of the trustee. They become an unsecured
creditor and the assets are then distributed among those members.
types of strategies: (i) the trustee can either attack the validity of the secured creditor (i.e.
alleged security interest was not a security interest) or (ii) attack the validity of perfection (i.e.
attack from the trustee trying to demonstrate that the alleged secured creditor did not properly
register thus no enforceable claim against 3rd parties).
to demonstrate a valid security interest, take attached security interest and perfect it (s.22, s.23,
(1) Is it personal property?
judicial test: what is the degree of control exercised by the issuing body with respect to issuance,
transfer and revocation of the license (Re Foster)?
(2) Is it a true lease or a security lease/conditional sale?
true lease: bailor takes the goods back.
security lease/conditional sale: falls under s.2 of the PPSA.
(3) If under s.2 of the PPSA, did the bailor perfect his security interest?
if bailor perfected his security interest, what are the priorities?
if unperfected, then lessor falls into unsecured creditors. Assets provided to lease go to the
previous secured creditor.
Strategy on a bankruptcy:
The TIB’s role:
o Property of debtor vests in trustee;
o Trustee owes a fiduciary duty to the general (i.e. unsecured) creditors;
o Therefore has a duty to challenge secured creditor’s claims where appropriate, in an
attempt to invalidate the secured claim
In which case, claim becomes unsecured, and pool of assets available to
unsecured creditors increases.
National Trust Co. v. Bouckhuyt (1987) (CA)
F: Two creditors, a farmer who sold the property and National Trust. One creditor registered their security
interest under the Mortgages Act (real property) and the other registered under the PPSA (personal
I: Is the tobacco farming license considered property for the purposes of the PPSA?
R: The license is not property but a privilege; the right conferred to it is too transitory and ephermeral
to be considered property. Thus it cannot be registered under the PPSA or the Mortgages Act, thus cannot
have a security interest in this license. Degree of control test: look at the degree of control the
administrative body has over distribution, transferring and re-issuing licenses. If too much discretion,
chances are that it is not personal property. The mere fact that it could be exchanged, sold, pledged or
leased does not in itself make it property.
209991 Ontario Ltd. v. CIBC (1988) (Ont. High Ct.)
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F: A license worth $1 million; real property party tried to claim it.
I: Can a security interest be created over a nursing home license through a mortgage instrument?
R: Nursing home license was not real property. The license is granted subject to wide discretion, thus
the license can be characterized as a privilege. Creditors lose out license as a form of collateral.
Fraudulent Preference: occurs when parties before going bankrupt, move assets out of reach of the
trustee to protect them. Fraudulent preference occurs during a specific time period as governed by the
Bankruptcy and Insolvency Act. Any transaction within 3 months (arms-length transactions) or within 12
months (non-arms length transactions) is considered a fraudulent preference.
CIBC v. Hallahan (1990) (CA)
F: Loans to a dairy farmer. Under statute, all transfers of licenses/quotas must be done with the approval
of the board. However, there can be transfers to family members without approval. The bankrupt farmer
transferred the license to his sister so that the license would become unavailable to creditors. Creditors
claimed a fradulent preferrence.
I: Could the transfer of a dairy farming license be considered a fradulent conveyance?
R: The milk marketing license is not property; the transfer could only become fraudulent if it is
property. National Trust was applied and the license was not considered property. Bank lost claim to
assets and joined the unsecured creditors.
Re Foster (1992) (Ont. Ct. Gen. Div.)
F: Foster, a taxi-driver became bankrupt. He had a taxi license which 4 secured and unsecured creditors
I: Is the license personal property? If so, it falls with the PPSA and rules will determine who gets it. Each of
the 4 parties should have perfected their interest -- if not, does the trustee in bankruptcy get it?
Definitions: s.2: This Act applies to every transaction without regard to the collateral; collateral is personal
property subject to a security interest.
R: Court looks at the regulatory scheme of the license. The license vests in the owner after 3 years, and
then the owner can do whatever he likes (transfer it).
These licenses are property and not privilege because the licensee has sufficient control over it.
The license is intangible personal property and dealings with it are therefore subject to the PPSA.
If the regulatory scheme treated the license as property and if the board treats it as property --
chances are that it is property.
Here, TIB representing the interests of the unsecured creditors to classify the licence as a
property which was not validly secured.
J. Lane introduced a spectrum—if issuing board has an unfettered interest in the licence then it is
not a property; but if the board has some discretion but not a lot, the it is personal property and
falls under PPSA and therefore could be secured and become available to the secured creditors.
TEST: license will qualify as a personal property under PPSA to constitute as a collateral
depending on the degree of discretion of the issuing tribunal.
NB: This case sets the test for determining what is/what is not personal property as the degree of control a
regulatory body exercises over the issuance, transfer and revocation of the license. If there is discretion,
the license is not property.
NB: Narrows the test in National Trust.
Many leases are, in substance, disguised conditional sales; if conditional sales, then fall under
PPSA, but if true lease then not in PPSA.
True Lease: Is not covered by the PPSA as it is not intended as a security interest. Title remains
with the lessor and possession is with the lessee.
o Upon bankruptcy, lessor reclaims the goods as he has true title—outside the pool of
assets available to the creditors.
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o Four characteristics of true leases:
lessor keeps a significant economic interest in the goods and charges a higher
rent than instalment payments on a sale
lessor retains some take in the risk of gain/loss in the value of the goods
time period is for less than economic life of goods
option clause should be referenced to the full market value of the goods upon
termination of lease.
o Solution: Ontario has had a chance to modify PPSA to put in a clause that a long-term
lease (over one year) must be registered in order to be valid against 3rd parties, but has
been withdrawn. Now courts are starting to push it back in.
Conditional Sale: Is intended as a security interest; covered by the PPSA. If debtor declares
bankruptcy, lessor can take back goods. Today creditors will try to negotiate a conditional sale to
resemble a lease so creditors will think they are a lessor coming to reclaim goods.
o Can tack on to the end of a lease an option to buy so that the party in theory has a lease
and when it expires they can pay a specific amount and buy the goods. However, what is
often not done is s.23 registration.
o The trustee in bankruptcy will attack the claim that it's a true lease as if it is a true lease --
no registration is necessary. If it is a conditional sale, then it ought to registered to secure
creditors position. Lessors often fail to register.
Judicial Test For Determining True Lease vs. Conditional Sale [Re Speendrack (1980)]
In the past, courts focused on title , i.e. Helby v. Matthews: is lessee obliged to purchase title or not after
the end of the lease? If so, then it is not a true lease. Now there is a 3 element test considered by the
courts to determine if genuine lease or intended to obligation of performance of an option:
(i) the role of the parties: is party genuinely a financier, or are they a leasing company? Was the subject
matter classified as inventory by the lessor?
(ii) the intention of the parties: is it the intention that title be transferred? Was the lessee concerned with
obtaining financing while maintaining use and possession of equipment?
(iii) the effects of the transaction: does lessee lose all ownership? Who pays for repairs, insurance, etc.?
Look to see if transaction in substance is a disguised conditional sale.
Re Ontario Equipment (1976) Ltd. (1981) (Ont. SC Bankruptcy)
F: There is a car lease and the customer (lessee) has the option of buying the vehicle at the best price
At the end of the lease if dealer gets more than $2500 the customer gets the surplus, if less then
the customer pays the difference. This was to encourage the customer to take care of the car.
The trustee in bankruptcy takes the position that the lease is akin to a conditional sale whereby
the property remains with the vendor until the purchase price is paid in full.
The trustee submits that the transaction is one of purchase and sale on the security of the lease
which has not been registered under the PPSA. Thus, the interest of the lessor is subordinate to
that of the trustee. Judge interpreted Speedrack (iii).
I: Whether a lease for a term of 3 years, at the end of which the lessee was entitled to buy, is a lease
intended as security under s.2 of the PPSA (which must be registered under the Act to protect the lessor's
interest against the trustee).
R: In this case, it was a straightforward leasing agreement.
Court looked at the lease option clause: was the price for a nominal sum: (close to the full market
value) then it is a disguised conditional sale as more people would buy it (ends up with the lessee)
at the end because it is a great deal and it must be registered; if it is for a substantial sum: it is a
genuine lease, the customer can either buy out the lease or leave it (with title remaining with
NB: As there was an agreed price payable at termination of lease, lessor had guaranteed return and were
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financing a conditional sale. Johnson says this looks more like a financing deal than a true lease and court
only focuses on where title ends up. The following cases are more sophisticated in their tests:
Standard Finance Corporation v. Coopers & Lybrand (1984) (Man .QB)
F: The bankrupt, Econ wanted to acquire a photocopier and negotiated with National. They negotiated an
agreement where Econ agreed to lease the photocopier from a division of the plaintiff's corporation.
Econ was required to make regularly monthly payments. At the end there was an option to buy for
10% of its original cost. The plaintiff had no showroom, its leasing business was in connection
R: Determined the role of the parties as being in the business of financing the sale of machines in the
form of disguised leases (they had no showroom or inventory thus no means of releasing to others).
The parties did not intend the transaction to be a true lease but as a means of financing the
purchase of the photocopier. The presence of an acceleration clause (s.16 of the PPSA; if default,
liable for all payments until the end of the term) is foreign to a true lease.
The effects of the transaction resembles a conditional sale as the condition of the equipment was
not a major factor at the end of the lease. Thus, the PPSA applies and since they did not register,
they lose goods to the trustee in bankruptcy.
Adelaide Capital Corp. v. Integrated Transportation Finance (1994) (Ont. Ct. Gen. Div.)
F: Greyvest finances, through leases the possession of trailor units by the debtor/lessee. The leases
contain purchase options for more than nominal amounts. They are leasing their equipment. Is it a true
lease or a financing lease?
R: Test is whether transaction in substance creates a security interest and whether the lease is one that
secures payment or performance of an oblilgation. In substance, transactions were in nature of financing
arrangements in which the leases were intended to secure repayment of monies advanced respecting the
acquisition of trailors. The role of the company was financier; intention was to make money as evidenced
by acceleration clause; and the effects was a purchase on credit with lease as security. The deal was set
up to return a yield on money lended. Thus, it was a disguised conditional sale.
NB: This has enlarged the test from Re Ontario. If you are a lessor, prudent practice would be to register
What would a True Lease Look like?
Lessor should carry goods as inventory and not as a/r
Lessor should have goods prior to “lease” deal
Lessor should have some of the attributes of an owner
Lease probably should be for a period less than economic use value of the goods
Option should be substantial, not nominal.
at the heart of consignments is an agency relation: an aqueduct through which title passes from
supplier to consumer.
near sale; for example, rather than a sale from the supplier, the supplier gives inventory to retailer
to sell and if the retailer sells these goods, the supplier (consignor) to get 20% of goods and if they
are not sold, retailer can send goods back to consignor. Title remains with the supplier and
passes through the retailer immediately upon sale to a consumer.
if the transaction is a true consignment, it does not fall within the scope of the PPSA. If it is
disguised as a consignment, or is a conditional sale, then the transaction falls under s.2(a)(ii): an
assignment, lease or consignment that secures payment or performance of an obligation... and it
ought to be registered.
consignments can defraud other creditors as the retailer has not borrowed money to purchase the
goods. In this way, the retailer can pass the savings to the consumer.
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Factors in Determining if it is a True Consignment [Re Stephanian's Persian Carpets Ltd.
If these questions indicate that the transaction secures payment or performance of an obligation then it
creates a security interest under the PPSA:
(a) Can the goods be returned? If goods can be returned, indicates a true consignment.
(b) Is there an obligation to purchase? If retailer is obliged to pay for goods then it is a sale under s.2(a)(ii)
of the PPSA.
(c) Is there an agency relationship? If there is no agency relationship, then it is a sale and falls within
s.2(a)(ii) of PPSA.
(d) Are goods separated within the store? If scattered within the store's inventory this indicates a sale
(e) What do invoices look like? If they are stamped: "Sold on consignment" then this indicates a true
(f) Is the accounting for these items in separate books? If so, then indicates true consignment.
(g) Is the money received from the sale deposited in a separate account? If so, indicates true
NB: A written consignment subsequent to delivery is not valid.
Re Toyarama Ltd. (1980) (Ont. SC)
F: A toy retailer received inventory from a supplier under two contracts. In the first, the retailer was obliged
to pay within 3 months of receiving the goods and the second contract stipulated that there was no
payment until the goods were sold. Inventory went in two different directions: some went to retailer's stores
and some went to a warehouse.
R: Agency is not necessarily at the heart of true consignments. This was a true consignment.
NB: Johnson says court got it wrong: when there is an obligation to pay there is a disguised sale; goods
paid for in 3 months is still a sale; and there is no agency relationship when the retailer pays in 3 months
as it is still a sale.
Bankruptcy and Insolvency Act states that property in possession of the bankrupt is
considered separate from the estate of the bankrupt. Trusts are outside the scope of the PPSA.
Re Berman (1979) (Ont. CA)
F: A bank, Astra lends money to Berman for an RSP with the bank remaining as a trustee. When Astra
makes the loan it gets a letter of discretion from Berman stating that if he reedems the RSP, he will first
apply the proceeds from the RSP to pay off the loan. The RSP was not registered under the PPSA, and
Berman goes bankrupt.
I: Is the RSP a trust? If a trust then who gets assets: the trustee Astra or Berman's beneficiary?
R: Court held that it was a trust therefore, the law of trusts applies. Astra as a trustee, has first claim
over assets and has the right to be repaid monies owed to them by the beneficiary, Berman.
NB: Not good law, if followed then every creditor would set it up as a trust. Today, the trustee can only
collect disbursements and expenses incurred under administration of a trust, with the trustee being paid
before other creditors.
IN general, trusts are excluded from PPSA—if it is a genuine trust, it does not fall under the
Section 427 of the Bank Act
how does the security device mesh with PPSA interests? Who gets priority and to what extent?
courts have tried to limit the s.427 interest as much as possible.
when searching for your client, search the PPSA and the Bank of Canada for a s.427 interest.
courts have limited s.427 power. There is a contrast between s.2 of the PPSA which ignores locus
of title in creating a security device and the fact that s.427 focuses on title and ownership
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language. The courts have stated: If banks choose to use s.427 as a form of security device,
courts will interpret it in a non-PPSA fashion by focusing on locus of title and limiting banks in
capacity as title owner.
s.4: Non-Application of the Act. This Act does not apply,
(a) to a lien given by statute or rule of law: there are three types: judicial, statutory and consensual and
there is a desire to keep PPSA as a consensual type lien.
(b) to a deemed trust: province passed statute that although funds from a security interest are all mixed up
together, they are deemed to be trust funds even though at common law one cannot have a trust fund if it
is mixed with other funds.
(c) to a transfer of an interest, insurance claim or annuity contract: insurance companies get their own
(d) to a transaction under Pawnbroker's Act
(e) to the creation or assignment of an interest in real property
(f) to an assignment to the benefit of creditors
(g) to a sale of accounts or chattel paper
(h) to an assignment of accounts
(i) to an assignment of an unearned right to payment to assignee who will perform assignor's contract
s.3 of PPSA states that the Act applies to the Crown and all Crown agencies of Ontario and not
If crown is claiming under a statutory lien and they will compete with PPSA claims
If crown has a consensual lien, it falls under PPSA.
Commercial Credit Corp. Ltd. v. Harry Shields (1981) (Ont. CA)
F: Landlords have the right of distraint of goods of their tenant (seize and sell goods to pay off arrears in
rent). This is similar to a statutory lien except it arises in common law. In this case, the landlord distrained
property for rental arrears after the mortgagee sent a notice claiming possession of the secured property
for default in payment.
I: Is the landlord's right of distraint is considered a statutory lien and therefore exempt from the PPSA.? If
not exempt, what is the priority between a chattel mortgagee and a landlord who distrained for arrears of
R: The landlord's distraint is equivalent to a lien given by statute and is excluded by s.4(1)(a). Thus, the
landlord's rights after making the distraint need not be registered in accordance with PPSA . As the
landlord has completed the distraint process and sold the goods, the secured creditors ahead of him are
out of luck. Landlord takes priority over chattel mortagee.
NB: If it fell under the PPSA and the landlord did not register, the secured creditor would take first. If the
landlord did register then he could take ahead of others creditors.
Re Urman (1984) (Ont. CA)
gives rise to s. 4(1)(e)(2)—i.e. PPSA does not apply to an assignment of an assignment itself
try to argue that the security interest is different from the book debt.
F: Urman is a mortgage broker (a charge on real property as opposed to personal property under the
PPSA). There are two components to the mortgage: (I) Charge on the real property: CIBC had a floating
charge (i.e. an interest in the book debt) over Urman's assets. Urman assigned two mortgages as security
to Kreindel Investments who registered this under the real property Registry Act. Two third parties are
mortgagors (debtors) and Urman has a right over debtors on default. Urman takes these two mortgages
and uses them as collateral to secure his own loan from Kreindel and (II) While mortgage is being paid,
the stream of income in the form of mortgage payments: Urman puts together a trust group who lends
money to mortgagors and Urman acts as trustee, collects money from mortgagors and distributes it to the
trust group. Urman has not registered a financing statement with respect to the trust. CIBC registers a
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Both CIBC and Kriendel inform mortgagors of Urman’s insolvency and to pay them directly and
not lend anymore money to Urman.
Floating charges that are created and exist at the moment that it is created, and pertains to a pool
of assets (not the assets inside the pool) until crystallization, so that the debtor has the license to
manage the assets in the pool of assets free of consent of the floating charge creditor during the
life of the agreement.
Therefore, CIBC lost out because the charge was still floating at the time of the assignment and
had not crystallized yet; therefore Urman had the right to assign those assets (in this mortgages)
without CIBC’s consent.
Crystallizations probably occurred when CIBC informs Urman’s mortgagors of Urman’s default—
therefore bank cannot take priority over Kreindel.
I: Are rights to mortgage payments from land covered by the PPSA?
Parties: Trustee in bankruptcy versus Kreindel Investments.
H: Bank waived its rights because fixed charge over floating charge.
R: Where there is a mortgage on a real property mortgage, it should be registered under the Registry Act
for real property, and is exempt from the PPSA. If it were to be registered under the PPSA then that would
lead to inefficiency and uncertainty. Although the right to payments is considered personal property, these
two transactions cannot be separated out. Kreindel is entitled to those payments over the trustee in
TIB argues that mortgages have 2 components: real property interest and PPSA—i.e. Kreindel’s
interest in the debt is unperfected/unregistered interest.
Courts disagreed and said that whenever there is a real property interest then the debt must be
kept as one; policy reason to register under Real Property Act—having to register in both leads to
inefficiency, and also because under PPSA debt registered under debtor’s name and after a
couple of debtors, it’s easy to lose the chain of debtor—therefore complicated.
CIBC lost because its floating charge had not crystallized during the time of assignment to
Kreindel and trustees—therefore at time of assignment, charge was still floating and Urman had
right to assign the assets free of their interest. Crystallization likely occurred when CIBC notified
Issue of trust: not registered under PPSA—trusts outside range of trustee of bankruptcy and
therefore not part of debtor’s property anyway—deemed to be a trust because Urman intended for
them to be treated as trusts.
NB: This case sets up s.4(1)(e). PPSA should still apply where party assigns right to payments/charges on
land and where the security interest in land is not transferred with it -- in this case it was mortgages (the actual
interest in land) and not the right to payments that were assigned.
Security agreement is a contract in which the security interest is created, it is where this consensual
The Validity and Effect of the Security Agreements
Security agreement is a K in which the security interest is created, it is not actually the security
interest (a consensual lien).
s.9(1): Except as otherwise provided, a security agreement is effective according to its terms
between the parties to it and against third parties.
o Whereas contracts are personal agreements between 2 parties and are not enforceable
against 3 parties, in the PPSA, where two parties create a security interest in a security
agreement, it is binding in its terms against 3 parties—overcomes privy to contract.
o In effect it creates a real right i.e. a right in an asset therefore the charge remains active
no matter how far the chain of parties goes as opposed to personal rights i.e. between
two parties, and doesn’t go outside these parties—caveat to this real right, to release the
real right through an exception.
s.9(2): A security agreement is enforceable against a third party by reason of an error, defect,
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irregularity, omission or error in the execution, unless the third party is actually misled by the error.
s.73: Where there is a clash between PPSA and other provincial acts (except Consumer
Protection Act) the PPSA prevails.
o S. 73: PPSA overrides other provincial legislation, except consumer.
s.10: Where there is a security agreement in writing, the debtor has a right to a copy of that
agreement within 10 days after the execution of that agreement (this is how subsequent creditors
will learn of a prior secured party's right in the collateral).
S.11(2)(a)—Statute of Frauds requirements:
o If possessory, writing is not required; if non-possessory, writing required—to be enforceable.
o When there is a security agreement in writing, it stipulates that the description of the collateral
sufficient to enable it to be identified…but this description can be as broad as “all items in the
inventory supplied by us”—not very particular.
Atlas Industries v. Federal Business Development Bank (1983) (Sask. QB)—contents of a written
F: A receiving party's signature on the work orders which go with the delivery of items on credit is required.
There is a claim that these signed work orders constitute a security agreement.
The fact is that it was open to the applicant to search the Personal Property Registry even before it
delivered the goods.
Debtor must be aware of terms of the security agreement; evidenced by debtor’s signature as debtor,
not as receiver of goods.
I: Do the work orders constitute a security agreement?
R: No, the work orders do not constitute a security agreement as the other party may not know what they are
signing. The intention of both parties is that a work order merely indicates that the goods have been received.
No real consensual lien created here by the signature on the work order because buyer not aware of
the vendor’s intentions.
Errors in Security Agreements [see p.20 for Errors of Omissions]
s.9(2): A security agreement is enforceable against a third party by reason of an error unless the third
party is actually misled by error (subjective test).
s.46(4): Financing statement or financing change statement is valid even if there is an error, unless a
reasonable person is likely to be misled materially by the error or omission (objective test).
s.9(3): Failure to describe some of the collateral in a security agreement does not affect its
effectiveness with respect to collateral described.
Re Ayerst and Ayerst (1984) (Ont. CA)
F: The entire schedule of goods was left off so the s.11(2) requirement was not met, although it was intended
to be there. Both parties agreed that the collateral was covered by the security agreement but they forgot to
attach it at the end.
Note: this case precedes the 1989 amendment to the PPSA
This is an invalid security agreement but is there a valid security—to have a perfected security
agreement under s.19 a &b
I: Is there a valid security agreement given that there is no description of the collateral?
Recall: Section 19 has two parts: (a) occurrence of attachment s.11 (2)(a-c) and (b) steps for perfection s.22,
H: Applied the subjective test (reliance test) for s.9(2) as the court is dealing with an error in the security
agreement and held that the trustee in bankruptcy was not actually misled by the error. Therefore, the creditor
takes ahead of the trustee in bankruptcy.
See a defect in s.11(a)—meaning that you have failed to fulfil the s.19 requirement although the
agreement is registered; s.19(b) fulfilled—therefore have an unperfected interest, as a result,
s.21(b)(2), party claiming to be secured say that s.9 has a provision which allows errors or omissions
in security agreement to be curable—s.9(2)—i.e. not unenforceable by reason of a defect, irregularity,
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omission, or error unless the 3 party is actually misled by the omission or error.
Therefore held that agreement enforceable.
Policy: not misled in their risk assessment or priorities assignment—if lead lender did intended to
attach a schedule and only included ½ the assets and left off the other ½ i.e. last couple of pages of
schedule missing, if another creditor uses that agreement to take an interest in the other ½ of the
assets, now the first creditor cannot say the error is curable because another 3 party acted in
reliance to the error.
S. 46(4)—talks about an error or omission in regards to a financing statement or financing change
statement—uses a different test: i.e. would a reasonable person is likely to be misled with the error or
omission, whereas, s.9 is actually misled.
The difference occurs because they deal with 2 different documents—s.9 deals with security
agreements whereas s. 46 deals with financing agreements i.e. key public documents which get filed
with the registry office and so any errors in the agreement make the registration invalid—therefore
use a higher standard so that people ensure their agreements are right.
The Essentials of a Security Agreement
Guntel v. Kocian (1985)(Man. QB)
F: Bank of Nova Scotia lends money to Kocian who purchase a truck. Bank takes a security interest in the
truck and files appropriate documents. Kocian transferred her ownership right to Ward who gave her a
note. She registered a financing statement and perfected her interest. Ward sells the truck to Guntel and
convinces Guntel to purchase the truck. Ward reneges on the money he owes Kocian. Kocian seizes the
Guntel purchased truck from Ward, with CIBC loan
BNS lends money to Kocian transfers ownership to Ward who sells the truck truck bought
by Guntel who borrows money from CIBC to purchase the truck; when Ward defaults Kocian
exercises her security interest, and Guntel exercises his ownership.
Guntel claims ownership of the truck’ Kocian claims security interest; CIBC claims security
interest because they also have perfected their security interest.
CIBC attacking Kocian’s security interest.
[Step I: Perfection]
The only way Kocian has a right to seize the truck is if she has a valid perfected security interest.
To get perfected security interest, s.19 of the PPSA:
2 REQUIREMENTS FOR A PERFECTED SECURITY INTEREST:
o s.19(a): The interest must have been attached to the collateral.
o s.19(b): All the steps necessary for perfection were taken.
[Step II: Registration]
s.23: Kocian registered the FINANCING STATEMENT: a form that initiates getting the necessary
information on the computer system. When information in the registrar's file needs to be changed,
a FINANCING CHANGE STATEMENT is needed.
Issue: Has the charge (security interest) attached to that vehicle?
[Step III: Attachment]
3 ELEMENTS NECESSARY FOR ATTACHMENT:
o s.11(1): A security interest is not enforceable against 3rd parties unless attached.
o s.11(2): A security interest attaches when (unless the parties have agreed to postpone
(a): The parties have executed the security agreement;
(b): Value (consideration) is given;
(c): The debtor has rights in the collateral.
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Rule: Court held that this was a valid security agreement. An intention of the PPSA is to do away with
formalities. Thus, Kocian can have the truck
Kocian executed 2 documents:
o I Fay Kocian sell my truck to Brian Ward…i.e. “I grant my interest to …”
NB: Do not write security agreements this way! Should say "...hereby grants... a security interest...in
s.11(1): Attachment required. A security interest is not enforceable against a third party unless it has
s.11(2): 3 elements of requirements: When security interest attached.
A security interest, including a security interest in the nature of a floating charge, attaches when,
o (a) the secured party...other than the debtor...obtains possession of the collateral or when the
debtor signs a security agreement that contains a description of the collateral...
o (b) value is given (value means any consideration sufficient to support a simple contract and
includes an antecedent debt or liability); and
o (c) the debtor has rights in the collateral, unless the parties have agreed to postpone the time
for attachment, in which case the security interest attaches at the agreed time.
NB: Generally, past consideration is no consideration, but under PPSA past advances are binding
with past consideration being sufficient value.
Preserve position by registry, i.e. register first then prepare the documents—check no one else has
an interest already existing, register your interest, prepare the documents and execute the documents
thereby creating a perfected interest.
s. 19: perfection and attachment, regardless of order.
S. 19(a) or (b) is being attacked for a lot of the cases here, almost always this argument therefore
20(1)(b) situation created an unperfected interest in a bankruptcy or insolvency—KNOW these
(b) Steps For Perfection [1 of 3 steps must be taken to satisfy s.19(b)]
s.22: Perfection by possession or repossession. Possession or repossession of the collateral by
the secured party, or on the secured party's behalf by a person other than the debtor or the debtor's
agent, perfects a security interest in, (a) chattel paper (b) goods (c) instruments (d) securities (e)
negotiable documents of title; and (f) money, but only while it is actually held as collateral. [non-
negotiable documents of title and intangibles left out]
s.23: Perfection by registration. Registration perfects a security interest in any type of collateral.
s.24: Temporary possession. [not important: most commonly occurs in cases with stock brokers or
investment banker buying on behalf of a client]
Floating Charges and Attachment
there has been a debate as to when the security interest attaches, with respect to a floating charge.
This has been resolved with s.11(2)(a)-(c). In the PPSA, a floating charge attaches when s.11(2)(a)-
(c) have been fulfilled.
the conversion moment of a floating charge to a fixed charge is called crystallization and occurs: with
bankruptcy, appointment of a receiver-manager, cessation of the Board of Directors of trading, in a
loan any attempt by the debtor to create a charge forced to rank above the lead lenders.
common law rules re: priority: (1) fixed charge prior to crystallization of floating charge goes ahead
of a floating charge (2) if there are two floating charges, they take according to the time of
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What is the position where crystallization has not occurred:
In other words, is crystallization relevant for attachment—NO—attachment is NOT deferred until
When you have 2 PPSA claimants competing then there is simply a charge, regardless of whether it
is floating or not, but if one of the claimants is non-PPSA then do need to look at if they are floating or
Exception on 11(2)—unless parties have agreed to postpone the agreement.
Debtor has rights in collateral—i.e. not debtor has property in collateral, but rather has rights in
collateral (Morton v. Booth—debtor will have rights in the collateral if there is more than mere naked
possession; something more than holding the collateral other than simple bailee)
PPSA & NON-PPSA: DEPENDS ON MOMENT OF CRYSTALLIZATION.
PPSA & PPSA: CRYSTALLIZATION IS IRRELEVANT—GO TO S. 19 FOR ATTACHMENT.
PPSA & TRUSTEE IN BANKRUPTCY: UPON BANKRUPTCY, CHARGE CRYSTALLIZES. THUS REGARDLESS OF WHEN
TRUSTEE IS APPOINTED, CRYSTALLIZATION WILL HAVE ALWAYS OCCURRED JUST PRIOR. CRYSTALLIZATION IS
where there is a floating charge and a non-PPSA charge, the court considers the floating charge as
valid at the time; gives the debtor a licence to deal with inventory or accounts receivables.
if it is an unperfected interest, it is subordinate to or ineffective against the trustee. When a party has
an unperfected security interest, the party with the unperfected interest ranks equally with the
priority rules are by order of registration:
o s.30(1): Priorities, general rule. If no other provision of this Act is applicable, the following
priority rules apply to security interests in the same collateral: 1. Where priority is to be
determined between security interests perfected by registration, priority shall be determined
by the order of registration regardless of the order of perfection...
Access Advertising Management Inc. v. Servex Computers Inc. (1994) (Ont. Ct. Gen. Div.)
The case is a contest between a PPSA & non-PPSA claimant—The Garnishee
(Know the chronology of facts for the exam)
Facts: Two creditors competing over assets of Canadian company: CIT and Access. A valid perfected security
agreement in the form of a floating charge was granted to CIT—security agreement between CIT and EV(US),
who then asks EV(CAN) to guarantee the agreement on behalf of EV(US); CIT, therefore, takes a security
interest in Everex Canada’s assets to security the guarantee. US Company goes bankrupt so CIT called on a
guarantee to the Canadian parent corporation. Canadian company could not come up with the money so CIT
sent them a notice of intention to seize assets of Canadian company. CIT appointed Price Waterhouse as an
interim receiver of the secured party to seize goods. Access then obtained a judgement and garnishment to
seize the goods to satisfy their claim (Jan. 12-14) before CIT appoints PW as a receiver on Jan. 17.
Issue: Did the judgement creditor complete the process prior to crystallization of the floating charge of the
PPSA creditor? If the floating charge crystallized prior to the process being complete, the PPSA creditor wins.
CIT: Attachment occurred at the time of s.11(2)(a)-(c), thus attachment occurred a year ago and crystallization
is irrelevant. However, in the event the court wishes to consider crystallization, the floating charge was
crystallized when they sent interim receiver so by the time Access got their judgement, the charged had
become fixed and CIT ranks ahead.
Access: As Access is a non-PPSA creditor, Access claims that crystallization of the floating charge did not
occur until PW was appointed as receiver on Jan. 17, which was not until a period subsequent to garnishment
by Access. (Rc: Floating charges are equitable charges and are vulnerable to a subsequent legal charge and
in this case garnishment is a legal charge).
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H: Although it is a PPSA interest, there is competition against a non-PPSA party, which invokes the common
law rules of priority. Thus, the question is when crystallization occurred. The sending of the notice of default
was not sufficient to alert that charge was crystallized, however the notice of intention to seize assets was
sufficient. Thus, CIT takes ahead of Access.
Notice of default does not signal anything to anyone else other than notifying the debtor that they are
in default, the notice of intention to seize is representative of action being taken by the creditor.
NB: This case only applied where you have a PPSA and a non-PPSA party competing. Where two PPSA
parties are competing, crystallization is irrelevant.
Notice of default—is simply a notice that you are in default; notice of intention to enforce on Jan. 6
meant that if you are intending to seize all or substantial amount of the assets, then the creditor must
give 10days notice of their intention to seize, because by seizing they may put the party out of
business, therefore this is a last opportunity for them to arrange some financing to prevent the seize
of assets (224(2)).
Policy reasons: don’t want to have secured creditors to be at risk—because then while waiting for
receiver to be appointed, anyone can come in and take the assets—desire to protect the secured
National Bank of Canada v. Grinnell Corp. of Canada:
Facts: Oct. 28, 87—Bank obtains GSA
Oct. 30, 87—Bank perfects
Aug. 2, 91—JC issued notice of garnishment
Held: moment of crystallization irrelevant;
Interest attached when PPSA criteria met (s.11(2)(a-c) doesn’t’ have anything to do with floating
charge when 2 PPSA creditors)
Fact that it is PPSA vs. non-PPSA is irrelevant in this instance
Assets were proceeds, subject to a floating charge.
Royal Bank of Canada v. G.M. Homes Inc.:
Facts: although the deductions were supposed to be held separate, in this case, the monies were held as
part of the debtor’s general/current account—therefore not identifiable as a separate corpus of the trust and it
has to “deemed”
Health deductions—prior to debenture, therefore no issue of crystallization
Revenue Canada—deemed trust, therefore never a part of the debtor’s estate
Note: the Supreme Court has complicated the situation where there is a floating charge and a non-
There are deemed trusts which come from source deductions (taxes held by employer for Revenue
Canada)—therefore not part of debtor’s estate and even though the funds were mixed up with others
htat does not weaken the position of the Attorney General.
HOWEVER: FOR OUR PURPOSES, WHERE THERE ARE TWO COMPETING PPSA CLAIMANTS,
CRYSTALLIZATION IS IRRELEVANT.
Morton Booth Case:
Court said with regard to the criteria that the debtor have rights in the collateral: “where a debtor gains
possession of collateral pursuant to an agreement endowing him with any interest other than naked
possession, the debtor has acquired such rights as would allow the security interest to attach.”
After-Acquired Property: s.12
This is property that comes into economic domain of the debtor as an asset subsequent to the
Lead lender takes a charge in all the property that exists, but the manufacturer has also contributed to
the dealer’s assets—so does the LL capture another party’s contribution to Dealer’s assets?
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If LL has an after-acquired property clause, then yes LL does capture interest in another party’s
See case Tailby on Book debt.
floating charges were designed to get over the common law hurdle that one could not have a charge
on future goods, or goods not in existence at the time of the charge.
the exception's policy is to prevent creditors from overreaching in consumer instances. For example,
if you buy a couch from a retailer, he cannot take an interest in your household goods acquired
thereafter, but only those goods acquired within ten days of giving value.
s.12(1): After-Acquired Property. A security agreement may cover after-acquired property.
s.12(2): Exception. No security interest attaches under an after-acquired property clause in a security
agreement (a) to crops that become such that one year after the security agreement has been
executed...(b) to consumer goods, other than accessions, unless the debtor acquires rights in them
within ten days after the secured party gives value.
Future Advances: s.13
Can LL increase the amount of its loan, in one security agreement and still enjoy the same priority
position for the additional amount?
Section to protect the lender—with a future advances clause, so that the agreement will cover the
charge under the same priority.
common for security advances securing a line of credit to cover present and future advances. For
example, if the lead lender says that this general security agreement will cover all your existing credit
and your after-acquired property then it covers any credit given now and any future advances lead
lender makes. Most institutions work on future advances subsequent to the first advance: if bank
lends $50,000 and then lends more money in the future, the same security agreement can cover both
the original amount and the amount lent thereafter.
Do future advances only apply to specific transactions? Yes because courts have tended to say they
want to see some relationship between the subsequent advances and initial charge.
Perfection: s. 19, attachment and perfection:
A security interest in perfected when, (a) it has attached, and (b) all steps required for perfection
under...the Act have been completed, regardless of the order or occurrence.
3 methods for satisfying 19(b):
o s.22—possession (classic pledge);
o s.23—registration—financing statement
o s.24—temporary perfection
o Note: there are various grace periods granted in addition to these 3 methods
These periods in a sense act as a form of temporary perfection.
Financing Statement: means the information prescribed for a financing statement in the prescribed form or
format. This is the statement filled out to get into the registry system.
Financing Change Statement: means the information prescribed for a financing change statement in the
prescribed form or format. This statement is for changing the data in the system.
Perfection by Possession:
Re Raymond Darzinskas (1981) (Ont. SC)
F: Morgenstern instructed a bailiff to seize the manufacturing equipment. However, the equipment was not
removed from the premises. The court found the bailiff to have seized the equipment, the question is whether
the seizure is an effective possession under s.22 of the PPSA.
Want to take priority over trustee in Bankruptcy; when go to prove their claim, the claim is not
registered—i.e. 19(b) not met—therefore unperfected interest.
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Bailiff did seize the goods, but then the creditor let the debtor use the equipment after the seize.
I: Was the security interest of Morgenstern perfected by possession thereby fulfilling s.19(b)?
Morgenstern: He argues s.22 (repossession) in this case because s.23 was blown (never registered financing
statement). He claims to have repossessed and when he did so, that repossession served to fulfil s.22 which
in turn satisfies s.19(b). He also argued s.62(b): but you can only argue this where the collateral is equipment
and the security interest has been perfected by registration. This is a remedies section, which cannot be used
to satisfy the s.19 requirement.
R: Section 22 requires actual physical possession to be taken and the goods held by the secured party to
perfect his interest in order to give notice to all persons. This actual physical possession is required even more
where the security interest was not perfected by registration.
The judge satisfied that bailiff seized the equipment; does not mean it had to be carted out but if it
had been taped up with a notice of seize—that would have satisfied the possession criteria.
H: As Morgenstern had only constructive possession and not actual possession, his possession was not
perfected. Thus his interest is subordinate to the interest of the trustee by virtue of s.22.
Policy: Intention of the Act is to provide notice to third parties via actual notice, registration or possession.
Sperry Inc. v. CIBC (1985) (Ont. CA)
F: In 1976, Allinson (dealer) entered into a dealer security agreement with Sperry (company). In 1977, Allinson
entered into a general security agreement with CIBC. Upon default, CIBC could appoint a receiver to carry on
business and he shall be deemed to be the agent of the debtor. Both security interests were perfected but
both lapsed in 1979. In 1980, CIBC appointed a receiver and at the same time, Sperry renewed its financing
statement in order to perfect its security interest in the inventory. CIBC argued that it “perfected by
possession”--under s. 22—where perfection is done by when the receiver went in and took possession, i.e. the
possession was sufficient to perfect the interest. Sperry relies on "first to attach rule"—where both parties are
unperfected it is the first party to attach (i.e. register) that takes priority s.30(1)(4).
Receiver as agent of debtor
Possession for purposes of s. 24 must be “unequivocal” i.e. “reasonable, clear and actual possession”
such as to inform outsiders.
Prior to 1989, a registration expired if not renewed in 3 years.
I: Is possession by CIBC's agent (receiver manager) valid possession for the purposes of s.22?
RECEIVER - official government employee.
TRUSTEE IN BANKRUPTCY - takes charge of all debtor's property on bankruptcy, not a government official.
RECEIVER AND MANAGER - operate on behalf of secured party (converting debtor's property) and on behalf of
debtor (attempting to turn debtor's business into a profitable one; situation where debtor is in default but not
yet declared bankruptcy).
CIBC: Bank has a perfected interest and Sperry has an unperfected interest. Would argue s.20(1)(a)(i) in
which case, CIBC takes first.
s.20(1)(a)(i): Unperfected security interests. Except as provided in subsection (3), until perfected,
a security interest, (a) in collateral is subordinate to the interest of, (i) a person who has a perfected
security interest in the same collateral...
Sperry: The security interest is attached but not perfected in which case s.30(1)(4) governs and Sperry wins.
s.30(1)(4): Priorities, general rule. If no other provision of this Act is applicable, the following priority
rules apply to security interests in the same collateral: 4. Where priority is to be determined between
unperfected security interests, priority shall be determined by the order of attachment.
Held: Possession by CIBC's agent does not constitute possession sufficient to fulfil s.22 requirements.
Furthermore, if steps necessary for perfection are fulfilled, s.19(b) is satisfied and thus so is s.9(1) with the
right acquired now enforceable against third parties. Steps require putting third party on notice (notice that the
collateral is no longer really in debtor's control). However, while acting as debtor's agent, receiver-manager is
not informing everyone else that possession in collateral has been taken. One cannot take advantage of
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subsequent creditors while acting as a competitor. This could become a trap for third parties. Therefore, the
receiver-manager agent acting for the debtor does not fulfil the s.22 requirements—not acting on the
behalf of creditor until the creditor decides to liquidate at which point the receiver becomes an agent
Ratio: A receiver will be treated as acting as the debtor's agent and will be considered acting for the creditor
only when the receiver actually realizes (sells) the property.
Therefore receiver cannot have been taking possession for creditor; for purposes of s. 22 possession
must be “unequivocal,” “reasonable, clear and actual possession” such as to inform outsiders
Policy: Need at least some form of public notice to make other creditors aware that collateral is not in control
Re MC United Masonry Ltd; Peat Marwick Ltd. v. Goldfarb (1983) (Ont. CA)
F: Pledge of shares, which were only transferable on the books of the corporation. They had not been
transferred on the books because the Board has to agree to transfer them. The argument of the trustee is that
there cannot have been possession sufficient for s.22 as the holder of the shares has the ultimate control.
MC united had the right to pledge its assets, including shares it held
However, Palm Hill articles required express sanction of Board for transfer of its shares to have any
o Board refused to make the transfer.
o S.22 & also s. 19(b) not fulfilled because have physical possession but because the shares
cannot be transferred, possession means nothing.
I: Is the possession of non-transferrable pledged shares sufficient for perfection, without the sanction of the
board? (Did Goldfarb as a result of receiving the security agreement together with possession of certain
shares acquire a perfected security interest in the shares, having priority over the interest in the collateral?)
H: When Goldfarb received the security agreement and the pledge of shares, he received an “equitable
interest" in the shares that was sufficient to constitute a security interest under PPSA. To perfect by
possession, s.22 requires that the secured party have possession by actual holdings as collateral. Thus, the
possession was sufficient to perfect his interest under s.22.
Time of attachment was immediately upon the execution of security agreement
Cannot compel the Board to make the transfer—there is sufficient interest to constitute a “security
interest” within the meaning of the PPSA—the transferee had an equitable interest that is sufficient.
Policy: The effect of this decision enables a secured party to obtain a perfected security interest in shares
even though the shares have not been transferred on the books and the directors did not give their consent.
However, if secured party wants to dispose of and transfer shares to another party he still must comply with
the corporation's by-laws.
Perfection and Conflict of Laws: Different Jurisdictions—ss.5-8
s.5(1): Conflict of laws, location of collateral. Except as otherwise provided in this Act, the validity,
perfection and effect of perfection or non-perfection of, (a) a security interest in goods; and (b) a
possessory security interest in a security, an instrument, a negotiable document of title, money and
chattel paper, shall be governed by the law of the jurisdiction where the collateral is situated at the
time the security interest attaches.
with respect to a dealer in Michigan: if the dealer took a security interest in the goods, one looks to the
law of Michigan to determine whether the interest has attached, perfected, etc. to see if all
requirements are fulfilled in order to determine its enforceability against third parties.
Therefore, if goods coming from BC to ON, then if dealer in BC goes bankrupt, the laws of ON must
be fulfilled to perfect one’s interest.
s.5(2): Perfection of security interest continued. A security interest in goods perfected under the
law of the jurisdiction in which the goods are situated at the time the security interest attaches but
before the goods are brought into Ontario continues perfected in Ontario if a financing statement is
registered in Ontario before the goods are brought in or if it is perfected in Ontario, (a) within 60 days
after the goods are brought in; (b) within 15 days after the day the secured party received notice that
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the goods have been brought in; or (c) before the date that perfection ceases under the law of the
jurisdiction in which the goods were situated at the time the security interest attached, whichever is
earliest, but the security interest is subordinate to the interest of a buyer or lessee of those goods
who acquires the goods from the debtor as consumer goods in good faith and without knowledge of
the security interest and before the security interest is perfected in Ontario.
if you want to continue perfection on in Ontario, need to register within that time period, and then that
interest registered in the other jurisdiction will be deemed to have continued on (the maximum period
is 60 days after the goods come in).
s.5(2)(c): suppose the goods cross the border on day 1 and Michigan dealer registered them 3 years
prior. If the dealer's interest (in Michigan) lapses on day 5, the dealer has until day 5 to file a financing
statement in Ontario in order to continue perfection. It is the earliest of: 60 days; 15 days after
receiving notice; or lapse of perfection in other jurisdiction (5 days).
s.5(2) has consumer protection: consumer can take goods ahead of dealer if he acquired them from
the debtor in good faith without knowledge of the security interest, before being perfected in Ontario.
Q: do the goods perfected through to day 60, without the BC counterpart doing anything, or do they
remain unperfected until BC counterpart registers it?—not perfected if BC counterpart fails to act—
Perfection is retroactive.
s.5(3): Perfection otherwise. Subsection (2) does not apply so as to prevent the perfection of a
security interest after the expiry of the time limit set out in that subsection.
dealer is not prevented after 60 days (assuming no notice and no lapse) from registering financing
statement in Ontario, but their perfection will not link back to Michigan date and they will be start fresh
when competing against Ontario dealers.
for example, if you cross border on day 1, sold to dealer on day 2, lead lender's interest attaches to
those goods immediately, then on day 70 the Michigan dealer learns of this and registers (it will only
count from day 70), and the lead lender's interest will be ahead of Michigan's interest.
s.5(4): Perfection in Ontario. Where a security interest mentioned in s.(1) is not perfected under the
law of the jurisdiction in which the collateral was situated at the time the security interest attached and
before being brought into Ontario, the security interest may be perfected under this Act.
an out of Province security interest, not perfected elsewhere can be perfected in Ontario.
s.5(5): Revendication. [Specific to Quebec].
Exception to s.5
s.6(1): Goods brought into province. Subject to section 7, if the parties to a security agreement
creating a security interest in goods in one jurisdiction understand that at the time the security interest
attaches the goods will be kept in another jurisdiction, and the goods are removed to that other
jurisdiction...within thirty days after the security interest attached, the validity, perfection and effect of
perfection or non-perfection of the security interest shall be governed by the law of the other
o where parties understand that the goods will be removed to another jurisdiction within 30
days of attachment, then perfection, validity and effect is governed by law in new jurisdiction
where the goods are headed. For example, if a Manitoba dealer sells a car to an Ontario
resident and knows (at the time of the attachment) that the car is headed to Ontario within 30
days, he should be fulfilling requirements necessary for Ontario and should register in
s.7(1): Conflict of laws, location of debtor. The validity, perfection and effect of perfection or non-
perfection, (a) of a security interest in (i) an intangible or (ii) goods that are of a type that are normally
used in more than one jurisdiction, if the goods are equipment or inventory leased or held for lease by
a debtor to others; and (b) of a non-possessory security interest in a security, an instrument, a
negotiable document of title, money and chattel paper, shall be governed by the law of the jurisdiction
where the debtor is located at the time the security interest attaches.
s.7(2): Change of location. If a debtor changes location to Ontario, a perfected security
interest...continues perfected in Ontario if it is perfected in Ontario, (a) within sixty days from the day
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the debtor changes location, (b) within fifteen days from the day the secured party receives notice... or
(c) prior to the day perfection ceases under the law of the jurisdiction referred to in subsection (1),
whichever is earliest.
s.7(3): Idem. A security interest that is not perfected as provided in subsection (2) may otherwise be
s.7(4): Location of debtor. ... a debtor shall be deemed to be located at the debtor's place of
business, ...at the debtor's chief executive office,...and otherwise at the debtor's principal place of
o if dealing with goods in other jurisdictions or intangibles, must look to s.7 and not s.5 (deals
with goods, security, instrument, negotiable document of title, money and chattel paper).
Procedural and Substantive Matters
s.8(1): Procedural and substantive issus. Despite sections 5, 6 and 7, (a) procedural matters
affecting the enforcement of the right of a secured party in respect of collateral other than intangibles
are governed by the law of the jurisdiction in which the collateral is located at the time of the exercise
of those rights; (b) procedural matters affecting the enforcement of the rights of a secured party
against intangibles are governed by the law of the forum; and (c) substantive matters affecting the
rights of a secured party against the collateral are governed by the proper law of the contract between
the secured party and the debtor.
"proper law of contract" - the system of law by which parties intended the contract to be governed
or where their intention is neither expressed nor to be inferred from the circumstances, the system of
law with which the transaction has its closest and most real connection.
Re Claude A. Bedard (1983) (Ont. SC)
F: On May 16, bank takes security interest in the purchase money for Bedard's purchase of an automobile.
The security agreement attached in Quebec on the date of purchase. On May 17, the automobile was brought
into Ontario and 64 days later the bank registered a financing statement. Assignment in bankruptcy was made
Sept. 10 but court wants to conclude that the security agreement was perfected in Quebec so as to enable it to
take advantage of the conflict of laws provision.
H: Judge assumes one has until 60 days to act and after, cannot perfect security interest. Under s.5(4) and
s.7(3) perfection starts with registration in Ontario and anything not perfected may be perfected under PPSA.
Registration by bank is not valid as bank had notice debtor was from Ontario. One has to perfect according to
jurisdiction if they know goods are headed there.
**Re Adair (1985) (Ont. CA)
F: A van is brought into Ontario. In 35 days there is a voluntary assignment in bankruptcy on May 26. The
trustee in bankruptcy has to notify old creditors. After receiving notice on June 4, GM wants to prove its claim
as a secured creditor on June 15. As they were not registered in Ontario, the trustee disallowed the claim on
June 17. After that, but outside of 60 days and the 15 day time limit (66 days), GM did register a financing
statement on June 28.
I: Is the 60 days a grace period for filing or an absolute period of perfection?
Trustee: In a grace period the secured party must take action in order to continue as a perfected interest in the
new jurisdiction. But the secured party must take steps to link it back to the original jurisdiction.
GMAC: It is an absolute period and the secured interest remains perfected in the new jurisdiction, regardless
of whether the secured party takes action until the limitation period expires. It lapses after 60 days but
bankruptcy occurred before the lapse. Everything should stop at the moment of bankruptcy because GMAC is
an out of jurisdiction creditor.
R: It is a grace period, therefore GMAC's interests are subordinate to the trustee in bankruptcy. A secured
party must takes active steps to link the perfected interest back to the original jurisdiction. If the secured party
fails to take the requisite steps within the requisite time period, their interest in the new jurisdiction will not be
retroactively perfected. If the secured party does takes steps before the expiry, the security interest will be
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retroactively perfected to the day it was registered in the original jurisdiction.
Reasoning: On June 4 when GMAC received notice, it had 15 days to perfect (until June 19). On June 15
when GMAC presented proof of claim, they were prima facie registered but had until June 19 to perfect
security interest in Ontario. On June 28, they registered a financing statement, but it was outside the 15-day
statute limit, and outside the 60 day limit as well.
Principle: A security interest in goods perfected under the law of the jurisdiction in which the collateral was
when the security interest attached, before being brought into Ontario, becomes unperfected as of the date the
collateral is brought into Ontario if the person who owns the security interest fails to perfect it in Ontario within
the time limits in s.5(2).
For our purposes, if the creditor is not perfected on the day the receiving order is issued, it is
unperfected interest—have an opportunity to perfect their interest subsequent to receiving
order being issued ONLY if out-of-jurisdiction creditor, then retroactively perfected if
interested is perfected within 60 days..
Policy: Once the property leaves the foreign jurisdiction and enters Ontario, the creditor cannot launch a claim
for the property under the PPSA as the property has been lost to unsecured creditors in Ontario. Requires
creditors to monitor their debtors more closely (i.e. if you see vehicle registration is in another jurisdiction,
should wait until you know more). Despite the time limits, usually creditors in other jurisdictions do not lose out
because most debtors do not leave the jurisdiction. Thus creditors let these ones go because they have more
security interests that remain in the jurisdiction.
Trying to balance two competing interests: that of foreign creditor and local creditor; this provides
foreign creditor with reasonable period to discover that debtor has relocated elsewhere.
Local creditors should ask for history including previous addresses and driver’s license.
At certain point, foreign creditor’s interest outweighed by need for debtor to obtain local credit.
NB: Section s.71(1) of the Bankruptcy and Insolvency Act states that there are one of two ways to get put into
bankruptcy: (i) by petitioning party into bankruptcy; court issues a receiving order and at that moment is the
moment of bankruptcy and (ii) by voluntary assignment; the moment of the assignment to the other creditors.
Nature of Registration system: s. 23
Question: what if you did it wrong from the beginning and you file change document?
Is a notice filing system, whereby creditors provide notice to others of the existence or potential
existence of an in rem interest in the property of a debtor. Documents are not filed (these are more
popular these days).
Claimants only file notice of their interest - not the actual security agreement [You simply file notice of
your charge (no need to file actual security agreement or other docs).]
onus on subsequent Secured Parties to seek copy of the security agreement, and assess their risk
accordingly [It is up to the subsequent secured parties to obtain copies of that charge.]
Note: s. 23 – registration perfects a security interest in ANY type of collateral.
Perfection by Registration
deals with s.19(b): A security interest attaches when (b) all steps required for perfection...have been
addresses the s.23 requirement: Registration perfects a security interest in any type of collateral.
Ontario's registration system is based on notice filing (as opposed to a document filing system). The
purpose of a notice filing system is for creditors to provide notice to others of the existence or
potential existence of a security interest in the property of the debtor.
notice filing system places a heavy emphasis on the act of the inquirer taking the appropriate action.
The database can only generate information according to the nature of the inquiry.
a financing statement is filed according to s.45. The statement gets the secured party's interest on
the system. The information contained is sparse: name of debtor, their address and the name of the
secured party and how long interest is to be registered. The actual agreement is not available and to
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ascertain the terms, one must go to the parties.
o S. 45(1): Registration of financing statement. In order to perfect a security interest by
registration under this Act, a financing statement shall be registered.
o If information on the form is not accurate, the security interest is NOT valid and will fail.
o Put the general description of the collateralPro: it may save as creditor if you check the
wrong boxes; Con: you are limited to that general description as a creditor
o Only secured party’s signature is required in ON.
a financing change statement allows the secured party to change data already in the system but it
is not a substitute for getting on the system.
o s.47(1): Assignment of security interest. A financing change statement may be registered
where a security interest is perfected by registration and the secured party has assigned the
secured party's interest in all or part of the collateral.
where collateral is not consumer goods, financing statement may be registered before or after
security agreement is signed by the debtor. Consumer protection is at work here.
o s.45(3): Collateral other than consumer goods. Where the collateral is not consumer
goods, the financing change statement referred to in subsection (1) may be registered before
or after the security agreement is signed by the debtor.
this section takes note of normal business financing practices. For example, GMAC will want to put
down one financing statement that covers all subsequent agreements that are similar to avoid
having to file a statement every day. However, each financing of a consumer good (couch) requires a
individual financing statement because consumers are not in business.
o s.45(4): Subsequent security agreements. Except where the collateral is consumer goods,
one financing statement may perfect one or more security interests created or provided for in
one or more security agreements between the parties.
o Practicality of this: if you are a manufacturer supplying to retailer, you will likely have many
subsequent agreements after the main agreement—market efficiency allows subsequent
agreements to be perfected provided they are in some way related to the original agreement.
registration of a financing statement or a financing change statement does not constitute
constructive notice or knowledge to third parties.
o s.46(5)(a): Effects of registration. Registration of a financing statement or financing change
statement, (a) does not constitute constructive notice or knowledge to or by third parties of
the existence of the financing statement or financing change statement or the contents
Problem: SP1 registers a financing statement on consumer goods prior to attachment on day 1. On day 10,
SP2 registers a financing statement and security agreement. On day 60, SP1 gets debtor to sign the security
Question: Which party takes ahead?
Answer: According to s.30, regardless of the order of perfection, the day of registration takes priority and SP1
takes ahead of SP2. This is fair as SP2 should have inquired in the terms of SP1's status once SP1 saw that
SP1 was ahead of them. Recall that it is a notice filing system.
NB: Even though SP1 is there, they may not have perfected and as a lawyer, this must be determined.
What Constitutes Registration?
Bank of Nova Scotia v. Clinton's Flowers & Gifts Ltd. (1994) (Ont. CA)
F: On Sept. 20, Clinton's executed security agreements charging its inventory, equipment and accounts
receivable to the bank. Bank prepared a financing statement for registration pursuant to the PPSA, which was
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properly prepared. Bank registered its financing statement on Sept. 25. On June 5 next year, Clinton's made
an assignment in bankruptcy. Bank filed as a secured creditor. Trustee investigated validity of claim but saw
no match. Found out that it was someone in the registry that made an error. Clinton's contends that the bank's
statement was not properly registered and was therefore unperfected and it should take priority over the
bank's unperfected security interest because of s.20(1)(b) of the PPSA.
Error by registrar, not by creditor
Properly registered, even though not searchable
Note: re: compensation, see s.44; and note 44(20): maximum of one million
o Where should loss fall? Improperly registered creditor and subsequent claimants—that relies
on the certificate of the registrar is entitled to the compensation out of the Assurance Fund.
Contract with Western model PPSA’s: only validly registered when searchable—in many cases, send
a verification that the interest has been registered—onus on the creditor to cheque the registration.
I: Did the bank register its security interest before the bankruptcy on June 5?
Clinton's: Section 20(1)(b) of the PPSA states: until perfected, a security interest is not effective against a
person who represents the creditors of the debtor, including the trustee in bankruptcy. The registration
contains an error and is thus invalid. Creditor has not fulfilled s.23 (perfection by registration) and s.22
(perfection by possession) was also not covered. Therefore, s.19(b) is not fulfilled and bank falls into pool of
Bank of Nova Scotia: Should not be penalized for a mistake which was not under its control. Its security
interest was thus perfected on Sept. 25 prior to Clinton's bankruptcy.
H: Bank's Security interest effective against Clinton's; was registered properly and was perfected before June
Reasoning: If the registrar makes an error in the registration of a security interest, the creditor is not held
responsible and the registration is still valid. Thus, registration period began on Sept. 25. Because of s.23 of
the PPSA, the bank's security interest was perfected on that date prior to the debtor's bankruptcy. Thus, the
provisions of s.20(1)(b) are inapplicable and do not give the respondent priority over the appellant.
NB: If error was by creditor filing the statement (ie. got debtor's name wrong), the registration is invalid. But
what about the possibility of the VIN? Contrast to Western model where security interest is only validly
registered if it is searchable.
NB: Compensation: consequence of court's decision is that financing statement may be deemed to be
registered but may not be searchable if there is an error by the registrar. The subsequent creditor is eligible for
compensation under the Personal Property Security Assurance Fund governed by s.44 of the PPSA.
s.44(4): Entitlement to payment. Any person who suffers loss or damage as a result of the person's
reliance upon a certificate of the registrar...that is incorrect because of an error or omission in the
operation of the system of registration...is entitled to be paid compensation...
s.44(2): Maximum payable from Assurance Fund. The maximum amount that may be paid out in
the Assurance Fund...shall not exceed $1,000,000 in total.
Errors of Omissions in a Financing Statement
with the registry system, it is imperative that SP2 see that SP1 is on the system. If SP1 does
not register properly, other creditors cannot find the security interest which creates a secret
o s.46(4): Errors, etc. A financing statement or a financing change statement is not
invalidated nor is its effect impaired by reason only of an error or omission...or in its
execution or registration unless a reasonable person is likely to be misled materially
by the error or omission—[objective test]
o likely to be misled, not actually misled, puts the onus on the creditor to ensure
validity of the registration, and if not valid then unperfected interest but if right on
the financing statement but the registrar makes a mistake then entitled to
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compensation from the Assurance Fund.
s.9(2): Idem. A security agreement is not unenforceable against a third party by reason only of a
defect, irregularity, omission or error...or in the execution...unless the third party is actually misled by
the defect, irregularity, omission or error. [subjective test]
Re Lambert (1994) (Ont. CA)
F: Lambert purchased a car under the terms of a conditional sales contract. Vendor sold that contract to
GMAC. GMAC registered its security interest in the car by filing a financing statement stating owner as "Gilles
J. Lambert" which was the name he used when signing the contract. But his proper name on his birth
certificate was "Joseph Phillipe Gilles Lambert." The financing statement correctly set out his date of birth and
the car's VIN. After the registration, Lambert made an assignment in bankruptcy and the trustee took
possession of his car. GMAC filed a proof of claim as a secured creditor with an interest in the car. Trustee
made a search under the name, which did not reveal a financing statement.
VIN correct but debtor’s name does not show up, therefore issue of how through does the creditor
need to be in their search?—unperfected interest
What kind of parties are using the system and what level of search is appropriate?—if average user
without much knowledge of the system, then searching under the debtor name is sufficient; but if a
sophisticated user then a higher level of search is expected i.e. also search under the VIN.
Also issue if it’s a valid registration—prima facie it’s not but is it curable.
P. 5 of case refer to technique used in judgment—useful for exam layout—look at 19(a) & 19(b)
Trustee declared that GMAC's security interest was not effective against the trustee. The trustee states that
errors in recording the financing statement were fatal to perfection against the trustee.
GMAC maintains that the errors were cured by s.46(4) of the PPSA since the trustee could have performed a
VIN search and had she done so, would not have been misled by the errors in the debtor's name.
I: When will an error in the contents of a financing statement render the statement invalid as against third
parties? If name is incorrect but registration is correct, which governs?
If name is incorrect, but VIN correct, is the registration valid?—burden on party seeking to have
registration declared invalid.
H: The trustee did not establish that the error in the GMAC financing statement would have materially misled a
reasonable person. GMAC's error was cured by s.46(4) of the PPSA and therefore, GMAC's statement is not
invalidated and its security interest in the vehicle is perfected.
R: Section 46(4) is potentially applicable to any error in a financing statement. An error in a financing
statement does not per se invalidate the statement or impair the security interest claimed by the statement.
Section 46(4) requires an objective approach and asks whether or not a reasonable person would likely be
misled materially by the error or omission.
The reasonable person has the following attributes: (i) reasonably prudent prospective purchaser or
lender who looks to the registration system of the PPSA to provide notice of any prior registered
claims against the property to be bought or taken as collateral for a loan (ii) conversant with the
search facilities provided by the registration system and is a reasonably competent user of those
facilities (iii) where the property to be bought or taken as collateral is a motor vehicle, the reasonable
person will obtain the name and birth date of the seller/borrower as well as the VIN (iv) where the
property is a motor vehicle, the reasonable person will conduct both a specific debtor name search
and a VIN search.
Creditor's secured interest should not fail as against third parties by virtue of an error in the financing
statement if that error would not impede retrieval of the financing statement by a reasonable person taking
reasonable steps to protect their interest. If the error in the financing statement results in the reasonable
person not retrieving that financing statement from the system, then the reasonable person will probably be
materially misled. However, a reasonable person would not be materially misled by an error in a financing
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statement relating to the debtor's name if that statement accurately set out the VIN and the financing
statement would come to the attention of the reasonable person through a VIN search despite the name error.
There is a higher standard imposed on those who perform searches versus the inexperienced searchers.
Outcome: VIN by itself is adequate. If X sells to Y, and then Y sells to Z, Z will only search Y's name because
he does not know about X. This flaw in the system is solved by using the VIN which remains constant
NB: Burden of proof is on the party seeking to have registration declared invalid.
NB: Often the subjective approach is applied for s.46(4) which begs the issue of whether trustees are
pouncing on the windfalls such that an error in the name takes ahead of a secured third party.
NB: Three searches: (I) individual specific debtor name inquiry: first name, middle initial, last name, date of
brith, (II) a non-specific debtor inquiry: debtor's first and last name, (III) VIN inquiry: VIN only (available only if
collateral is motor vehicle).
NB: Note approach followed by the judge (good exam technique): s.19 PERFECTION, s.23 PERFECTION BY
REGISTRATION, s.45 REGISTRATION OF FINANCING STATMENT, s. 46(2) PRESCRIBED FORM, s.16 of
the Regulations NAME OF DEBTOR AS FIRST NAME, MIDDLE INITIAL AND LAST NAME, s.3(7)(8)(9) of the
Regulations IF COLLATERAL IS A MOTOR VEHICLE, NEEDS DESCRIPTION AND VIN, and consequences
of s.20(1)(b) in the event of unperfection UNPERFECTED SECURITY INTERESTS - CREDITORS.
See diagram in Lect. 10 slides—if VIN invalid and D name valid.
Defective Classification of Collateral
Adelaide Capital Corp. v. Integrated Transportation Finance Inc . (1994) (Ont. Ct. Gen. Div.)
F: Greyvest registered 6 financing statements in 1987. The registrations do not mark "inventory" as collateral
being secured. Greyvest claims that the collateral is inventory in the hands of ITFI and should be classified as
such in the financing statement and argues that this error can be cured by the operation of s.46(4) of the
I: Can the misclassification of the collateral in the 1987 Greyvest registrations be cured by the application of
s.46(4) of the PPSA such as to preserve Greyvest's priority to the initial 75 trailers?
H: Four of the financing statements are not curable by s.46(4) and are invalid and ineffective to establish a
R: Greyvest's argument cannot proceed with respect to all registrations. The trailers were inventory in the
hands of ITFI and would have been properly classified had they been described as such in financing
statement. January 1987 registrations classify the collateral as "equipment," "book debts" and "other" without
anything in the general description section. There is nothing in the filing to notify a person doing a PPSA
search that Greyvest is claiming any security interest in debtor's inventory. Error is likely to mislead a
reasonable person materially and thus it invalidates effect of the financing statement. Reasoning: It is not a
valid registration because this is supposed to trigger notice that the debtor has a certain category of collateral
charged by a prior creditor. If the correct box is not checked a subsequent creditor is not put on notice that the
item of collateral is put on charge. Therefore a security interest in already registered assets is invalid.
If check off the wrong box but put in a description of the collateral then the registration is
saved and thus curable.
NB: Some financing statements did not refer to "inventory" but contained general description of collateral.
These financing statements would not likely mislead a reasonable person as to nature of collateral which
security interest is being claimed.
NB: If only the general description box is filled, the party limits themselves to those words. Many lawyers
check all boxes and put nothing in the description so as not to limit themselves (don't provide description
unless you are sure that the limitation is desirable). However, if you don't fill out the relevant box but fill in the
description, then you are limited to whatever box you filled out. Because saying to the subsequent inquirer that
these are our interests—because being more particular and will be held to those particulars—on the upside
can save the interest but downside, limited to that description—in general, most registrants leave the
s.46(3): Classification of collateral. Except with respect to proceeds, where a financing statement
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or a financing change statement sets out a classification of collateral and also contains words that
appear to limit the scope of the classification, then...secured party may claim...security interest
perfected by registration only in the class as limited.
if there is no relation between the items, then the registration of one cannot continue the registration
of the other.
o s.21(1): Continuity of perfection. If a security interest is originally perfected...and is again
perfected in some way...without an intermediate period when it was unperfected, the security
interest shall be deemed to be perfected continuously...
Registered a debenture for a year, and it lapsed, but re-registered again before the lapse but first
registration lapsed, deemed continuously perfected, therefore go back to the time of first registration
because no intermediate period when it was unregistered.
Greyvest’s ability to register one financing statement for several security agreements: counsel for
Greyvest argued that the 1990 registration would also perfect he early incomplete 1987 registration as
a result of the language of subs. 45(4)—see slide 12 (lect 10)—no linkage between earlier
Basic Priority Rules
underlying policy: at the time one takes a security interest, does one have notice either through
registration or possession of goods, that there is another security interest? The first to file rule is in
place in order to encourage registration.
s.30(1): Priorities, general rule. If no other provision of this Act is applicable, the following priority
rules apply to security interests in the same collateral: 1. Where priority is to be determined between
security interests perfected by registration, priority shall be determined by the order of registration
regardless of the order of perfection. 2. Where priority is to be determined between a security
interest perfected by registration and a security interest perfected otherwise... i. the security interest
perfected by registration has priority...if the registration occured before the perfection of the other
security interest, and ii. the security interest perfected otherwise than by registration has priority...if the
security interest perfected otherwise than by registration was perfected before the registering of a
financing statement related to the other security interest. 3. Where priority is to be determined
between security interests perfected otherwise than by registration, priority shall be determined by the
order of perfection. 4. Where priority is to be determined between unperfected security interests,
priority...determined by the order of attachment.
o s.30(1): if security interests have all been perfected by registration, order of registration
determines order of priority.
o s.30(1)(2)(i): security interest perfected by registration has priority if registered before the
perfection of other interest—i.e. if other party perfects before the first creditor register, then
other has priority but if first perfects before the other perfects, than first has priority—matter of
o s.30(1)(2)(ii): security interest perfected by other means has priority if perfected before other
party registered statement.
where you change the method of perfection, you will be deemed to have perfected
always by the first method.
o s.30(1)(3): if both security interests are perfected without registration, then interest which is
perfected first takes priority.
o s.30(1)(4): if none have been perfected, they rank according to the order of attachment, if no
TIB involved, but if TIB involved then TIB ranks pro rata and takes priority against both
* CIBC v.Sperry: both attached but were unperfected and the first to attach would have won.
S30(2)—tells you whichever you perfect the first time is the method you will be stuck for priority rules;
21(1)—says you are continuously perfected by the same means
o Possession by SP1, who registers the collateral and then relinquishes the possession;
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s.30(2) assumes they were always possessing but s.20(2) (check section no.)—perfected by
S. 30(3)—contest by the two creditors because both perfected interests, both deemed to have
perfected by possession.
S. 30(4)—has rule and then exceptions—for future advances made while its perfected, ranks same
as first one exception to this which arises where the subsequent judgment sends a notice in writing to
lead lender saying we (trustee in bankruptcy) now have an interest—subsequent advances by the
lead lender cannot be consolidated back after the written notice—
o an exception to this exception, i.e. unless the secured party makes the advance for the
purpose of paying reasonable expenses (i.e. unavoidable and obliged to make them), may be
to preserve the property—allowed to consolidate this back, or if contractually obliged to make
S. 30(5) deals with proceeds—priority for proceeds, this section says the date for the collateral is the
date for the proceeds.
S. 30(6)—about reperfected security interests—reperfection creates a period of continuous
perfection, even after a lapse, except with respect to a party who acquires rights during the lapse
o Principle? All other parties have notice of the prior (lapsed) interest
o Potential for a loop
o Vis-à-vis SP2—as if the interest never lapse—the subs lapse was not at the expense of sp2,
and governed their risk assessment accordingly—without this rule, sp2 would receive a
windfall—therefore this rule allows sp1 to reperfect.
o When Sp3 comes in, they don’t see sp1 because lapsed, and set their assessment
accordingly, and through continuous perfection, the reregistration will be prejudicial against
sp3, therefore sp1’s interest does not take a priority against sp3, but will do so against sp2—
see Slide 29 but between sp2 & sp3, sp2 takes priority due its prior status.
o To break circular priorities: one is to make sp1 lose for letting the registration lapse, because
now there is sp3—but if only 2 parties allow sp1 to reperfect but not when there are 3 parties
OR give sp1 their reperfected interest which will be sp1, sp2, sp3 and then sp1 must pay sp3
the amount sp3 was prejudiced by, privately—allows sp1 to have continuous perfected
interest, but still is not prejudicial against sp3.
o The loop is a priorities loop—i.e. statutory loop
o Subordination are not priority loops.
o Do not confuse this situation with that of a party who lapses and remains lapsed at the time of
bankruptcy—it will be unperfected.
Subordination of Unperfected Interests
an unperfected security interest is equivalent to an unsecured creditor, even though you have a
security interest in collateral.
"subordinate" means that a security interest is ineffective as against the other party. It does not mean
subordinate per se.
if you have an unperfected security interest (have s.19(a) but not s.19(b)) then s.20 states priority.
s.20(1): Unperfected security interests. ...until perfected, a security interest, (a) in collateral is
subordinate to the interest of, (i) a person who has a perfected security interest in the same
collateral...(ii) a person who assumes control of the collateral through execution, attachment,
garnishment, charging order, equitable execution or other legal process, or (iii) all persons entitled by
the Creditors' Relief Act... (b) in collateral is not effective against a person who represents the
creditors of the debtor... (c) in chattel paper, documents of title, securities, instruments or goods is not
effective against a transferee...who takes under a transfer that does not secure payment or
performance of an obligation and who gives value and receives delivery...without knowledge of the
security interest; (d) in intangibles other than accounts is not effective against a transferee...who takes
under a transfer that does not secure payment or performance of an obligation and who gives value
without knowledge of the security interest.
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o s.20(1)(a)(i): until perfected, a security interest in collateral is subordinate to a perfected
interest in the same collateral.
o s.20(1)(a)(ii): an unperfected security interest is subordinate to interest of judgement creditor
who completed their process.
s.20(1)(b): an unperfected security interest is not effective against a trustee in bankruptcy.
Compare s.20(1)(a)(i) to s.4(1)(a)
s.4(1)(a): Non-application of Act. This Act does not apply (a) to a lien given by statute or rule of law,
except as provided in subclause 20(1)(a)(i)...
s.20(1)(a)(i): Unperfected security interests. ...Until perfected, a security interest (a) in collateral is
subordinate to the interest of, (i) a person who has a perfected security interest in the same collateral
or who has a lien given under any other Act or by a rule of law or who has priority under any other Act.
used to be that the date of bankruptcy was the date of petition. Under s.71(2) of the Bankruptcy and
Insolvency Act, the date of bankruptcy is the date of the receiving order, or the date of the voluntary
assignment of bankruptcy (s.42(1)).
unsecured creditor who gets a writ of execution authorizing seizure; one who has obtained judgment
against his debtor under which he can enforce execution.
JANUARY 1 - A advances $50,000 to X but does not register a financing statement and does not take
JANUARY 7 - B advances $25,000 to X secured by the same goods and takes possession (perfects by other
JANUARY 8 - A registers a financing statement (registers)
Q: When did each party attach? A: B attached on January 7, A attached on January 8.
Q: Who prevails? A: As a result of s.30(1)(2)(ii), B prevails. As B's security interest was perfected by
possession, B has priority over A because B perfected before A registered a financing statement.
The Robert Simpson Co. Ltd. v. Shadlock and Duggan (1981) (Ont. SC)
F: P registers after D and P's employees inform D of P's security. However, the actual registration did not take
place until after D's registration.
See slide 20-L10
I: Is the doctrine of actual notice relevant for PPSA purposes? Is D2's actual notice to D1 good enough to
H: Despite s.72 (application of the principles of law and equity), and despite the fact that actual notice is
sufficient in property law, the courts are reluctant to engraft equitable principles onto the PPSA. Thus, the
doctrine of actual notice is not relevant for PPSA purposes.
NB: You can tell the whole world you have a security interest, but it does not matter. What is required is a
s.22, s.23 or s.24 step to fulfil s.19(b).
This doctrine existed before PPSA
For purposes of the PPSA, constructive notice is not relevant either—as of 1989—this means that we
have a series of priority rules with a concept of perfection with methods of perfection. After following
the steps outlined in the PPSA, the consequences are outlined there as well. Not worried about actual
or constructive notices here.
Continuous Perfection: which priority rule governs when method of perfection alters, notwithstanding
s.30(2): Idem. For the purposes of subsection (1), a continuously perfected security interest shall be
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treated at all times as if perfected by registration, if it was originally so perfected, and it shall be
treated at all times as if perfected otherwise than by registration if it was originally perfected otherwise
than by registration.
I.e. if two parties perfected by possession and one registered in the mean time, you go back to that
original form of perfection and apply that priority rule.
s.30(3): Future Advances. Subject to subsection (4), where future advances are made while a
security interest is perfected, the security interest has the same priority with respect to each future
advance as it has with respect to the first advance.
future advances are consolidated with the amount previously lent. For example, if X lends Y $10,000
a month ago and then lends Y $10,000 today, all future advances are gathered back to have the
same priority as the first advance.
Four Different Types of Future Advances:
(i) FIXED AMOUNT: party states in the security agreement a fixed amount of which only a part is lent at a time.
Often preconditions are attached.
(ii) OBLIGATORY FUTURE ADVANCES: with mortgagee/debtor contractually bound to make subsequent
advances. For example, where the lender is notified by the borrower of the completion of the stage, the lender
disburses the next tranche. Usually the borrower does not want the whole amount because then interest will
accrue. As opposed to a fixed amount, there are no preconditions attached.
(iii) OPTIONAL OR OPEN-ENDED: with the advance at the discretion of the mortgagee/lender.
Limited - mortgage document stipulates a ceiling usually valid only to that amount, i.e. credit cards.
Unlimited - no mention of ceiling in the mortgage document and the interest rate is set high.
(iv) NECESSARY OR PRESERVATION ADVANCES: where the lender/mortgagor must pay in order to preserve the
collateral as the borrower can no longer afford to do so (ie. the frozen meat is put into storage).
s.30(4): Exception. A future advance under a perfected security interest is subordinate to the rights
of persons mentioned in subclauses 20(1)(a)(ii) and (iii) if the advance was made after the secured
party received written notification of the interest of any such person, unless (a) the secured party
makes the advance for the purpose of paying reasonable expenses, including the cost of insurance
and payment of taxes or other charges incurred in obtaining and maintaining possession of the
collateral and its preservation; or (b) the secured party is bound to make the advance, whether or not
a subsequent event not within the secured party's control has relieved or may relieve the secured
party from the obligation.
a future advance under a perfected security agreement is subordinate to judgement creditors listed in
s.20(1)(a)(ii)(iii) if the advance was made after the secured party received written notification of the
interest. Future advances which come after this notice will be subordinate to the judgement creditors
interest with the exception of obligatory (debtor contractually bound to make advances) or necessary
(preservation of collateral) future advances.
policy: notice releases the party from taking a further interest in the debtor and having to make future
advances., with the exception of obligatory or necessary future advances.
s.30(5): Proceeds. For the purpose of subsection (1), the date for registration or perfection as to
collateral is also the date for registration or perfection as to proceeds.
I.e. if a lead lender registers the original collateral on day 1 which is the date of attachment, and the
car is sold in exchange for money and there is a competition between two creditors, the money is
covered from day 1 as a result of s.30(5) as it allows for a substitution of collateral (in this case
money). The same goes if chattel paper came back to GM such that the interest in chattel paper
would remain at the same priority level of the car.
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Reperfected Security Interests
s.30(6): Reperfected security interests. Where a security interest that is perfected by registration
becomes unperfected and is again perfected by registration, the security interest shall be deemed to
have been continuously perfected from the time of first perfection except...if a person acquired rights
in all or part of the collateral during the period when the security interest was unperfected, the
registration shall not be effective as against the person who acquired the rights during such period.
SP1 perfects----------SP2----(lapse)----SP3----------SP1 reperfects
reperfection creates a period of continuous perfection even after a lapse, except with respect to a
party who acquires rights during the lapse as that party would be unnecessarily prejudiced.
as a result of s.30(6), SP1 can file a financing statement and link it back to the original date as long as
it does not prejudice SP2 who came in during the lapse. SP1 will only beat out any party who is there
prior to the lapse. The lapse is therefore irrelevant and perfection occurs all the way, except if SP2 is
prejudiced by SP1's lapse and reperfection.
there is a problem when SP3 is added. SP1 will go ahead of SP2, and SP2 will go ahead of SP3 but
because SP3 would be prejudiced by the subsequent perfection of SP1, SP3 goes ahead of SP1!
Thus, if there is any deficiency in SP3's claim SP1 must pay SP3 the deficiency.
Note that a party who lapses and remains lapsed at the time of bankruptcy remains unperfected—
potential for a loop.
PMSI: Purchase Money Security Interest
An exception to the general priority rules in s.30.
if not introduced, risk much higher for Manufacturer because LL would get priority and thus
manufacturer may charge higher interest based on greater risk.
LL has situational monopoly
Pre-PPSA this situation would not occur, because retailer would not have the title to the goods for
sale, only a conditional sale, manufacturer would have title, but retailer would have possession only,
and title would trump the floating equitable charge by LL
o PPSA does not care of title, only about priority of registration, therefore now system
upsetthus, because doing away with title, priority based on straight priority, i.e. fit into
specific category of lender then that category has super-priority over all other lenders.
s.33 provides that a subsequent creditor with a PMSI who registers it will rank ahead of the lead
lender and therefore have a super-priority. Usually a PMSI party is a conditional seller (ie. a car
o S. 33 makes a distinction between inventory and non-inventory.
the Act will give a PMSI party who complies with its requirements, priority over any other person who
claims an interest in the collateral, which is granted by the same debtor by operation of an after-
acquired property clause.
o s.1(1): Definitions. "Purchase-money security interest" means,
(a) security interest taken or reserved in collateral to secure payment of all or part of
its price [inventory](typically manufacturer, classifying a conditional sale), or
(b) a security interest taken by a person who gives value for the purpose of enabling
the debtor to acquire rights in or to collateral to the extent that the value is applied to
acquire the rights [other collateral](typically banker or financier who’s not taking title
but paying a supplier full price of goods and taking an interest in those goodsthus
taking priority over all other interests).
o Straight added value from LL perspective, windfall for LL because after acquired
property clause—from a Policy rationale, no problem giving super-priority because LL
does not suffer any greater loss than what they were willing to suffer anywayLL
actually gains a little out of this, because at the end of each month manufacturer
incrementally gets paid off, and retailer accumulating greater interest in the inventory
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therefore at time of bankruptcy, manufacturer only entitled to outstanding owed
money, therefore remaining value of inventory entitled to LLLL gains equity over
Debenture will include a clause for hereafter acquired property, describe a defaulting event, and also,
if debtor purport to grant an interest equal or above the LL is also considered default, and an
exception to this clause i.e. except an interest that is related to the loan for the acquisition of the
Rc: Manufacturer giving goods up front, instead of money, as credit—and this exception reduces the
competition between the Manufacturer and LL so that the cost of borrowing can be reduced.
Manufacturer needs dealer to sell cars, and can borrow at a lower rate from the bank than the retailer,
and because goal to make a profit on the goods, therefore will pass on the cost of borrowing to the
retailer without making a profit on this cost, which is then passed on to the consumer as part of cost of
the car – this is cheaper than having retailer try and secure credit – GM Canada is bigger than North
Need PMSI to functionally achieve same consequence as before PPSA.
Types of PMSI's:
(a) Conditional sale where a seller reserves title in goods as security for purchase price, i.e.
conditional seller or
(b) Enabling loan where some one has lent debtor money in order to enable the debtor to
purchase a specific item such that the secured party will have priority in that item over other
creditors to the extent of the purchase price, i.e. financier who pays off supplier and takes
charge on specific items. Loans made for unrestricted purposes do not get this status.
must fulfil requirements of s.33 to get this priority, otherwise default goes to s.30 first to file rule.
However if the PMSI party does not take the proper steps, their interest is not necessarily unperfected
-- it just won't have a PMSI priority.
PMSI is an answer to the after-acquired property rule of s.12. Allowing an after-acquired property
clause saves the costs of re-writing contracts, but it also creates a situation where secured creditors
could lock up the debtor so that it will be difficult to find subsequent creditors. Without PMSI, GM
would never put cars on the lot because they would end up with the same priority as other secured
creditors. Thus, PMSI is the best way to alleviate the situational monopoly of an after-acquired
property clause because it gives a super priority to SP2 vis-a-vis the LL (but only in respect to items
put on the lot).
s.33(1): Purchase money security interests, inventory. A purchase money security interest in
inventory or proceeds has priority over any other security interest in the same collateral given by the
same debtor if, (a) the purchase money security interest was perfected at the time (i) the debtor
obtained possession of the inventory or (ii) a third party, at the request of the debtor, obtained or held
possession of the inventory, whichever is earliest; (b) before the debtor receives possession of the
inventory, the purchase money secured party gives notice in writing to every other secured party who
has registered a financing statement in which the collateral is classified as inventory before the date
of registration by the purchase money secured party and (c) the notice referred to....states that the
person giving it has or expects to acquire a purchase money security interest in inventory by item or
a search has to be done on the registry to see who has an interest against the debtor. Notice must
then be sent to all of those people who have an interest, because of the revolving nature of inventory.
If GM breached s.33(1)(a)-(c) and did not give notice, they still have a PMSI but the consequence of
not giving notice is that they do not get super priority. If GM and LL have the same priority, must look
to s.30(1) in which case the LL would take first as he registered first.
s.33(1)(a)(i): the PMSI has to be perfected at the time the debtor obtained possession of the
inventory, ie. prior to the car coming on the lot, there must be perfection.
o PMSI only pertains to the collateral mentioned in the notice
o If manufacturer does not give notice, then no super-priority, and thus PMSI invalid.
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s.33(2): Purchase money security interests other than inventory. Except where the collateral or
its proceeds is inventory or its proceeds, a purchase money security interest in collateral or its
proceeds has priority over any other security interest in the same collateral given by the debtor if the
purchase money security interest (a) in the case of collateral, other than an intangible, was perfected
before or within ten days after, (i) the debtor obtained possession of the collateral as a debtor or (ii) a
third party at the request of the debtor obtained or held possession of the collateral, whichever is
earliest or, (b) in the case of an intangible was perfected before or within ten days after the
attachment of the purchase money security interest in the intangible.
a PMSI in non-inventory (in collateral other than an intangible ie. equipment) has priority if: (a) the
PMSI is perfected before or 10 days after the debtor has possession (b) if it is an intangible, since the
debtor cannot take possession, the interest must be perfected within 10 days of attachment of the
PMSI in the intangible. There is no notice requirement here.
s.33(2)(a): other than inventory, party has up to 10 days after the debtor claims possession of the
equipment to perfect.
s.33(2)(b): can have a PMSI in an intangible.
s.33(3): Priority of seller's purchase-money security interest. Where more than one purchase
security interest is given priority by subsections (1) and (2), the purchase money security interest...of
the seller has priority over any other purchase money security interest given by the same debtor.
o when more than one PMSI priority is given in (1) and (2), the PMSI of the seller has priority
over any other PMSI party, ie. usually this will be a conditional sale.
Agricultural Credit Corporation of Sask. V. Pettyjohn and Pettyjohn
Pettyjohns wrote to ACCS to get loan to buy cattle
ACCS wrote letter back approving loan, but didn’t send money yet
Pettyjohns went to BMO and borrowed the money to buy the cattle
Pettyjohns, upon receipt of money from ACCS paid off their loan from BMO
Pettyjohns defaults on loan from ACCS; Saskatchewan laws required that loan from ACCS must be
classed as a PMSI for ACCS to be able to seize the cattle
Issue: Did ACCS provide an enabling loan, and therefore a PMSI? Where a purchase takes place after the
loan is approved but before the monies are advanced, does the lender have the right to claim a PMSI under
Holding: ACCS had a PMSI and could thus take the cattle, as ACCS essentially enabled the purchase in the
Argument: how do show PMSI if you didn’t use the money to buy the cattle, because you bought the cattle
before you got the loan.
Super-priority of the inventory financier over the LL: Clarke case
Substance not form—PMSIs are severable, provided there is specific accounting, and the
requirements of subs. 33(1) are met
o BMO was simply providing a bridge loan – substance was loan from ACCS was a PMSI
Requirements of 33(1) and rationale for notice.
Courts looks at the case functionally rather than literally and slightly expanded version of
“enabling” the loan.
PMSI TEST HAS 3 COMPONENTS:
1. The lender must take security interest in the property. [ACCS took a security interest in the cattle].
2. The lender must give value for the purpose of enabling the debtor to acquire rights in the property.
a. “Value" is given where a lender makes a binding commitment to extend credit, even if the
loan advances occur at a later time. [The final letter of loan approval received by the
Pettyjohns could be considered a binding commitment].
b. Connection between the giving of value through a loan advance and the acquisition of rights
can be established as follows:
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i. the debtor buys the collateral (cattle) on credit and then uses the loan advances to
repay the creditor.
ii. the debtor obtains interim financing to purchase the cattle and uses the loan funds to
repay the interim financier.
3. The value must be used to acquire those rights. [Commercially unreasonable to divide up the
transactions and the Pettyjohn's used the value given as part of a larger commercially reasonable
transaction to acquire those rights].
NB: Courts want to keep enabling issue narrow, otherwise anyone could claim it.
Clarke Equipment of Canada Ltd. v. Bank of Montreal (1984) (Man. CA)
F: P is a manufacturer and vendor of equipment. Bank has a floating charge on assets of Maneco Inc. Clark
writes to BMO to have PMSI on certain items they provide to Maneco. Clark also has a general claim over all
Maneco’s assets, ranked after BMO.
BMO challenges whether Clark had a PMSI (if there was a PMSI then Clark would win, if no PMSI, then
regular s.30 order applies and BMO would have priority)
I: Can you have a PMSI interest in certain assets and a general interest in others? Can a PMSI be severed
from a general security agreement (GSA)?
R: Can have a PMSI and a general security agreement all wrapped up in one with the PMSI clause being
separated out via different accounting on each item. This separation demonstrates their interest in matching
up the advance of funds to specific items of collateral. If the security agreement is drafted broadly enough, a
party can make its PMSI claim and then after the LL has taken, they will have an opportunity as a subsequent
creditor for anything that is left.
Notice provision puts LL on notice, cars that LL had initially are being sold off is generating proceeds,
LL’s interest is thereby converted to proceeds, and Manufacturer is taking an interest in the new cars
in lot—therefore notice allows LL to look to the proceeds for their recovery.
Re Chrysler Credit Can. Ltd. v. Royal Bank of Canada (1986) (Sask. CA)
F: Chrysler is a PMSI party with the inventory of a car dealership using a cross-collateral clause which links a
class of collateral with a class of debt. The dealership goes bankrupt and the lead lender claims that the PMSI
only covers individual cars and not new cars that have been fully paid off by the debtor to Chrysler. Chrysler
claims that PMSI cross over to all collateral and all proceeds in the class until all debts under PMSI are retired.
As the lead lender had an after-acquired property clause, Chrysler came after the lead lender so their only
alternative was to argue a PMSI.
How broad can the linkage be between the money owed to you and the assets that are supplied;
generally cross-over clause is all debts secured by all-assets supplied by manufacturer i.e. until all the
debt is satisfied.
Generally rule is that once the asset is paid off, you can’t have PMSI in that asset.
Class I: There were 4 vehicles which had not been repaid (they were trade-ins from proceeds still owed). The
new stock went out the door but had not been paid off. This class contained money still owed by the debtor on
Class II: There were 31 vehicles for which the loans were paid off. In theory, Chrysler had no claim for these
because Chrysler had been paid for this category.
Class III: There were 9 vehicles, which cannot be linked to any vehicles that Chrysler provided. This class is
eliminated because Chrysler is unable to demonstrate that these vehicles are linked to any vehicles that they
provided. Therefore, Chrysler only has an ordinary interest. Chrysler will rank behind the lead lender who will
sell the category, pay off its loan and if there is any surplus, it will be handed over to Chrysler.
CHRYSLER: As Class I can be traced to vehicles that have not been repaid, there is no issue as to whether
Chrysler's PMSI gives them super-priority as Chrysler takes first priority. The proceeds of disposition are not
sufficient to pay off the money owed on the new vehicles. Even if they get their PMSI super-priority they are
still out of pocket. Chrysler must then reach into Class II to get money. However, those vehicles in Class II are
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all linked to vehicles from which Chrysler has been repaid. But Chrysler has a cross-collateral clause in their
security agreement, which says that until such time as all the money is paid of for all the vehicles provided,
Chrysler has a security interest for anything that can be traced through to what Chrysler has provided. Chrysler
argues that their interest continues as a PMSI interest until everything has been repaid, thereby enabling them
to reach into Class II.
I: How broad is the PMSI?
H: It is possible to have these cross-collateral clause which links a class of collateral with a class of debt: a
party can link up a class of PMSI credit to a class of PMSI collateral. This cross-collateral clause was allowed
because the security agreement provided for it (a consensual lien, 9: a security agreement is effective
according to its terms). So long as you contain the cross-over clause to the PMSI credit itself, there should be
no problem with the allowing the linkage (there is no further risk to the lead lender). Chrysler did not just have
a PMSI on each individual car but rather a PMSI over the entire class due to the cross-collateral clause.
Therefore, paying off the debt on one car does not discharge the PMSI on that car. The whole category must
be examined. The cross-collateral clause in this case was applied to rectify the deficit and to give Chrysler
priority over Royal Bank.
Johnson: If we read cross-collateral clauses too broadly, we are in danger of allowing the PMSI party to be in
effect another general lender with a super-priority.
Policy? Ziegel’s suggestion:
o Financier must be free from the necessity of filing for every agreement;
o One underlying master [security] agreement should be sufficient;
o Cross-collateral clauses must be permitted in the agreement providing for a financier to
cross-over security (trade-ins, present or future advances) which is financed by financier. The
agreement must provide that the financier shall have a security interest in the proceeds of
any sale to the extent of any outstanding advances.
o McLaren’s suggestion: s. 12—subordination, subs give priority to previous creditor—
o Overreaching—if we read cross collateral clausesno, because PMSI is restricted to the
collateral acquired through the enabling loan—amount claimed by manufacturer is not
claiming for an amount more than they lent, so not overreaching, trying to prioritise the loan
and the recovering for that loan not the particular asset, if not allowed, then LL would have a
windfall—manufacturer can only claim on cars that can be traced back to the loan, not those
that cannot be tracednot windfall for manufacturer because don’t get super-priority on
Class III cars.
o PMSI rules give the debtor the freedom to choose a new financier when the debtor wants to
add to its asset pool.
o the new financier is given super-priority in recognition that it is a party's money or goods
which have enabled the debtor's pool of assets to increase. When the PMSI runs out, the
party falls to the priority of the lead lender.
o prima facie PPSA allows for a primary inventory financier to take ahead of the lead lender
with respect to a class of collateral. If the parties wish further refinements, they can provide
for them in the subordination agreement.
s.9(1): Effectiveness of security agreement. Except as otherwise provided by this or any other Act,
a security agreement is effective according to its terms between parties to it and against third parties.
Note Competing Policy Considerations:
-US – priority of a/r financier on grounds that a/r is more important form of financing…..see slide
entitled “Note Competing Policy Considerations” March 4, 2003
PMSI Priority in Proceeds
o s.25(1): Perfecting as to proceeds. Where collateral gives rise to proceeds, the security
interest...(a) continues as to the collateral, unless the secured party expressly or impliedly authorized
the dealing with the collateral; and (b) extends to proceeds.
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o the security interest in the original collateral continues through the proceeds. In Chrysler
Credit the security interest in the new cars continued on through the trade-ins and would
continue on into the cash.
o a close connection with respect to tracing proceeds is sufficient (Pettyjohn).
o s.25(2): Idem. Where the security interest was perfected by registration when the proceeds arose, the
security interest in the proceeds remains continuously perfected so long as the registration remains
effective or, where the security interest is perfected with respect to the proceeds by any other method
permitted.., for so long as the conditions of such perfection are satisfied.
o if the security interest in the collateral was perfected by registration when the proceeds arose,
the security interest in the proceeds remains continuously registered so long as the
registration remains effective (s.30(5): the date for registration or perfection as to collateral is
also the date for registration or perfection as to proceeds). If the security interest was
perfected by any other means, the security interest remains perfected so long as the
conditions of perfection remain satisfied.
o the security interest takes the same priority as the original collateral. Thus, if you have a
PMSI superpriority in the original collateral, you have a PMSI superpriority in the proceeds.
o a problem arises because there are often competing interests between the inventory financier
and the accounts receivables financier. For example, the inventory financier who supplies
vehicles has a PMSI, and the lead lender (accounts receivables financier) has an interest in
accounts receivables. When the inventory is sold, it generates accounts receivables. The
problem is resolved in Ontario because of s.33(1) which states that the inventory financier's
PMSI superpriority trumps the lead lender accounts receivable's priority, as the PMSI
superpriority carries on into the accounts receivables.
s.25(3): Idem. A security interest in proceeds is a continuously perfected security interest if the
interest in the collateral was perfected when the proceeds arose.
o if you have a perfected security interest in collateral when proceeds arose, then that security
interest continues perfected.
o s.25(4): Idem. If a security interest was perfected otherwise than by registration, the security interest
in the proceeds becomes unperfected ten days after the debtor acquires an interest in the proceeds
unless the security interest in the proceeds is perfected under this Act.
o if a security interest was perfected by possession, then the security interest in the proceeds
becomes unperfected ten days after the debtor acquires an interest in the proceeds.
However, if the interest in proceeds in perfected under this Act then it will continue perfected.
Massey Ferguson Industries v. Melfort Credit Union (1986) (Sask.)
F: M is inventory financier and has taken a PMSI interest in return for putting cars on the lot. Dealer sells car
to consumer, and proceeds come in on payments; LL takes an interest in A/R from dealer. Clash between 2
types of financing, PMSI proceeds come in, in the form of payments
I: do you allow super-priority, now that form of payment has changed i.e. payments instead of simple
H: Saskatchewan's PPSA gives priority to the lead lender (accounts receivables financier) with a security
interest in the accounts receivables. If the lead lender has registered their security interest prior to the PMSI,
then the lead lender trumps the inventory accounts receivables PMSI super-priority in the proceeds.
Policy: here in ON we give priority to M because put out a lot of cars in ON, in Sask crucial to give LL
priority due to their agriculture focus—Johnson’s point of view not necessarily accurate.
In ON, accounts financiers must make sure they are adequately secured by existing accounts which
cannot be traced as proceeds of the sale of inventory.
Note: that the accounts receivable financier has not provided the inventory which is generating the a/r
and instead expect to gain from profit of company—generally accounts receivable financier is the LL.
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ss.33(3) – where you have two PMSI parties in the same collateral, seller has precedence
-how would you ever get two PMSI parties in the same collateral?
-ex. manufacturer will put cars on lot, but wants you to pay 30% up front
-retailer can’t pay 30% themselves, so they go to another financial institution
-financial institution puts up the other 30%
-therefore, both parties have PMSI in the cars on the lot – they are both competing upon
-who takes priority?
-vendor takes priority, then financial institution, then other creditors
-could be done by pro-rata instead, but that’s not how we do it
-review – what’s a PMSI in the first place?
-credit is provided to purchase the item that becomes the collateral
-generally happens where
-manufacture puts vehicle on car lot
-borrow money to buy vehicle to put on the lot
-PMSI ever only applies to those assets that were supplied by the PMSI lender, or those assets that
can be traced to them
-it is also possible for a PMSI lender to also have a general security interest in the borrower’s asset
-assets in which the parties that provides the credit for them recognizes that they are going to become
adjoined with another asset
-fixture – going to be adjoined to real property (ex. elevator)
-not defined in PPSA, look to common law
-prominent common law case – Stack
-not in readings
-test: as it become so much of an element of the real property, such that it cannot be
removed without significant harm?
-pre PPSA - once the asset became fixed to the real property, the PMSI
supplier/lender lost their interest
-s.34 the fixture financier can keep an interest even though its attached
-two instances where you can get an interest
-before financed goods get fixed
-there is a situation between the fixture financier and the
real property lender that is the same as a PMSI situation –
the fixture financier is taking claim in an asset that’s adding
value to the property that didn’t exist before
-you must register in the real property registry
-based on the provisions in the act, there is a
majory problem if the fixture financier (FF) doesn’t
-it creates a loop – (FF) is ahead of real
property lender 1, but after real property
lender 2, but real property 2 is behind 1
-same loop arguments as other
loop from before reading week
-after financed goods get fixed
-in this case, fixture financier is not adding any additional
value to the property
-previous real property lenders have claim ahead of fixture
financiers; any real property lenders after fixture financier
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has claim after fixture financier
-policy – real property lender has assessed risk and loaned
included value of fixtures before fixture financier registers,
but not after
-you must register in the real property registry
-real property lender has the right to buy out the fixture financier
-if fixture financier does remove their asset, they have to pay the damage to
real property 1 for digging it up
-therefore, most issues get resolved by real property lender paying
out the fixture financier
-accessions – going to be attached to other products for re-sale (ex. tires of car)
-priorities same as fixtures
-commingled goods – going to be mixed together with other inputs to produce a completely new
product (ex. creditor one - aluminium and creditor 2 - tomatoes going into canned tomatoes)
-s.37 – priority is pro rata amongst competing secured creditors
-rest of fixture stuff below is not really necessary – he’s skimming through this this year – I left it
in just in case there’s anything in what I wrote above that isn’t correct – fixtures case is not
necessary for exam this year
there is no definition of fixtures in the PPSA, thus must look to common law: "The extent to which the
item is attached permanently and can be removed without permanent damages from the real
property." Large items which get attached to the real property such that it becomes part of the real
property. For example, elevators in big buildings.
s.34 reverses the common law rule that chattels affixed to realty lose their separate identity. If there is
a PPSA interest in that item, then the security interest remains. Rules provide a system through which
persons acquiring interest in land can be forewarned of a PPSA interest in goods affixed to the land.
in fixtures, there will often be competition between the supplier of fixtures and the mortgagee/financier
of the real property.
the supplier will register his interest under the PPSA and mortgagee/financier will register under Real
in determining whether the supplier or the real property mortgagee gets priority, look to s.34.
if goods when installed do not become fixtures, then the relevant priority section will be either s.30 or
s.34(1)(a): Fixtures. A security interest in goods that attached, (a) before the goods became a fixture,
has priority as to the fixture over the claim of any person who has an interest in the real property...
o if the security interest of the supplier attaches before the goods become fixtures, the supplier
of goods will prevail over prior real property parties. In theory, the party who adds value will
get priority with respect to those fixtures.
o subsequent real property parties will also lose out to SP1 (supplier or creditor of fixtures).
SP1 has priority over prior interests and of subsequent interests provided that s.34(2)
conditions are met.
o example: a supplier of hydraulic hoists sells them to a dealership on credit and they are
installed. There is a real property mortgage in the dealership. The supplier perfects a security
interest in the goods before they get installed. Subsequent to the attachment and perfection
of the supplier's interest in the hydraulic hoist, the dealer grants a second real property
mortgage: the chronology is: RP1, SP1, RP2. However, under s.34(1)(a) the priorities
become: SP1, RP1, RP2.
o the PPSA party will have priority over both real property mortgages.
o SP1 has priority over RP2 only if SP1 registered his security interest under s.54 of the Real
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o policy: (i) the PPSA creditor is adding value by putting the equipment on the real property,
thereby increasing the value of the property and thus has priority (ii) the second real property
mortgagee received notice that there was a prior interest in the hydraulic hoist when he went
to check the registry system.
s.34(1)(b): Fixtures. A security interest in goods that attached, (b) after the goods became a fixture,
has priority as to the fixture over the claim of any person who subsequently acquired an interest in the
real property, but not over any person who had a registered interest in the real property at the time the
security interest in the goods attached and who has not consented in writing to the security interest or
disclaimed an interest in the fixture.
o if the security interest attaches after the goods have become a fixture, the real property
interest prevails over the supplier unless the real property owner has disclaimed the interest
o example: someone takes a charge in the hydraulic hoist after they have been incorporated in
the real property. The chronology is: RP1, SP1, RP2. Under s.34(2) the priorities remain:
RP1, SP1, RP2.
o SP1 could go ahead of RP1 if RP1 had consented to such an arrangement.
o if RP2 cannot find SP1 when looking in the Real Property Registry, then RP2 will rank ahead
o policy: forces the PPSA creditors into the Real Property Registry with respect to fixtures if
they wish to gain priority.
s.34(2): Exceptions. A security interest mentioned in subsection (1) is subordinate to the interest
of, (a) a subsequent purchaser for value of an interest in the real property; or (b) a creditor with a
prior encumbrance of a record on the real property to the extent that the creditor makes
subsequent advances, if the subsequent purchase or...advance under a prior encumbrance...is
made or contracted for without knowledge of the security interest and before notice of it is
registered in accordance with section 54.
o a security interest mentioned in (1) is subordinate to (a) a subsequent purchase of real
property and (b) a creditor with a prior encumbrance of record on the real property to the
extent that the creditor makes subsequent advances, if made without knowledge of the
security interest before the notice of it is registered.
o if you do not register in the Real Property Registry, you are subordinate to subsequent
interests in both before and after situations. It is safer to double-register under both the
PPSA and the Real Property Registry Act.
GMS Securities v. Rich Wood Kitchens
F: NT registered mortgage in land; RWK sold cabinets to owner of land under conditional sales k.
GMS took a 2 mortgage in land; owner defaulted all round.
H: RW had priority over NT but not over GMS, because RW didn’t double register. NT had to pay RW the
value of cabinets.
Trial: value not to come from sale of the land—GMS entitled to surplus from land and cabinets over and
above amount due to NT—created a circular priority (loop).
I.e. NT before GMS; GMS before RW; RW before NT…
Appeal: considered all possibilities to break the loop; courts should have left it with NT, GMS—on the
theory that RW by not registering failed to preserve their interest in an item that became real property.
s.34(3): Removal of collateral. If a secured party has an interest in the fixture that has priority
over the claim of a person having an interest in the real property, the secured party may...remove
the fixture from the real property if...the secured party reimburses any encumbrance or owner of
the real property who is not the debtor for the cost of repairing any physical injury but excluding
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diminution of value of the real property...
o if the secured party wishes to seize the fixtures, he must reimburse the real property
owner for any encumbrances and the costs of repair.
s.35(1): Accessions. ...A security interest in goods that attached (a) before the goods became an
accession has priority as to the accession over the claim of any person in respect of the whole;
and (b) after the goods became an accession has priority...over the claim of any person who
subsequently acquired an interest in the whole...
o smaller item on a larger item of personal property. For example, a truck with a PPSA
interest with another party having a PPSA interest in the tires. PPSA rules for accessions
mirror those for fixtures in theory except that often in movables personal property,
removal of the item destroys the underlying item.
Commingled Goods: s.37
s.37: Commingled goods. A perfected security interest in goods that subsequently become part
of a product or mass continues in the product or mass if the goods are so manufactured,
processed, assembled or commingled that their identity is lost...and if more than one security
interest attaches to the product or mass, the security interest ranks according to the ratio that the
cost of the goods...bears to the costs of the total product or mass.
two security interests in separate goods that are merged together to produce a third entity. In
determining who has interest, the two parties share ratably in the finished product such that the
security interest continues in the mass following the commingling.
Subordination Agreements: s.38
s.38: Subordination. A secured party may, in the security agreement...subordinate the secured
party's security interest to any other security interest and such subordination is effective according
to its terms.
-you’ll see this a lot in the purchase of a business – the new financiers of the business will
require subordination agreements of all the creditors in the old business
s.50: Subordination of security interest. Where a security interest is perfected by registration
and the interest of the secured party has been subordinated by the secured party to any other
security interest in the collateral, a financing change statement may be registered at any time
during the period that the registration of the subordinated interest is effective.
o a secured party may in the security agreement or otherwise subordinate the secured
party's interest to any other security interest, and such subordination is effective according
to its terms. The priority is created by the private agreement.
o subordination agreements are often sought by the purchaser's creditor (SP4) who will
want a subordination from the vendor's creditors (SP1, SP2, SP3) before they are willing
to put down the money for the purchase. If the business thinks it will be better off with the
creditor than with the vendor then it is in their best interest to give a subordination
agreement. For example: X Company: SP1, SP2, SP3 sells to Y Company: SP4 (major
o subordination clauses differ from subordination agreements in that it appears in the
security agreement between a secured creditor and debtor in order to benefit a third party
(PMSI party) whereby the debtor agrees to not rank any charge ahead of or equal to one
of the creditors other than to a PMSI. In essence, the creditor is subordinating himself to a
PMSI. This is agreed to because the PMSI party is providing more collateral to the
business and if the business goes bankrupt, secured creditor will get residue after PMSI
party is paid off (Chips v. Skyview Hotels).
o the strategy is that an unperfected PMSI party who did not perfect under s.33 states that
regardless of their non-perfection, the creditor has agreed to subordinate themselves to
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the PMSI party with the subordination clause.
Note: subordination “agreements” distinguished from subordination clauses.
Greg: Chiips Inc. v. Skyview Hotels Ltd. (1994) (Alta. CA)
-LL had subordination clause in their agreement
-manufacturer has unperfected PMSI interest
-LL argues that manufacturer, since unperfected, collects same as general creditors
-manufacturer argues that they have a PMSI interest because it has been contracted for between LL and
borrower, so it was unnecessary for manufacturer to perfect – contract doesn’t talk about perfected or
unperfected so the contract is binding according to its terms
-s.20 says without perfected PMSI, LL would collect ahead of M
-but s.9 says contract will be enforced according to its terms
-therefore, LL collects money under PPSA, but must pay proceeds to M under contract
Dave Cohen: Chiips Inc. v. Skyview Hotels Ltd. (1994) (Alta. CA)
F: Debenture holders have a subordination clause and there is a subsequent creditor who has supplied
equipment to the hotel but failed to carry out their s.33 commitments and are therefore an unperfected
SP1 (bank) supplying to a hotel. Debenture is validly registered.
SP2 (Chiips) supplying to the hotel. Made an enabling loan through a conditional sales agreement
SP1 places the hotel into receivership. Receiver acts as agent for secured creditor trying to get
the business on its feet.
SP2 registered. Valid registration because the hotel was not placed in bankruptcy.
SP2 does not have a PMSI superpriority because it does not fit the elements necessary in s.33(1)
SP2 will lose out in the proceeds of disposition to SP1. (SP2 could have easily taken advantage of
a PMSI for $25).
SP2 increased the amount of assets available to the lead lender (extra $250,000).
SP2 argues that subordination clause in debenture gives them priority with respect to that furniture
over SP1's interest.
R: For subordination agreements to be effective, the junior creditor who is seeking to subordinate, need
not have a perfected security interest. (1) In this case, the scope of the subordination clause covered
Chiips (PMSI party) as the subordination clause stated that "...a subsequent secured party shall rank in
priority to the charge hereby created..." (2) Clauses in security agreements which do not have express
wording will not be enforceable. The subsequent party can enforce such a provision and Chiips could take
ahead of the debenture holder.
Reasoning: Court applied Euroclean Canada Inc. v. Forest Glade Investments Inc. (1985) (Ont. CA):
where a junior creditor was a PMSI party but did not follow the steps to perfect and did not have the
benefits of a super-priority. The CA held that registration/perfection is not necessary under s.38 in order to
claim subordination and an unperfected junior party can take ahead of a senior perfected party.
Policy: Why do we have subordination clauses? Lead lenders do not mind PMSI parties provided it does
not harm their position. So long as you link specific credit with specific collateral, a lead lender does not
mind someone else providing more money to the debtor.
Johnson: Does not like the result in Chiips because they had an opportunity to create a PMSI interest and
did not by not perfecting. To resolve the potential loop (SP1, Trustee, SP2) maintain public priority rules
but get SP1 to pay off SP2 privately so as not to prejudice SP2. If a privity of contract argument is used to
prevent this (i.e. cannot confer a benefit on a third party), keep in mind that statute overrides common law!
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NB: In a floating charge, collateral comes into the pool and leaves free of the charge. As a lead lender,
you do not want someone putting fixed charges on the inventory as it would crystallize and they would
rank ahead. You also do not want to shut out a person putting goods into the pool. To resolve, put in a
PMSI exception into the negative covenant to protect the floating charge.
CIBC v.International Harvester Credit Corp. (1986) (Ont. CA)
F: There is a fixed charge (land, building, equipment) and a floating charge created (inventory, accounts
receivables). The subordination clause only applied to the floating charge and the junior party tried to
claim that the lead lender was subordinate to them even though the language of the subordination clause
was not contained in the fixed charge clause. The subordination charge contained in the senior party's
debenture only related to their floating charge.
H: The language of the subordination clause must contemplate the specific kind of charge that the junior
creditor has in the collateral (ie. fixed or floating). In this case, the junior party had a fixed charge but the
subordination clause only applied to PMSI parties who were taking an interest in the collateral covered by
the floating charge.
TransAmerica Commercial Finance Corp. v. Imperial TV and Stereo Centre Ltd . (1993) (Alta.
F: The subordinate clause stated "We (debenture holder) do not mind you granting a security interest to
your banker." TransAmerica tried to take advantage of this clause as they were not the debtor's banker.
H: The language of the subordination clause must contemplate the particular class of junior creditor
before it can be held to be effective. The court accepted the Euroclean decision of giving effect to the
subordination clauses where applicable. TransAmerica was not contemplated by the clause as they were
not the debtor's banker and as such the plaintiff did not fit the class of plaintiffs contemplated by the
Subordination agreements are between 2 creditors and subordination clauses are between
creditor and debtor and a 3 party is claiming a right under that clause i.e. a beneficiary under that
clause—privity issue resolved by the fact that the creditor has registered their interest, thus by
registering agreed they will benefit the 3 party under s. 9.
In Dealing With Subordination Clauses:
(1) The clause in which the subordination is granted must contemplate the kind of charge that is granted
to the junior creditor (ie. fixed or floating).
(2) The clause must also contemplate the type of plaintiff that will benefit from the clause.
s.4(1): Non-application of Act. This Act does not apply, (a) to a lien given by statute or rule of
s.20(1)(a)(i): Unperfected security interest. ...Until perfected, a security interest (a) in collateral
is subordinate to the interest of (i) a person who has a perfected security interest in the same
collateral or who has a lien given under any other Act or by a rule of law or who has priority under
any other Act...
s. 30(7) & (8): security interest in accounts or inventory (except PMSI) does subordinate to certain
provincial deemed trusts – ex. employee rights to unpaid UI, CPP premiums;
s.31: Liens for materials and services. Where a person in the ordinary course of business
furnishes materials or services with respect to goods that are the subject to a security interest (ex.
mechanic’s lien, construction lien for services rendered and parts attached to the overlying asset
upon which the lien is placed – policy – mechanic is adding value to the asset that is recouped if
asset is sold in bankruptcy), any lien that the person has in respect of the materials or services
has priority over a perfected security interest (i.e. PPSA interests) unless the lien is given by an
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Act that provides that the lien does not have such priority.
-Repair and Storage Liens Act (RSLA)
-private lien (contrast to government lien)
-act modified some rules about mechanic’s etc. rights
-purpose was to extent mechanic’s liens to non-possessory – once you have
authorization from the owner to do the work, you are able to put the lien on if you
didn’t get paid – only need evidence of authority, not granting of security interest
(work estimate works for this)
-liens must be registered and are stored on the same database as PPSA claims
-pre RSLA, a mechanic (were using mechanic, but could be carpenter,
warehouse person, etc.) only had a claim while in possession of the asset – once
they give the car back, you can’t have an interest in the property
-RSLA changed that so it was possible to maintain a lien after the asset has been
released to the owner
-for non-possessory liens to get RSLA interest, you have to register (under PPSA
regime, checking RSLA box) prior to releasing the asset
-for non-payment, you give proper notice and then can sell item (if in your
possession) or confiscate & sell ((if not)
-amount of lien – s.3(1) is amount person agreed to pay, if no amount stated,
then FMV of the work
2 types of liens: private liens (generally s. 31) & government liens.
1. PRIVATE LIENS: Possessory, Non-Possessory Liens
liens have priority over all security interests, including PMSIs because they have added value to
the goods (ie. they fixed them) and they are very vulnerable. As such, they fall outside of the
in the Repair and Storage Lien Act, typically s. 31situations, one can take a non-possessory lien in
goods (ie. the lien claimant need not take possession of the goods). The RSLA applies to a
repairer or storer of an article. Liens for repair and storage will have priority over an unperfected
security interest by virtue of s.20(1)(a)(i). Section 31 gives the repairer a priority over a perfected
security interest unless the lien is given by statute that provides that the lien does not have such
Replaces mechanic’s liens—extends mechanics lien to non-possessory as well as
Mechanic’s lien only ran as long as the mechanic had possession of the asset, and it ran
out once the asset returned, therefore could hold the car until payment made
Goal: informality in creation and remedies; RSLA includes towing trucks, impounded
Note: non-possessory requires signed acknowledgment of debt—but not a grant of a
security interest—see s. 7(5)
Note the limitations on priority of non-poss
The person who repaired the vehicle added value in repairing it because without that
value it would not run, thus it is implicit that value was added to collateral therefore get
super-priority based on the value added.
If don’t allow liens, and services not paid for, others would get a windfall of added value.
an RSLA claimant must use the PPSA registry system for RSLA interests (on Form 1 of the PPSA
there is an RSLA box to check off). To create the interest, any acknowledgement of the debtor
debt will be sufficient to constitute the lien—RSLA was meant to be created informally such that
the debtor authorized the work is all that is required.
possessory lien: has priority over the interests of all other persons in the article (ie. Mechanics
Lien, Warehouse Persons Lien).
non-possessory lien: has priority over the interests of all other persons but is subordinate to (i) the
holder of a possessory lien (ii) holder of a non-possessory registered lien where the lienholder
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gave up possession to a prior registered lienholder and (iii) a buyer from a person selling the
article in the ordinary course of business where the repair or storage services were rendered at
the request of the seller or its agent. Non-possessory lien is only enforceable if: (1) there is an
acknowledgement of indebtness (2) the lienholder registers a claim for the lien.
2. GOVERNMENTAL LIENS: Statutory Deemed Trusts
s.30(7): Deemed trusts. A security interest in an account or inventory and its proceeds is
subordinate to the interest of a person who is a beneficiary of a deemed trust arising under the
Employment Standards Act or under the Pension Benefits Act.
statutory deemed trusts arise mostly in favour of the government and occur when employer
deducts source deductions.
for example, where a debtor is required to make deductions from a payroll and to remit them to
the government, the Crown can create a "deemed trust" in respect of that amount that should
have been remitted but were not.
the money deducted from the employer's pay is owed to the Crown but is in the current employer's
account or is used to purchase inventory which the lead lender has an interest in. According to
s.136 of the Bankruptcy and Insolvency Act, the Crown ranks equivalent to unsecured creditors.
the Crown enacted a series of statutory deemed trusts stating that whatever is owed (ie. tax, UIC)
is a deemed trust and is held separate and apart from the bankrupt's estate. If the statute is not
clear as to whether there should be a deemed trust, then the Crown cannot take the monies. With
source deductions, under s.67 of the Bankruptcy and Insolvency Act the money will be deemed
separate even if it is not kept physically apart.
Policy Behind Lien Priority:
implicit value added to collateral
artisans are vulnerable and have no leverage for security interest
if don’t allow lien, services not paid for and others get windfall of added value.
Transfer of Collateral in the Ordinary Course of Business
s.28(1): Transactions in ordinary course of business, buyers of goods. A buyer of goods
from a seller who sells the goods in the ordinary course of business takes them free from any
security interest...given by the seller even though it is perfected and the buyer knows of it, unless
the buyer also knew that the sale constituted a breach of the security agreement.
when a consumer purchases property, they do not have to search the PPSA registry to see if
anyone has a security interest in the property. The party who purchases on the open market takes
the goods free of any security interest the vendor has granted to others if sold in the ordinary
course of business.
an open-market consists: (i) must be a buyer (ii) buying in the ordinary course of business (iii) did
not know of any breach of a security interest and (iv) the buyer can only know of the security
interest if it is inventory-open market concept says that buyer takes free of the security interest
granted by the seller—exception to nemo dat principle.
s.25(1): Perfection as to proceeds. Where collateral gives rise to proceeds, the security
interest...(a) continues as to the collateral unless the secured party expressly or impliedly
authorized the dealing with the collateral, and (b) extends to the proceeds
with inventory, there is an implied understanding that the secured creditors have authorized the
sale of those items free of the security interest. The negative inference under s.25(1)(a) is that the
security interest will cease to exist in the disposed collateral. But this does not affect the secured
party's rights in the proceeds derived therefrom.
with equipment, it is understood that there is no authorization to deal with the equipment. The
secured party can claim that since there was no authorization, the security interest remains with
the collateral and extends to the third party.
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for example, proceeds from the sale of a courtesy vehicle (usually not sold) cannot be seized
because of s.28(1): not in the ordinary course of business and s.25(1)(a): the vehicle is equipment
and as such it is unauthorized.
there will be no conflict between the secured creditor and the buyer if the secured party expressly
or impliedly authorized the dealing.
-goods are covered by a different security interest, but the principal applies nonetheless
-covered by s.88 of the Bank Act 1968 – s. 427 today
-this is not a PPSA interest – it’s a federal security interest available only to the chartered banks
-uncollected debts owed to the customer, trustee in bankruptcy claims they are theirs,
bank claims they are proceeds, so are automatically covered by their security interest
-bank had required the debtor to hold the proceeds in trust for the bank, thus anything
that the retailer gets in the form of proceeds is not the retailer’s (they are the trustee
holding the funds for the beneficial owner, which is the bank – retailer has legal title,
bank has beneficial ownership) – thus there is an express trust relationship
-judge cites decision in Union Bank of Halifax: “Why would any lender who lends
for the purpose of enabling another to acquire and manufacture goods, permit the
sale of gods on which he holds security except on terms that the borrower must
bring in the proceeds of the sale of those goods?’
-bottom line – receivables are not the retailer’s, they belong to the bank
-express trusts is where trustee holds legal title and beneficiary holds equitable
interest, administer it for the benefit of the beneficiary
-set up by an expressed settlement in which one party says they convey their
property to X as trustee, for the benefit of Y
Flintoff is codified in PPSA s.25(1)(b) – its like everything above this about Flintoff was just for
fun – thanks Johnson
-underlying principle: borrower must bring in the proceeds to the lender
-prudent practice (what you do to avoid problems): include trust language in the security
agreement with respect to proceeds of sale of collateral
perfection of security interest in proceeds
-ss.25(2) you don’t have to re-perfect, just because your interest changes from a right to
the inventory to a right to the proceeds
-issue: how far along the chain are proceeds protected (ex. inventory sold and theres a
trade in, trade in is sold and there’s a trade in on that - is there a security interest in the
second trade in?)
-ss.1(1) says, you’re still perfected, as long as the proceeds are ‘identifiable and
-what is ‘identifiable and traceable’?
-s.1 (definitions) proceeds: ‘proceeds mean identifiable or
traceable personal property in any form derived dire tly or indirectly
from any dealing…’
-‘identifiable and traceable’ defined in Massey Ferguson v. BMO:
‘identifiable’ typically means the first replacement for the asset
-‘traceable’ means you can trace it back (thanks again Johnson);
in more detail, this means:
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-at common law, tracing proceeds stopped when
the proceeds got mixed as cash as money in an
-at equity, you can trace into a mixed account of
funds, but you had to trigger it by demonstrating
that there was a fiduciary obligation on the part of
the debtor to the lender (you would do that by
putting a trust clause in the loan agreement, thus
creating a fiduciary relation)
-rules for getting money out of the general
pot (presuming there’s not enough money to
go around) is LIFO or FIFO
-held in Agricultural Credit case: PPSA is supposed
to do away with the complexities of the common law
– lets simplify matters – original collateral was
cattle, then there was a whole bunch of
transactions, cattle were sold & replaced; cattle now
in the fields has close enough proximity to be
-where you’re disputing cash in a current account,
it’s the original common law and equity rules
-where you’re disputing about assets, even if cash
went through current accounts to produce a new set
of assets, different from the original assets, its
Agricultural Credit case
motor vehicles or consumer goods
-ss.5 “where a motor vehicle, as defined in the regulation….” – it’s a policy that
encourages lenders to register vehicle identification number for loans – as a new
purchaser, you’ll be liable for liens if the VIN has been registered
-usually there will be an implied agreement between borrower and lender that owner can
sell car (and pay back loan), this is for private sales
s.25(4): “if a security interest in collateral was perfected otherwise than by registration, the
security interest in the proceeds becomes unperfected ten days after the debtor acquires an
interest in the proceeds unless the security interest in the proceeds is perfected under this Act”
-this is an exception to the general rule that there is an automatic perfection of the
Camco Inc. v. Olsen Realty (1986) (Sask. CA)
F: An express prohibition in the security agreement against the sale of inventory (collateral) without
authorization of the creditor was inserted. Inventory consisted of a series of condominiums. Debtor was a
developer and the creditor was an inventory supplier of appliances. Condominiums were sold with the
appliances. The inventory supplier chased the third parties to get the appliances and typically there would
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be an implied authorization for the third parties to deal with the goods. But due to an express prohibition,
the condominium purchasers could not rely on s.25. The only other defence would be a s.28 defence that
they were (i) purchasers (ii) in the ordinary course of business (iii) unaware of any security agreement.
I: Whether or not buyers of household appliances who bought them with their condominium units obtained
H: The buyers of appliances could take free of a security interest—transaction was a sale notwithstanding
that property had not passed to buyer i.e. not an agreement to sell.
Reasoning: The mere fact that the seller was engaged in selling appliances is an incident to his primary
business of selling condominiums does not preclude the operation of s.30(1), general priority rules.
Arguably, it makes more sense for the secured party to take precautions and it is easier for them to deal
with the loss by spreading it out over all their debtors. It would be a far greater loss for an individual buyer
to lose an asset.
R: Consumer's defence when faced with a seizure of goods is s.28(1) that the consumer either (i) did not
know that the sale was prohibited in the security agreement or (ii) that the transaction took place within
ordinary course of business.
Did Not Know Sale Was Prohibited
Buyers knowledge of security interest is irrelevant unless buyer knows that sale is a breach of the
Ordinary Course of Business
s.28(1) is a question of fact: is this class of seller in the business of selling goods of that kind and
did the transaction take place in the ordinary course of that business.
in Ontario, the rule is "a sale in the ordinary course of business" according to the normal terms for
the class of item sold and for the particular type of business involved. If the transaction meets this,
then it will qualify as sale.
the general commercial practise should be used as a criteria to determine the ordinary course of
business—only when it is in breach of the agreement can one rely on 28.1.
if a large quantity is sold then court is less likely to consider it to be in the ordinary course; if the
price is too low then the court may find it is not a transaction in ordinary course; if the buyer is not
an ordinary consumer but a financial institution then he may not be regarded as ordinary buyer
(not conclusive as dealer may receive benefit of the provision).
Policy: The policy of s.28 is to protect the buying public and to uphold the normal flow of commerce,
where as s. 25 protects the creditor.
NB: In Saskatchewan the rule is "a sale in the ordinary course of business" of that particular seller (more
subjective)—in ON—seller’s business as a class of seller; whereas Sask: business of this particular seller.
Spittlehouse v. Northshore Marine Inc. (Receiver of) (1994) (Ont. CA)
F: A conditional sale of a boat for $550,000 where P had paid 90% of the price. The boat was to be
delivered once the payment was made in full. Upon the company's (i.e. seller’s) bankruptcy, the creditors
took the boat having a perfected security interest in all of the company's assets, and say that P has an
agreement to sell, and since title has not passes yet therefore conditional sale and P not a buyer yet, and
as such does not fit under s. 28.1. P claims that he is a buyer in the ordinary course of business, and can
take it without any securities interest.
I: Does a pre-paying customer in a conditional sale agreement without clear title to the goods, take priority
over a secured creditor by virtue of s.28(1): a buyer of goods...who sells the goods in the ordinary course
of business takes them free from any security interest..?
H: By holding that this sale was a conditional sale, s.28 allows the pre-paid purchasers to take the boat so
long as they pay the remainder. As such, this constitutes sale in the ordinary course of business and the
boat purchaser takes priority over the secured party despite the fact that title did not pass until payments
were made in full. The inventory financier can still look to proceeds.
Reasoning: In a conditional sale, P only needs partial title to be protected by s.28(1) of the PPSA.
However, under the SGA, a sale does not occur until title is transferred and if goods are pre-paid but left
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behind then they third parties will claim them. However, instead of looking to the SGA, the court finds a
more equitable remedy using s.28(1) of the PPSA.
J. Grange concludes that it was a sale, not an agreement to sell
It is in the scope of the PPSA because even if conditional sale, it was a type of sale, and under s.
2 do not care about title.
If there is a commitment to buy then it’s a sale.
NB: As V still had title and possession of the boat, there is a huge potential to deceive subsequent
creditors who see the item in your possession but no registered security interest. These secured creditors
think they have a claim although these goods have been sold.
Passage of title in transfer very important because it is determinant of the risk allocation, therefore
rules as to the when property passes.
Johnson: Agrees with the above decision. But judge could have arrived at the same result based on the
fact that a prior creditor beats out a subsequent creditor.
Is this unfair to inventory financier? No: should look to proceeds, this was allowed, then it would
be a windfall for the financier because they’ve already received the down payment—and should
have been monitoring the debtor more closely which is not the problem of the purchaser.
S. 11.2.c: when conditional sellers brought under the Act, brought in system that is more flexible
than tracking who has title, but under this section debtor has rights in the collateral. (check
Transfer of Collateral Out of the Ordinary Course of Business
s.25(1): Perfection as to proceeds. Where collateral gives rise to proceeds, the security
interest...(a) continues as to the collateral unless the secured party expressly or impliedly
authorized the dealing with the collateral, and (b) extends to the proceeds. ["authorized']
s.48(1): Transfer of collateral out of the ordinary course. Where a security interest is
perfected by registration and the debtor, with the prior consent of the secured party, transfers the
debtor's interest...the security interest in the collateral transferred becomes unperfected fifteen
days after the transfer is made unless the secured party registers a financing change statement
within such fifteen days.
s.48(2): Idem. Where a security interest is perfected by registration and the debtor, without the
prior consent of the secured party, transfers the debtor's interest...the security interest in the
collateral transferred becomes unperfected thirty days after the later of (a) the transfer, if the
secured party had knowledge of the transfer and if the secured party had, at the time of the
transfer, the information required to register a financing change statement; and (b) the day the
secured party learns the information required to register a financing change statement, unless the
secured party registers a financing change statement or takes possession of the collateral within
such thirty days. ["unauthorized"]
s.48 applies were there is a sale out of the ordinary course of business (i.e. in the sale or
mergers of businesses). In cases where LL1 (perfects, registers on day 5) and LL2 (perfects,
registers on day 1) come together in a business merger LL2 will take priority because they
perfected/registered before LL1. Both of their interests will become unperfected unless a
financing change statement is registered.
Consent is obtained in advance and is a matter of s.i. agreeing to accepting a substitute debtor vs.
“knowledge”: a factual awareness on the part of the s.i. of the transfer.
See diagram 13.20
S.48 gives a time period for M to change name of debtor to the new debtor’s name—after which it
becomes an unperfected interest.
s.48 protects the creditors of the transferor's company from the creditors of the
as a lawyer, do not consent to a merger, but (i) ask the other side to buy out current
mortgages or (ii) make a stipulation that any transfer of business constitutes a default and
that way the new company cannot assume collateral.
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Note that re-registration is to protect against transferees creditors
Transfer of Chattel Paper
s.1(1): Definitions. In this Act, "chattel paper" means one or more than one writing that evidences
both a monetary obligation and a security interest in or a lease of specific goods.
for example, a dealer will receive chattel paper from a consumer who purchases the goods.
The dealer will give the chattel paper to a financial institution in return for money. The financial
institution is assigned the rights to the security interest. If consumer payments do not come in,
the financial institution will enforce the security interest.
to find out who has priority over the security interest (financial institution, lead lender or PMSI
party), look to s.28(3):
s.28(3): Idem, purchasers of chattel paper. A purchaser of chattel paper who takes possession
of it in the ordinary course of business has, to the extent that the purchaser gives new value,
priority over any security interest in it (a) that was perfected by registration if the purchaser did not
know at the time of taking possession that the chattel paper was subject to a security interest; or
(b) that has attached to proceeds of inventory under section 25, whatever the extent of the
s.28(3)(a): if the chattel paper is subject to a security interest, then the party who has the
security interest in the original collateral takes priority. Requires the competing purchaser to
be without knowledge that the chattel paper was subject to a security interest, in order to take
priority. [other interests]
o thus, a secured party who finances the receivables comes under clause (a) for priority
purposes (as collateral is in the form of accounts receivables). This person will lose
only to the purchaser who does not know at the time of taking possession of the
existence of the accounts receivables financier.
s.28(3)(b): the chattel paper purchaser has priority regardless of knowledge of a prior security
interest if the chattel paper is the proceeds of inventory. Indicates that a purchaser of chattel
paper which is subject to a proceeds claim has priority regardless of the effect of the
purchaser's knowledge. [interest claimed as proceeds]
o thus, a secured party who finances the inventory and whose interests shift to
proceeds under s.25 has a claim to priority under clause (b). This person will lose to a
purchaser of chattel paper, regardless of whether that purchaser knew of the
existence of the inventory financing arrangement.
o if the claim to proceeds is unperfected, any of categories in s.20(1) will also take
priority [judgement creditor, trustee in bankruptcy, lien holder]. If the claim to
proceeds is perfected, purchasers in s.28(3) will take priority.
o priority of PMSI with respect to proceeds of inventory in form of chattel paper is
governed by s.28(3)(b) not s.33(1).
EXAMPLE: dealer sells car which has a PMSI (from lead lender) to consumer. Consumer pays
with chattel paper. As the consumer takes possession free of security interest (s.28(1)), PMSI
party has a right to those proceeds. If the chattel paper is sold to a financial institution, PMSI
follows through to proceeds from chattel paper sale. The financial institution who purchased the
chattel paper which attached to inventory proceeds (s.25(1)(b)) has priority over PMSI party to the
extent that he gives value to the dealer (s.28(3)(b)). If the financial institution purchased chattel
paper from the dealer worth $10 for $8, then the financial institution will be responsible to pay the
difference of $2 to the PMSI as the purchaser has priority only to the extent that he gives value. If
the consumer goes bankrupt, the financial institution can repossess and sell cars as it has all the
rights to the goods. But if the security interest is invalid, the financial institution must then make a
claim against the consumer's trustee in bankruptcy.
LL (aap/future advance/s.427 interest)
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Both the financial institution and the lead lender are chasing proceeds of the sale—i.e. have
competing interests because security interests of LL and M stay with the chattel paper, but now the
dealership has sold this chattel paper to a financial institution. According to s.28(3)(b), the institution gets
priority over proceeds of the chattel paper as the security interest latched onto the lead lender's proceeds
that came back in from the sale.
Financial institution pays Present value of the money they will receive over time from the
consumer and pay that to the retailer—therefore now retailer paid, because don’t have to pay for
the cost of carrying the chattel paper, but now FI, LL and M competing for the same proceeds of
the chattel paper but only FI being paid by consumer on an ongoing basis—therefore need
something to release the interests of M & LL from the proceeds or FI will never buy the chattel
papers. 28.3; LL & M’s interests are taken off of the chattel paper and focus onto proceeds i.e.
proceeds of proceeds—28.3 protects FI.
s.28(4): Idem, purchasers of instruments. A purchaser of collateral that is an instrument or
negotiable document of title has priority over any security interest therein perfected by registration
or temporarily perfected under section 23 of 24 if the purchaser (a) gave value for the interest
purchased; (b) purchased the collateral without knowledge that it was subject to a security
interest; and (c) has taken possession of the collateral.
Right to Follow Proceeds
s.1(1): Definitions. In this Act, "proceeds" means identifiable or traceable personal property in
any form derived directly or indirectly from any dealing with collateral or the proceeds therefrom,
and includes any payment representing indemnity or compensation for loss of or damage to the
collateral or proceeds therefrom.
"identifiable" (collateral must be easily distinguished from proceeds) and "traceable" (converted
into a traceable form) are not defined and under s.72 of the PPSA, one must look to common law
(can only trace insofar as the items are not commingled) and equity (can trace into commingled
accounts but this requires a fiduciary relationship).
secured party has a right to follow proceeds where debtor disposed collateral, with or without
secured party's consent.
courts will read in an express trust into the arrangement between secured party and debtor with
respect to proceeds.
if there are two competing PPSA creditors and the inventory financier does not have a perfected
security interest and the accounts receiver does, then the accounts receiver will win. This is due to
the fact that if you have an unperfected interest, it remains unperfected regardless of whether the
goods were meant to be held on trust.
Flintoft v. Royal Bank of Canada (1964) (SCC)
NB: This is a pre-PPSA case and would not stand today.
F: There was an assignment of accounts receivables to the Bank and any money that came in as
proceeds was held in trust for the Bank. The assignment was not validly registered and the trustee in
bankruptcy claims that the Bank therefore has not right to the proceeds. The Bank argues that because
the accounts receivables arose from the sale of goods covered by the Bank's security, this gives them
priority notwithstanding failure to register.
I: Who is entitled to the proceeds from the accounts receivables?
H: The Bank is entitled as an express trust was created.
Reasoning: The incoming accounts receivables are directed straight into the Bank's trust fund and never
actually get to the debtor. An express trust was created which stated that the debtor agrees to hold the
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proceeds in a separate account on trust for the creditor. As such, these funds are identifiable and
traceable even when they were not validly registered.
R: In order for the court to deem the money to be held in trust, this provision must (i) be included in the
security agreement and (ii) the money must be held in a separate account (modification of Flintoft).
NB: The court almost reads in a fiduciary obligation to hold proceeds in trust for the lender.
Tracing the Proceeds
when the original collateral is sold, exchanged or collected, the secured party will have an interest
in the proceeds resulting from the transaction. The secured party's continuing interest in the
original collateral will depend on whether the transaction creating the proceeds was an authorized
or unauthorized disposition.
s.25(1)(a): Perfection as to proceeds. Where collateral gives rise to proceeds, the security
interest... (a) continues as to the collateral, unless the secured party expressly or impliedly
authorized the dealing with the collateral...
if transaction disposing of collateral is not authorized by the secured party, s.25(1)(a) continues
the security interest.
if transaction is authorized, expressly or impliedly, the negative inference is that the security
interest will cease to exist in the disposal of collateral. Whenever the collateral is inventory or a
floating charge, this authorization is implied.
s.48(1) indicates that a secured party consenting to a disposition under s.25(1)(a) could expressly
retain a security interest in the original collateral but requires an interest perfected by registration
and the appropriate financing change statement registered within a 15-day period.
consent (s.48, which debtor gets after security agreement has been executed, i.e. debtor asks
before selling) differs from authorization (s.25, stated in the security agreement, i.e. debtor does
not have to ask before selling).
s.25(1)(b): Perfection as to proceeds. Where collateral gives rise to proceeds, the security
interest... (b) extends to proceeds.
the consent of a secured party to a dealing with the original collateral under s.25(1)(a) does not
affect the rights of the secured creditor in the proceeds derived therefrom.
security interest in proceeds from the sale of inventory may include replacement of inventory
purchased with proceeds.
Tracing Proceeds: s.25(1)(b)
Massey-Ferguson Industries v. Bank of Montreal (1983) (Ont. HC)
F: Proceeds get mixed up with other monies in the dealer's account. The Bank that holds the current
account is also the lead lender and is skimming off monies to pay down their revolving line of credit (any
money in the excess of $X will be transferred daily out of your account and into another). The money
being skimmed off happens to be the proceeds provided from Massey. Massey argues that it has a
security interest in the money in the account, and the Bank argues that the money is not traceable and as
such the money is no longer proceeds and the security interest does not extend to the money in the
H: Massey was permitted to trace the proceeds and take it out.
R: Common law of tracing states that a party can only transfer insofar as the items are not commingled.
To trigger tracing at equity, you need a fiduciary duty at the outset. Therefore, most security agreements
will contain trust clauses which allow for equitable tracing in the event that the debtor does not hold it in
NB: These rules still apply to commingled bank accounts. The change occurs in Pettyjohn:
s. 427 takes priority over all other prima-facie, rogerson lumberno payments made to seller,
bank act is federal takes priority, in this case, bank act security interests are proprietary rather a
notice regime as in PPSA, and debtor doesn’t have any property in the goods yet, prior bank act
interest receive nothing, if debtor had made payments, creditor would have received equitable
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amount to the payments made.
IHCC case: response in Canada tended to be to double register to get benefit of Bank act and
PPSA depending on what gave greater equitycan choose pursue a 427 interest or go under the
PPSA, here Bank selected PPSA, however courts said that according to 9.1 can only go for
whatever is in the security agreementhere bank had registered its 427 security agreement
under the PPSA therefore only had that one agreement; courts said 427 interest gives it a
proprietary interest therefore priority over conditional seller but only to the extent of the interest
they had as per Rogerson Lumberend result: banks now do 2 security agreements each
registered respectively i.e. under PPSA and 427 for Bank Act, force banks under the PPSA.
Effect to return banks to pre-PMSI, but banks still take 427 interests.
Tracing Collateral: s.25(1)(a)
Agricultural Credit Corp. of Saskatchewan v. Pettyjohn and Pettyjohn (1991) (Sask. CA)
F: Someone took money from a creditor and purchased cattle with the money (so there is a PMSI). They
sold off the cattle, put the money in their account and then used the money to purchase more cattle. The
original cattle had offspring, which was raised and then it had more offspring. The farmers ended up with
cattle in the field.
I: Can the proceeds be traced to the cattle standing in the field? Can the PMSI holder seize the cattle
claiming that they are proceeds of the original collateral?
H: The test for determining whether one price of property is traceable into another is whether a close and
substantial connection exists between the original collateral and the replacement property. Such a
relationship exists is a series of transactions takes place in which one set of chattels replaces another of
the same kind or function in the affairs of the debtor. Therefore, as the PMSI party gave an enabling loan
for the purchase of cattle, any offspring which resulted are closely connected to the original cattle to stand
as a substitute.
NB: Prior to this case, the court would not find traceable proceeds, as there was no fiduciary relationship.
The original cattle was sold off so the chain of proceeds was cut off when the money was commingled.
The effect of this decision is to broaden what is considered to be traceable for items other than funds in a
commingled bank account.
Can only be read in the narrowest sense technically cannot be read at common law.
S. 427 Bank Act v. PPSA
Bank act is federal and therefore takes priority over PPSA
-what happens when PPSA claim battles with Bank Act claim?
-ex. LL has s.427 Bank Act security with retailer
-manufacturer has PMSI for 2 cars on car lot
-if LL had normal PPSA interests only, manufacturer would have first right to 3
-pre Rogerson case, LL would have priority on 3 cars
-flaw in Bank Act, is it still makes title relevant (unlike PPSA), so the courts have
limited the Bank Act using this flaw (see Rogerson)
TJ thinks that BA is an unfair advantage for banks—courts don’t like them either, courts try to
level out the playing field between bank and non-bank interests
End result of Rogerson and IHCC is that banks may as well register under PPSA—be no worse
off but may actually be better off.
Rogerson Lumber v. Four Seasons Chalet (1980)
F: There were two competing interests: (i) a bank who took a s.427 interest in the debtor's lumber and (ii)
a conditional seller who sold lumber to that debtor. Although it was a conditional sale, no money had been
paid to seller at the point of bankruptcy (under a conditional sale, conditional seller retains title and when
debtor pays off all installments title goes to debtor. As the debtor pays off amounts, he acquires equity in
the collateral to the extent of those installments). Debtor had an equitable ownership right subordinate to
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that of the creditors. But because the seller had received no installments, the debtor had no equity in the
R: Even though the Bank Act is paramount, you can only take an interest in the goods to the extent that
the debtor has equity in those goods at the time of bankruptcy. Under the conditional sale, no payments
were made and debtor did not have equity in lumber at the time of bankruptcy. Thus, as debtor acquires
equity, he gains a security interest under s.427.
NB: Under s.428, a Bank Act security interest will have priority over all subsequent creditors but will not
take priority over prior creditors. This case started to limit the power of s.427.
Bank of Nova Scotia v. International Harvester Credit Corp. (IHCC) (1990) (Ont. CA)
F: IHCC registers first but it is invalid (unperfected because they did not follow through on s.19(b)). Bank
registers next using a financing change statement which is invalid so they too are unperfected. Bank
registers again but the financing statement is wrong and they remain unperfected. Years later, the bank
registers again correctly and they have a perfected interest. In this case, it was a double registration -- not
two security interests. IHCC was never a perfected party as they failed to fill out the form properly. If
information is wrong the onus is on creditor to make sure it is correct.
Summary of facts: bank chose PPSA over BA, executed only one agreement but in 178 (i.e. s.
427) format, did not execute a “general security interest” pursuant to the PPSA, and now in
electing PPSA priorities, Bank has to claim that 178 document is the PPSA security agreement.
I: Can the bank double register? If so, do they have to elect which regime they are in or can they take the
benefit of both with respect to priorities and remedies?
Strategies: IHCC is unperfected so they must demonstrate that the bank chose s.427 and therefore
cannot have a perfected interest under the PPSA (as s.30 states that priority is by order of registration
where both have been perfected; if neither have perfected priority is order of attachment). IHCC will argue
that they had a conditional sale and at most the bank can take equity in the goods. Bank will argue that
since they registered under the Bank Act, they are paramount and can choose which regime to register
H: Bank only has an interest in the amount that conditional seller (IHCC) has received from debtor.
R: Banks can double register and pick and choose what regime to sue under and elect their priorities and
remedies. PPSA trumps the Bank Act insofar as there is a prior registration but they are limited to the
equity of the debtor, because s. 427 of BA is title-based regime. Thus, bank can double register but still
cannot get more than the equity of the debtor.
NB: Only look to equity of debtor in s.427 cases! This outcome will only hold true for conditional sales.
NB: Now banks take a general security interest under the PPSA and a s.427 interest. They take a s.427
interest out of habit as there is no great advantage because they can only take before subsequent
creditors, not prior (s.428). Chances are you will be safe if you double-register and double-execute.
PART V: DEFAULT - RIGHTS & REMEDIES
important as it is one of the key ways in which creditors ensure they are taken care of in a fair and
with competing creditors, the first creditor is tempted to cash out the collateral quickly and forget
about the others.
the first creditor in a way, acts for all of the other creditors and debtor when they sell off the
remedies are basically there for the secured party as the trustee acts for the unsecured creditors.
By and large, the remedies are non-judicial. Processes of disposition are designed to realize the
greatest value for the collateral while maintaining a balance amongst the interests of all parties
concerned, including the debtor.
s.1(1): Definitions. In this Act, "default" means the failure to pay or otherwise perform the
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obligation secured when due or the occurrence of any event whereupon under the terms of the
security agreement the security becomes enforceable.
s.58: Rights and remedies cumulative. The rights and remedies mentioned in this Part are
if a party takes one route, they are not prevented from taking another.
3 key concepts: part 5 of the ACT has 3 themesconsiderable flexibility in terms of the
agreement, seizing of the assets and the disposal of them; remedies section a private
monitoring system (how do you make sure fairness is met all around that courts don’t monitor
but parties monitor it); and, how is fairness defined through concept of commercial
S. 58: part 5 triggered when default occurs i.e. failure to meet one’s obligations as they become
due but also defined in the security agreements; therefore parties not confined to definition in Act,
a larger concept of default may be in the agreement for example, may have a covenant that
default occurs if grant another creditor same or higher security interest [banks do this]
o Another example, d/e or current or cash ratios must be met, and if that ratio is exceeded
then considered to be in default therefore debtor must file financial statements with the
bank to keep these ratios in check—here default occurs even if on time with payments.
o Here, concept is that the creditor feels they have been put into an insecure position—not
a subjective position but rather an objective view.
Under this section; rights and remedies are cumulative, and can exercise other rights and
remedies58 address the act
s.59(1): Right and remedies of secured party. Where the debtor is in default under a security
agreement, the secured party has the rights and remedies provided in the security agreement and
the rights and remedies provided in this Part and, when in possession of the collateral, the rights,
remedies and duties provided in section 17.
in the debtor is making the creditor feel insecure about the way he runs his business, the
creditor is permitted the right to appoint a receiver, appoint directors to your corporate board,
s.59(2): Enforcement by secured party. The secured party may enforce a security interest by
any method permitted by law and, if the collateral is or includes documents of title, the secured
party may proceed either as to the documents of title or as to the goods covered...and any method
of enforcement that is permitted with respect to the documents of title is also permitted...with
respect to the goods covered thereby.
a secured party may enforce a security interest under any method permitted by law.
s.59(5): Non-waiver of rights and duties. Despite subsection (1), the provisions of section 17,
and sections 63 to 66, to the extent that they give rights to the debtor and impose duties upon the
secured party, shall not be waived except as provided by this Act.
parties may not waive or contract out of sections 17 and 63 to 66 , which give rights to
the debtor and impose duties on the secured party. An clause which does so is
Right to receive a demand for payment, and right to give notice that if they don’t pay, you can
seize their assets.
At common law, how much time do you have to give before you can seize the assets? The longer
the relationship, the more time you give, is the collateral likely to disappear if given too much time,
therefore a reasonable amount of time to meet the demand.
When you give notice to seize, giving the debtor a chance to make alternate source of funding
before you seize.
s.59(6): Where agreement covers both real and personal property. Where a security
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agreement covers both real and personal property, the secured party may proceed under this Part
as to the personal property or may proceed as to both the real and personal property in
accordance with the secured party's rights, remedies and duties in respect of the real property...as
if the personal property were real property, in which case this Part does not apply.
if the security agreement covers both real and personal property, the secured party may
proceed under either Act.
s.60(1): Receiver, receiver and manager. Nothing in this Act prevents, (a) the parties to a
security agreement from agreeing that the secured party may appoint a receiver or receiver and
manager and... determining the rights and duties of the receiver or receiver and manager by
agreement; or (b) a court of competent jurisdiction from appointing a receiver or receiver and
a Receiver is the agent of the secured creditor (usually the lead lender) who hires him and
does not owe a fiduciary duty to the rest of the creditors. The Receiver has the right at law to
collect monies that are coming into the business.
a receiver and manager has the right to manage the business as well as collect the accounts
s.61(1): Collection rights of secured party. Where so agreed and in any event upon default
under a security agreement, a secured party is entitled, (a) to notify any person obligated on an
account or on chattel paper or any obliger or an instrument to make payment to the secured party
whether or not the assignor was...making collections on the collateral; and (b) to take control of
any proceeds to which the secured party is entitled under section 25.
the secured party is entitled to notify any person who makes payments to the secured party
that they now have an interest, and must give notice so other creditors can ensure the price is
s.62: Possession upon default. Upon default under a security agreement, (a) the secured party
has, unless otherwise agreed, the right to take possession of the collateral by any method
permitted by law; (b) if the collateral is equipment and the secured interest has been perfected by
registration, the secured party may...render such equipment unusable...and the secured party
shall...be deemed to have taken possession of such equipment; and (c) the secured party may
dispose of collateral on the debtor's premises in accordance with section 63.
s.62 stipulates the right to take possession and the notice requirements.
s.62(a): the secured party has the rights to take possession of collateral.
s.62(b): if the collateral is equipment and the security agreement was perfected by
registration, the secured party may render the equipment unusable and shall be deemed to
s.62(c): the secured party may dispose of the collateral in accordance with s.63.
Lister v. Dunlop (1982)
I: What is the time period that the creditor must wait, between giving notice of intention to seize and
actually seizing the collateral?
R: At common law, the debtor has a right to receive demand for payment as well as a right to a
reasonable amount of time to meet the demand. Reasonable time is a question of fact. The factors that
should be considered when determining length of time are: (i) amount of loan (ii) risk to the creditor of their
losing money or security (iii) character and reputation of debtor (iv) potential of the debtor to be able to
raise money in a relatively short period of time (if there is little hope of getting money, the creditor does not
have to wait long) (v) circumstances surrounding demand for payment (if creditor agrees with the debtor to
wait a few weeks, then creditor must wait) (vi) other relevant factors.
NB: These factors give the debtor a certain amount of time to raise money elsewhere, but the third party
may lose their collateral. The amount of time to wait is at least one day, but more likely between 5 and 10
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days depending on the size of the loan and how long the creditor-debtor relationship is. Anything less than
24 hours is prima facie unreasonable. Common law still applies in situations where creditor is not seizing
all or substantially all of the property of the debtor.
NB: Section 244(1) and s.244(2) of the Bankruptcy and Insolvency Act was amended to state that
where the secured creditor intends to seize all or substantially all of the inventory, accounts
receivables or other property, they are required to send a notice of intention to seize and must
wait 10 days to seize. This section overrides the common law only when the creditor is seizing all
or substantially all of the inventory.
Mister Broadloom Corp (from before)
factors to be considered laid out:
o amount of loan, risk to creditor of losing money or security, character and reputation of
the debtor, potential to raise money in short period of time, circumstances surrounding
demand for payment, and other relevant factors.
Kavcar Investments v. Aetna Financial Services
reasonable time depends on the circumstances—anything less than 24 hours is prima facie
Reasonable time only goes to raising money as against paying the money—the time given is not
about paying the money but about going to get a source of funding.
BIA s. 244: must give 10 days notice before seizing all or substantially all assets—because
essentially closing down the business therefore must give “reasonable notice”
o Debtor’s response to a demand is to prepare a proposal for restructuring
o 2 types of proposals: consumer and commercial.
o Proposal that debtor puts to creditors and if they accept it with their voting rules there is a
stay on all creditors—if court accepts proposal, it is subject to a 6-month review
o Proposals will have agreements with each class of creditors
o Purpose: to keep businesses running rather than shutting them down.
PPSA s. 60: creditor can do with seized assets – can make repairs to property for sale and sell
them into the loan—can sell by public/private sale.
Acceleration Clauses: s.16
s.16: Acceleration provisions. Where a security agreement provides that the secured party may
accelerate payment or performance if the secured party considers that the collateral is in
jeaopardy or that the secured party is insecure, the agreement shall be construed to mean that
the secured party may accelerate payment or performance only if the secured party in good faith
believes and has commercially reasonable grounds to believe that the prospect of payment or
performance is or is about to be impaired or that the collateral is or is about to be placed in
this can only be exercised in good faith and on commercially reasonable grounds. It is based on
the fact that the secured party was made to feel insecure by the debtor's actions.
there is a need to balance the insecurity of the creditor against the debtor to not be put into
bankruptcy on a whim. Therefore, there is notice of intention to seize: s.65(4).
s.17(1): Care of collateral. A secured party shall use reasonable care in the custody and
preservation of collateral in the secured party's possession and unless otherwise
agreed...reasonable care includes taking the necessary steps to preserve rights against prior
Disposition of Collateral and Surpluses, Compulsory Disposition and Redemptions of
this part sets up a regime in which the secured party taking possession and who wishes to
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dispose of the collateral has an obligation to make sure (i) they obtain a commercially reasonable
price for those assets and (ii) that they have notified all other interested parties that the disposal is
about to take place.
when one goes to take possession of the goods, party must give notice of intention to seize:
s.65(4). The notice issue protects the debtor when they are forced out of business by trigger-
s.63(1): Disposition of collateral. Upon default under a security agreement, the secured party
may dispose of any of the collateral...either before or after any commercially reasonable repair,
processing or preparation for disposition, and the proceeds of the disposition shall be applied
consecutively to, (a) the reasonable expenses of the secured party... and (b) the satisfaction of
the obligation secured by the security interest of the party making the disposition, and the surplus
if any, shall be dealt with in accordance with section 64.
secured party may dispose of collateral or do any commercially reasonable repairs in order to
"commercial reasonableness" ensures that the lead lender only takes whatever they are
owed, and the remainder funnels down to the other creditors.
subsequent creditors can challenge initial seizer as to whether procedure and price were
s.63(2): Methods of disposition. Collateral may be disposed of in whole or in part, and any such
disposition may be by public sale (auction), private sale, lease or otherwise and subject to
subsection (4), may be made at any time and place and on any terms so long as every aspect of
the disposition is commercially reasonable.
the creditor can sell property together or separately in a public or private sale so long as it is
commercially reasonable, for example, advertise the sale of property within the field that deals
with that type of collateral.
Problem with auctions because many times the best price is not realized therefore private sale is
much more efficient.
If there is residual left, that is given to the debtor.
To ensure that the selling parties are fair: private monitoring through informing all creditors that
property is being sold—all parties registered on PPSA system must be informed of the sale i.e.
must get notice of disposition2 theme from earlier
If first creditor responsible for sale and rest passed onto other creditors: to ensure that appropriate
price is met put in “commercial reasonableness standard” i.e. sale methods very transparent
therefore get 2-3 independent valuations and typically advertise these assets for sale in the
relevant industry newspapers/gazettes.
Foreclosure right: different from salehere the creditor accepts the assets in satisfaction of the
debt and keeps them for themselves; concern that other creditors don’t get to satisfy their
because no assets to sell—if secured party wants to keep the asset but they must notify the other
parties and the other creditors have the right to object, i.e. they can force a sale if they think that
the assets are worth more than the debt to the first creditor.
If the secured party wants to purchase the collateral: then they can only do so at a public sale not
a private sale with the debtorthis is different from foreclosure; or the creditor can get court
approval for the sale—s. 63.8
s.63(3): Secured party's rights to delay disposition of collateral. Subject to subsection 65(1),
the secured party may delay disposition of all or part of the collateral for such period of time as is
s.63(4): Notice required. Subject to subsection (6), the secured party shall not give less than
fifteen days notice in writing of the matters described in subsection (5) to, (a) the debtor who owes
payment or performance of the obligation secured; (b) every person who is known by the secured
party...to be an owner of the collateral or an obligor who may owe payment or performance of the
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obligation secured; (c) every person who has a security interest in the collateral and whose
interest, (i) was perfected by possession...(ii) is perfected by registration... (d) every person with
an interest in the collateral who has delivered a written notice to the secured party of the interest
in the collateral...
secured party shall not give less than 15 days notice in writing to dispose of the collateral to
the debtor, every person who is known by the secured party as owner of the collateral, and all
registrants under the PPSA who have a perfected security interest in the collateral.
if a secured party gives notice to seize to a debtor, the debtor should have the right (ie.
enough time) to look for financing elsewhere to pay off the loan against the creditor who wants
s.63(5): Idem. The notice mentioned in subsection (4) shall set out, (a) a brief description of the
collateral; (b) the amount required to satisfy the obligation secured by the security interest...
s.63(8): Secured party's right to purchase collateral. The secured party may buy the collateral
or any part...only at a public sale unless the Ontario Court (General Division), on application,
notice must describe collateral and the amount required to satisfy obligation. The secured
party's right to purchase collateral is only exercisable at a public sale, or through court
approval if it is a private sale.
s.63(9): Effect of disposition of collateral. Where collateral is disposed of in accordance with
this section, the disposition discharges the security interest of the secured party making the
disposition and, if the disposition is made to a buyer who buys in good faith for value, discharges
also any subordinate security interest and terminates the debtor's interest in the collateral.
this has the same effect as if a judicial sale had occurred. The purchaser takes title clear of
any security interest. Debtor's title gets transferred by state to the purchaser.
After collateral disposed, the security interest is also gone and cannot move it on to other
assetsalso discharges all other interests by other creditors into that asset.
Buyer takes free of all security interests.
s.64(1): Distribution of surplus. Where the secured party has dealt with the collateral...or has
disposed of it, the secured party shall account for and...pay over any surplus consecutively to, (a)
any person who has a security interest in the collateral that is subordinate to that of the secured
party and whose interest, (i) was perfected by possession, the continuance of which was
prevented by the secured party who took possession of the collateral, or (ii) was immediately
before the dealing or disposition, perfected by registration; (b) any person with an interest in the
surplus who has delivered a written notice to the secured party of the interest before the
distribution of the proceeds; and (c) the debtor or any other person who is known by the secured
party to be an owner of the collateral, but the priority of the claim of any person referred to in...(a),
(b) and (c) against the recipient of the surplus shall not be prejudiced...
where there are any proceeds, the party who disposed of it can take what they are owed, and
then has to pay off any surplus to the other creditors in the chain, then the debtor.
Distributed in order of whatever the act decided the order would be.
64.1.c if any other surplus left after all creditors give to debtor.
s.64(3): Deficiency. Unless otherwise agreed in the security agreement, or unless otherwise
provided under this or any other Act, the debtor is liable for any deficiency.
the secured party's right to deficiency remains—but creditor joins the ranks of the unsecured
creditors—thus the necessary steps to assess risks when issuing the loans.
s.65(1): Compulsory disposition of consumer goods. Where a security agreement secures an
indebtness and the collateral is consumer goods and the debtor has paid at least 60 per cent of
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the indebtness secured and has not signed...a statement renouncing or modifying the debtor's
rights...the secured party who has taken possession of the collateral shall...within ninety days after
taking possession, dispose of or contract to dispose of the collateral under section 63, and if the
secured party fails to do so, the debtor may process under section 67 or in an action for damages
or loss sustained.
Encourages rapid disposition of the assets
s.65(2): Acceptance of collateral. In any case other than that mentioned in subsection (1), a
secured party may, after default, propose to accept the collateral in satisfaction of the obligation
secured and shall serve a notice of the proposal on the person mentioned in...63(4)(a) to (d).
s.65(3): Objection. If any person entitled to notification under subsection (2), whose interest in
the collateral would be adversely affected by the secured party's proposal, delivers to the secured
party a written objection within thirty days after service of the notice, the secured party shall
dispose of the collateral in accordance with section 64.
s.65(4): Proof of interest. The secured party may require any person who has made an objection
to the proposal to furnish proof of that person's interest in the collateral and, unless the person
furnishes proof within ten days after demand by the secured party, the secured party may proceed
as if no objection had been made.
s.65(5): Application to judge. Upon application to the Ontario Court (General Division) by the
secured party, and after notice to every person who has made an objection to the proposal, the
court may order that an objection to the proposal of the secured party is ineffective because (a)
the person made an objection for a purpose other than the protection of the person's interest... (b)
the fair market value of the collateral is less than the total amount owing to the secured party and
the estimated expenses recoverable...
s.65(6): Foreclosure. If no effective objection is made, the secured party is, at the end of the
thirty-day period mentioned in subsection (3), deemed to have irrevocably elected to accept the
collateral in full satisfaction of the obligation secured, and thereafter is entitled to the collateral free
from all rights and interests therein...
s.65 deals with secured party's right to foreclosure: choosing not to sell the goods, but
accepting the goods as payment. Foreclosure constitutes full satisfaction of the debt secured.
If secured party forecloses, they are deemed to have extinguished the debt and cannot
recover for any loss sustained once they foreclosed (s.65(6)). However, the other creditors
then have no claim and can force the secured party to not foreclose and force a sale.
the right of foreclosure does not extend to consumer goods under certain conditions (ie.
s.65(1): consumer protection if debtor has paid at least 60% of the debt and the debtor has
s.66(1): Redemption of collateral. At any time before the secured party...has disposed of the
collateral or contracted for such disposition or before the secured party...elected to accept the
collateral, any person entitled to receive notice under subsection 65(4) may, unless the person
has otherwise agreed in writing after default, redeem the collateral by tendering fulfilment of all
obligations secured by the collateral together with a sum equal to the reasonable
expenses...incurred by the party, but if more than one person elects to redeem, the priority over
their rights to redeem shall be the same as the priority of their respective interests.—to have
status reinstated without having to buy out all of the assets (?)
s.66(2): Consumer goods, reinstatement. Where the collateral is consumer goods, at any time
before the secured party...has disposed of the collateral or contracted for such disposition or
before the secured party under subsection 65(6) shall be deemed to have...elected to accept the
collateral, the debtor may reinstate the security agreement by paying, (a) the sum actually in
arrears... and (b) a sum equal to the reasonable expenses referred to in clause 63(1)(a) incurred
by the secured party.
the debtor's right of redemption under s.66(1) extends to other parties listed under s.63(4): the
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debtor, every person known by secured party as owner of collateral, and all registrants under
the PPSA who have a perfected security interest in the collateral.
PART VI: MISCELLANEOUS
CAR DEALERSHIP OVERVIEW:
Car dealership comprised of new/used cars, orders, parts, service bay. The lead lender will put up all the
money and will have a general security agreement in the whole business (includes fixtures). The lead
lender takes a charge and will have an after-acquired property charge, a future advance charge (because
of the revolving line of credit), and an acceleration clause all in the general security agreement. The lead
lender will also take an interest in the accounts receivables. The lead lender files a financing statement
(satisfies s.19(a) and s.19(b)). A manufacturer will put new cars on the lot and will have a PMSI in new
vehicles (to avoid after-acquired property and future advances clauses) in which case s.33 governs. When
vehicles are sold, s.25 governs proceeds. If vehicles come in from another jurisdiction, s.5-8 governs the
conflict of laws and under s.7 that party should register. There may be other items which do not slot into
s.2 (they may be true leases or consignments), but the used vehicles are caught under s.25. As vehicles
come off the lot, chattel paper may be generated and the dealership will sell it to a financial institution, and
s.28(1) deals with consumers rights through the security interest and s.28(3) deals with the chattel paper.
If there is default (as defined by the Act or security agreement), first creditor can step in and seize
collateral by any method allowed by law. Lead lender may also take a s.427 interest.
In any fact scenario, ask these questions:
i. Who went bankrupt and what event triggered bankruptcy?
ii. Who are the creditors?
iii. What is the nature of collateral?
iv. Does any party have a super-priority?
SALE OF GOODS ACT
Sale of Goods Act (SGA) is modified by other Acts: (I) Consumer Protection Act: certain areas
(ss.18, 24, 33, 34, 19) override the SGA. The CPA governs advice to clients. (II) Business
Practices Act: governs unconscionable transactions and false representations.
the SGA deals with transactions regarding the sale of goods, and commercial and consumer
sales. –applies to a contract whereby the seller transfers or agrees to transfer the property in
goods to the buyer for a money consideration called the price (s.1 = definitions)
s. 2 defines scope of SGA--Important to bring contract within the scope of the Act because if the
contract is vague, the court will look to SGA to imply warranties or conditions. Sometimes courts
will look to the SGA notwithstanding express contracts. For example, s.15(2): The goods will be of
merchantable quality; s.15(1): The goods will be fit for the purpose of which they were purchased;
s.14: The goods will correspond to the description you ordered them by.
therefore under s.53, a party can contract out of the SGA and waive rights by express agreement.
s.53: Exclusion of implied laws and conditions. Where any right, duty or liability would arise
under a contract of sale by implication of law, it may be negated or varied by express agreement
or by the course of dealing between the parties, or by usage, if the usage is such as to bind both
parties to the contract—most commercial parties have the ability to contract out of the SGA—
therefore SGA not used very often; significant number of the parties draft themselves out of the
warranties and conditions.
CPA applies to consumers of goods of consumption or services where as SGA applies to sale of
o Executory contracts: a contract between a buyer and a seller for the purchase and sale
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of goods or services in respect of which delivery of the goods or performance of the
services or payment in full of the consideration is not made at the time of the contract;
o Direct Sales Contract: s. 23.1--contract between a buyer and a seller for goods or
services where the purchase price exceeds the prescribed amount or if the negotiation of
the contract is conducted off of the seller’s place of business—does this apply to the
internet? (aside question)
o Credit Transaction = where you have a lender/vendor credit charges interest rates for
the purchases (VISA bill)
o Also applies to leases: s. 32.1
o In general, under s. 33—CPA applies to all consumer transactions; s. 34.2 states that
the vendor cannot contract out of the implied conditions and warranties that are there
under the sale of goods by virtue of SGA, in particular applies to executory contracts,
direct sales and leases, and in general applies to all consumer contracts.
BPA Scope: s. 2.1 refers to “a false misleading or deceptive consumer representation” and its
purpose is to remove bad actors from the business cycle.
o Applies to consumer transactions and representations made to consumers.
o S. 2 refers to unconscionable transactions—to sue someone under this, go to Ministry of
Consumer Affairs who first tries to get the parties together for mediation (self-help); very
bureaucratic therefore very hard to sue under this Act, and thus almost never used.
o BPA is supposed to “cut through the legal red tape” and help consumers
Background: SGA in England in 1893; and ON in 1920—very few changes since then
o Note: it was intended as a codification of the law as it then existed
o Bank of England v. Vagliano Bros—Courts do not look behind the legislation—
assumption that the statute is a statement of existing law at the time of the drafting of the
o Note also, s. 53 of SGA: is the capacity to contract out of the SGA or part thereof.
o S. 57: application of the common law and law merchant: the rules of the common law,
including the law merchant, except in so far as they are inconsistent with the express
provisions of this Act, and in particular the rules relating to the law of principal and agent
and the effect of fraud, misrepresentation, duress or coercion, mistake or other
invalidating cause, continue to apply to contracts for the sale of goods.
Formation: Same rules as regular K’s; until circa 1994, s. 5 required that all Ks for sale of goods
where value of K exceeded $50 must be in writing (Statute of Frauds provision; repealed 1994)—
no longer relevant, except explains some of the “K for labour and materials” issues.
Conditions and Warranties: Significant component of SGA; risk allocation for most part
discussing conditions and warranties—especially s. 14 & 15 of SGA
Two paradigms: default rule analysis—allocate risk in a manner that the parties would have
bargained for, had they foreseen the event; and least-cost risk distribution—allocate loss to the
seller, on the grounds that the seller can spread the loss amongst other customers, which
purchaser cannot do.
o S. 13: deals with clear title
o S. 14: sale of goods by description--implied condition that you will get what you ordered
o S.15.1: fitness and purpose of goods—i.e. the goods are for the purposes ordered.
o S.15.2: not they are not fit for the purpose but that the goods are not of “merchantable
o Independent promises and dependent promises;
o independent promises are 2 promises independent of each other-- the term that the seller
is breaching is independent of the buyers promise to pay, then the buyer must pay (i.e.
carry out the promise) and recover for damages
o dependent promises depend on the occurrence of an event or something else
happening—but if the term being breached is dependent upon the buyers promise, then
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the breach allows the buyer to reject the contract because now the buyer has lost the
consideration for the seller’s promise—buyer can also still sue for damages but must
mitigate their losses.
Test: Boone v. Eyre (1777)—did parties promise to go to the part or to the whole of the consideration
that the injured party bargained for? I.e. did they get substantially what they bargained for?
Independent—damages only; vs. dependent—treat as repudiation—i.e. promises
If a condition is breached, then the innocent party ahs the right to reject the contract and sue
for damages regardless of the extent of damages even if it is minimal as a condition goes to
the root of the contract; warranty (independent promise) then the innocent must perform the
promise and then sue for damages because their promise was not dependent on the other
parties’ promise—but rather it is a collateral to the contract.
S. 12 is the governing section for conditions & warranties.
o S.13—implied warranty that the buyer will have and enjoy quiet possession of the goods
and that the goods will be free from any charge or encumbrance in favour of any third
party not declared or known to the buyer before or at the time when the contract was
s.12(1): When condition to be treated a warranty. Where a contract of sale is subject to a
condition to be fulfilled by the seller, the buyer may waive the condition or may elect to treat the
breach of the condition as a breach of warranty and not as a ground for treating the contract as
s.12(2): Stipulation which may be condition or warranty. Whether a stipulation in a contract of
sale is a condition the breach of which may give rise to a right to treat the contract as repudiated
or a warranty the breach of which may give rise to a claim for damages but not a right to reject the
goods and treat the contract as repudiated depends in each case on the construction of the
contract, and a stipulation may be a condition, though called a warranty in the contract.
s.12(3): Where breach of condition to be treated as a breach of warranty. Where a contract
of sale is not severable and the buyer has accepted the goods or part thereof, or where the
contract is for specific goods the property in which has passed to the buyer, the breach of any
condition to be fulfilled by the seller can only be treated as a breach of warranty and not as a
ground for rejecting the goods and treating the contract as repudiated, unless there is a term of
the contract, express or implied, to that effect.
s.12(4): Fulfilment excused by impossibility. Nothing in this section affects the case of a
condition or warranty, fulfilment of which is excused by reason of impossibility or otherwise.
Cehave N.V v. Bremmer Handelsgesellschaft m.b.H (1976 1 QB 44(CA))
F: Ship load of oranges were not in good condition when they arrived. The purchaser said that this was a
condition and repudiated the contract. After the repudiation, the party who was known to the purchaser
inspected the oranges and found they were damaged and the price was thus reduced. The purchaser's
related party purchased and sold the oranges to the original party for the same purpose which they were
intended to be used.
H: It is neither a breach of condition or a breach of warranty but an intermediate stipulation of which there
is no right to reject unless the breach goes to the root of the contract. Here the parties did not suffer any
loss, and therefore the breach did not go to the root of the contract and the party can only sue for
R: In binary world, consequences are irrelevant. Intermediate term allows courts to look at the
consequences. Must ask:
(1) Is the term a condition? If yes, then party may repudiate. If no, then ask:
(2) Do the consequences go to the root of the contract? If yes then party may repudiate. If no, then
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Reasoning: In Hong Kong Fir Shipping v. Kawasaki Kisen (1962) (QB) the House of Lords created a third
term called an innominate term in which the court had to examine the severity and consequences of the
breach and then categorize it as essential or non-essential to the contract and determine what remedy
NB: In the case of an anticipatory breach, when one party before the day he is obliged to perform declares
in advance that he will not perform or displays an intention to not perform, the other may treat his
declaration or conduct as a breach going to the root of the contract and to treat himself as discharged
from further contractual obligations.
Johnson: This case is significant because Denning shifts the test entirely.
Therefore 3 kinds of breach: intended it to be a condition, intended it to be a warranty or
intended to wait and see what kind of damages caused before determining whether it is a
condition or a warranty depending on the damage—does not apply to all situations.
Timely delivery as condition:
Bunge Corp v. Trudex Export S.A.
NB: This case limited Denning's interpretation because not everything can be an intermediate term.
F: Buyers agreed to buy soya bean meal at the rate of 5,000 tons in each May, June and July at one port
of the seller's option. The parties agreed that the clause in the contract should be read to give the buyer at
least 15 days notice of probable readiness of the vessel. The parties then agreed to extend the time in
June but the sellers rejected the notice because of lateness and subsequently claimed damages from the
buyers for breach of contract.
I: Was the time requirement a condition, a warranty or an innominate term?
H: Time was a condition of the contract and the sellers could repudiate the contract.
R: As each sale depended on the performance of a prior party, the timing of the vessels was essential to
each party's performance of their contractual obligations. A loose test which looks only to consequence is
commercially undesirable with respect to time clauses in mercantile contracts, and the courts should not
be reluctant in suitable cases to hold that a time obligation has the force of a condition.
Courts say that not every term is an innominate term—here it is a string sale where time is of the
essence i.e. it is a condition; when the parties formed the contract, this term was negotiated for
and thus now buyer can reject the contract.
The term that is breached is either a condition or a warranty—based on the formation of the
contract what would the parties to the contract have classified this term as i.e. condition or
warranty, if it’s a whole of the consideration negotiated for then it is a condition, but if it’s only a
part of the consideration negotiated for then it is a warranty—i.e. how important is the term for the
performance by the buyer
Correspondence with description--S.14: requires that the sale be a “sale by description” what is a
sale by description i.e. ordering a good that has not been made and thus cannot be seen.
Policy: Commercial law depends on the strict adherence to time requirements (ie. notice). Finding
innominate terms in every case is therefore commercially unreasonable
s.2(1): Sale and agreement to sell. A contract of sale of goods is a contract whereby the seller
transfers or agrees to transfer the property in the goods to the buyer for a money consideration,
called the price, and there may be a contract of sale between one part owner and another.
s.2(2): Absolute or conditional. A contract of sale may be absolute or conditional, based on
s.2(3): What constitutes a sale or agreement to sell. Where under a contract of sale the
property in goods is transferred from the seller to the buyer, the contract is called a sale, but,
where the transfer of the property in the goods is to take place at a future time or subject to some
condition...to be fulfilled, the contract is called an agreement to sell.
s.2(4): When agreement becomes a sale. An agreement to sell becomes a sale when the time
elapses or the conditions are fulfilled subject to which the property in the goods is to be
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o there are related contracts that are not sale of goods, but are "near sales" where the
plaintiff argues that the sale of goods was not a near sale to bring it under the implied
warranties of the SGA so that the goods can be rejected. Examples of near sales are
labour and materials, leases with an option, and consignments.
Labour and Materials
it approximates a sale as it is close to a contract for sale of goods but is really a separate type of
three tests: (i) substance or essential character (ii) value of goods vs. value of labour (iii)
passage of property.
1. SUBSTANCE OR ESSENTIAL CHARACTER: was the party contracting for goods or skill/labour of party
performing the work? Was the essential nature of the bargain work or goods?
Borek v. Hooper (1994) (Ont. Ct. Gen. Div.): the plaintiff bought a painting which after five
years started to yellow and chip. Plaintiff sues defendant, an artist for breach of an implied
warranty condition of merchantable quality under s.15 of the SGA. Court held that the contract
was not a contract to which the SGA applied but was a contract for labour and materials.
However, the defendant was held liable for damages for half the expected time of the painting the
damage was caused by materials and techniques of defendant.
Robinson v. Graves (1935) (KB): the oral commissioning of the plaintiff artist to paint a
portrait was not a contract for the sale of goods but was a contract for work and labour, despite
not being evidenced in writing. The defendant had to pay the plaintiff for his labour.
Clay v. Yates (1856) (Ct. Exch): in the case of art, where application of skill and labour is of
the highest description and the material is of no importance as compared with the labour, the
price may be recovered as work, labour and materials.
Lee v. Griffin: the defendant died before paying for his dentures and the court held that the SGA
applied as the party contracted for goods and not the work of the particular dentist.
2. VALUE OF GOODS VS. VALUE OF LABOUR: did contract depend on whether the purchaser was to pay
substantially for the materials or substantially for the skill/labour? For example, if value of labour far
outweighs material then it is a contract for labour/skill.
Keillian West Ltd. v. Sportspage Enterprises Ltd. (1982) (Alta.): the defendant argued
that the guarantee was for goods and this is a contract for services and thus, the defendant is
released from the guarantee. The court interpreted the clause in the sales agreement to be a
guarantee and not an indemnity of the sale of goods, and not on the making of a contract for the
provision of services. The delivery of completed chattels was more important than the skill applied
to produce them. [Johnson: there is no reason to suppose that skill is worth more than the chattel
itself, and a contract for finished programs are not really labour per se].
3. PASSAGE OF PROPERTY: did title transfer from seller to buyer? If so, then it is a sale of goods.
Gee v. White Spot Ltd. (1987) (BC SC): the plaintiff suffered botulism from defendant's
restaurant. Court held that a menu item offered for a fixed price is an offering of a finished product
and is primarily an offering for the sale of goods and not sale of services. In order to come within
the SGA, a contract need not be exclusively for the sale of goods as partial sales will qualify.
Section 15(1), the goods will be fit for the purpose for which they were ordered, applies. [Johnson:
it is easier to prove breach of contract than negligence. In the case of defective materials, might
need to prove negligence].
s.5 of the SGA repealed, which was the old Statute of Frauds requirement that all contracts for
the sale of goods valued at more than $50 had to be evidenced in writing. If the agreement was
not in writing, then it was prima facie unenforceable. The exception occurred if there was sufficient
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evidence to indicate acceptance of the contract, for example through such behaviour as making
payments. Usually if there was a verbal contract, then it is not governed by the SGA. However, the
defence of stating that contract does not fall within the SGA because it is not in writing is gone.
the new SGA (1979) favours property test over the essential character and relative value test.
in medical contexts, instead of going through a difficult negligence claim, individuals tried to
argue that the medical profession was governed by SGA in supplying medical products. But
courts have held that the medical profession is not governed by the SGA because there had been
no transfer of money.
o In Ter Neuzen v. Korn (1993) (BC CA): the plaintiff was infected with HIV-tainted blood
and sued the doctor on the basis that goods provided were not fit for their purpose and
were not of merchantable quality. The court found that it would be inappropriate for a
warranty of quality to be implied.
Policy: desire to relieve doctors of strict liability—therefore definitely not a sale of
goods; if sale of good is merely incidental to what is primarily a contract for
service then the statue will not imply a warranty.
No implied warranty: because their services are necessary in essence but there
can be negligence provision of the service—but no negligence is a defence here.
Consumer Protection Act, s.19 and the Writing Requirement
s.19(1): Form of executory contract. Every executory contract, other than an executory contract
under an agreement for variable credit, shall be in writing and shall contain,
(a) the name and address of the seller and the buyer;
(b) a description of the goods or services sufficient to identify them with certainty;
(c) the itemized price of goods or services and a detailed statement of the terms of
(d) where credit is extended, a statement of any security for payment under the contract,
including the particulars...;
(e) where credit is extended, the statement required to be furnished by section 24;
(f) any warranty or guarantee applying to the goods or services and, where there is no
warranty or guarantee, a statement to this effect; and
(g) any other matter required by the regulations.
s.19(2): Validity. An executory contract is not binding on the buyer unless the contract is made in
accordance with this Part and the regulations and is signed by the parties, and a duplicate original
copy thereof is in the possession of each of the parties thereto.
J. Schofield Manuel Ltd. v. Rose (1975) (Ont. Co. Ct.): the plaintiff was an interior designer who
contracted with the defendant to perform services. The contract was in writing but the documents
were not signed in the usual way. Defendants argued that the contract was an executory contract
as defined in s.19 of the CPA and as the plaintiff did not comply with all the terms of the Act the
contract is invalid. Court holds that once the contract is in its executory stage, the seller must
comply with s.19 and if not then the contract is void. But once contract is partly executed, s.19
requirements are waived (as occured here when _ of the purchase price was paid). The court
finds that the contract is not an executory contract governed by s.19 as the contract had to have
existed at the time _ of the purchase price was paid. Thus the defendants' argument failed and
the contracts are therefore binding. If there was no contract at that time, title in the goods could
not have passed to the purchaser and he could have no right to possession.
s.57(1): Application of common law and merchant. The rule of common law, including the law
of merchant, except in so far as they are inconsistent with the express provisions of this
Act...continue to apply to contracts for the sale of goods.
if there is nothing to the contrary (rules relating to the law of principal and agent; effect of
fraud, misrepresentation, duress or coercion, mistake or other invalidating cause) then
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common law and equity apply to sale of goods contracts.
Three Important Sections in the Sale of Goods Act
1 s.14: sale by description
2 s.15(1): purpose
3 s.15(2): quality
Sale By Description
s.14: Sale by description. Where there is a contract for the sale of goods by description, there is
an implied condition that the goods will correspond with the description, and if the sale is by
sample as well as description, it is not sufficient that the bulk of the goods corresponds with the
sample if the goods do not correspond with the description.
o an implied condition will be read into the contract that the goods that are delivered will
correspond with the description by which they were ordered. Note that s.14 now applies to
private and commercial sales but that s.15 only applies to sales in the course of business.
o if the goods arrive and they have a defect, must ask whether the defect goes to the
description. If it does, then there is a breach with respect to the correspondence of
description and the party can repudiate the contract.
o at one time, correspondence with description only applied to "unascertained goods" which
did not yet exist or that were part of a bulk that had not yet been separated out for that
individual purchaser. By definition, there was no other way of buying these goods other
than by description.
o description goes to the essential nature of the goods (ie. number, quality, kind, state,
quantity, condition shipped in and other attributes) and not their attributes. Where goods
are unascertainable, these things will be considered in their description. Where the goods
are specific, this criteria will not be looked at as much. However, most distinctions
between a sale of specific and non-specific goods have been abandoned.
o in Andrews Brothers Ltd. v. Singer & Co. Ltd. (1934) (Eng. CA): the sales clause
stipulated that "...all conditions, warranties and liabilities implied by statute, common law
or otherwise are excluded." Where goods are expressly described in the contract and do
not comply with that description, it is inaccurate to say that there is an implied term when
the term is expressed in the contract. The court held that the implied condition was
waived under s.53 such that it became an express warranty.
Varley v. Whipp (1900) (Div. Ct.)
NB: Before this case, correspondence with description only applied to unascertained goods.
Facts: P (harvester) sold a second-hand binding machine to D (purchaser). At the time of the sale, D had
not seen the goods which were described as being a year old and had only been used to cut 50-60 acres.
When the machine was shipped by rail, it was obvious that the machine was not a year old and had done
more work than 50-60 acres.
Issue: Is the defendant entitled to repudiate the contract?
Problem: Property had passed (s.12(3)) and the party had asked for a second hand binding-machine
which is what they got. Rest of description was a warranty and party can only sue for damages if it didn't
operate the way it said it would.
Ratio: When there is no identification other than by description, then the passage of property is delayed.
At common law, the earliest date that these goods would have passed was when they were put on the rail.
However, the court read in that where there is no other way of seeing the goods other than through
description, the passage of property is delayed until the purchaser has accepted the goods (ie. when he
saw the goods).
Holding: The court held that the misrepresentations was a condition as the binding machine did not
correspond to the description. Because it did not fulfil the implied condition, property could not pass as the
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buyer did not accept it.
NB: Court extended notion of sales of description from unascertained goods to specific goods that are
bought unseen—2 propositions this case stands for cases where goods are ordered by descriptions,
acceptance does not occur until the buyer has had a chance to inspect the good.
In this case, court holds that it is a breach of a condition (horse analogy); and that no acceptance
until buyer sees and inspects the goods
Horse analogy—don’t they fit into the “four year old horse in sound condition” situation?
o No-“four year old horse” and it is not a four year old horse—then breach of condition.
Note the extension of concept of description from unascertained goods—description an integral
part of nature of the goods, because that is the only way in which they could be ordered—to goods
seen and inspected by the buyer.
NB: Not governed by s.12(3) as the property never passed, and therefore a right to repudiate still exists.
Beale v. Taylor (1967) (Eng. CA)
Facts: A car was bought by the plaintiff and it was later found out that the car was really made up of two
cars. The buyer relied on the fact that there has been a description of this vehicle as a Triumph Herald
1200, and that the vehicle which was delivered did not correspond to that description—car advertised in
paper—2 cars badly welded together.
Issue: Can the plaintiff repudiate the contract and get his money back?
Holding: This is a private sale and thus, the buyer cannot rely on s.15(1) or s.15(2). However, the buyer
was relying on the fact that the car was a Triumph Herald 1200. Therefore, a sale of goods by description
may apply where the buyer has seen the goods if the deviation of the goods from the description is not
Used Varley v. Whipp: where the good did not correspond with the description; specific goods
extend the correspondence by description to the moment that the buyer is able to ascertain the
Buyer got damages—generally in favour of consumer protection.
Johnson: The court expands s.14 to encompass specific goods as seen by the buyer, instead of applying
only to unascertainable goods. Court probably felt bad for the kid.
Harlington and Leinster Enterprises Ltd. v. Christopher Hull Fine Art Ltd. (1900) (Eng. CA)
F: Defendant seller, who is not an expert in paintings sold a fake painting to the plaintiff purchaser, who
purports to specialize in paintings of a particular period and style. The painting was sold for £6000 despite
only being worth £150. The seller argues that the buyer was not relying on their description as they had a
chance to inspect the painting and even purported to be experts. When the buyers accepted the painting,
the sellers were relieved.
I: Was there a breach of s.14?
H: The description must have a sufficient influence in the sale to become an essential term of the contract,
and the correlative of influence is reliance. Reliance by the buyer is the natural index of a sale by
description. In this particular situation, the seller is not liable for the loss as the buyer did not rely on the
seller's description of the painting, but rather made up his own mind about the painting based on his own
assessment. As such, the description of the painting as a Münter was not an essential term of the identity
of the goods.
R: Where the description is not relied upon, deviance from the description does not breach an implied
Dissent: This is not an issue of reliance because if it is a term of the contract, the buyer does not have to
prove that he entered into the contract in reliance on that statement. It should not matter whether the
purchaser was more expert than the seller because this does not exclude the implied condition. The
minority would like to see clear language, excluding the authorship of the painting from the description of it
in order for the seller to escape liability. Otherwise every art dealer would turn around and say that they did
not know about that period of time in order to escape liability.
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Johnson: In s.14 of our SGA, there is nothing that discusses reliance.
Arcos, Limited v. E.A. Ronaasen and Son (1933) (HL)
NB: This case outlines the "perfect tender doctrine."
F: Sellers were to supply to the buyers wooden goods "hereinafter specified" in the contract. The staves
were required to make cement barrels which was made known to the seller. When the shipping
documents were tendered, the buyers refused them on the grounds that there had not been a summer
shipment. The buyer examined the goods but rejected them on the grounds that they were not of contract
description. At trial, the court found that the staves when shipped were commercially usable under the
I: Whether the goods when shipped complied with the implied condition that they should correspond with
H: If the written contract specified conditions of weight, measurement and the like, those conditions must
be complied with. These become essential characteristics of the contract, and if not performed the buyer
has a right to reject. Therefore, the seller must tender goods that were specified. A man may require
goods of a particular purpose and make it known to the seller so as to secure the implied condition, but
there is no reason why he cannot abandon that purpose and apply the goods to any purpose which the
description makes them suitable for.
NB: Exact measurements do not need to be complied with in situations where commercial use of that
language in the trade is vague and non-specific, ie. "a baker's dozen."
Johnson: Permissable if seller gives you more goods than what was stipulated in the contract, as long as
it is not less.
Ashington Piggeries Ltd. v. Christopher Hill Ltd.; Christopher Hill Ltd. v. Norsildmel (1972)
F: Mink food was supplied by Ashington Piggeries to Christopher Hill in accordance with a formula
prepared by the managing director. Contract of sale was entered into and deliveries of the food
commenced immediately. Soon after, Christopher Hill's minks began to die. This was the first time that
herring meal was used for mink food in England. Later on, it was found that the meal was manufactured
from herring preserved with sodium nitrate which rendered the meal toxic to animals, especially mink. It
was also found that the toxic substance was dangerous to a whole range of animals. However, there was
no evidence that any other animals in England suffered from the herring meal.
I: Did the defendants commit a breach of the condition of the description?
H: Defect in the meal was a matter of quality or condition, rather than of description. Description goes to
whether the goods can be identified by the buyer. For example, if asked what the relevant ingredient was,
most buyers would say herring meal and thus, there was no failure to correspond with that description.
Plaintiff's action fails because they got what they ordered.
Johnson: The lawyers should have gone under s.15(1) fitness for purpose, or s.15(2) merchantable
quality, which would have made finding a breach easier.
Reardon Smith Line Ltd. v. Yngvar Hansen-Tangen (The "Diana Prosperity") (1976) (HL)
F: Case involved a charter and a sub-charter party, both relating to a new tanker to be built. By the time
the tanker was ready for delivery, the market had collapsed because of the oil crisis. It was therefore in the
interests of the parties to try to escape their contractual obligations by rejecting the ship. They sought to
do so on the grounds that the tanker did not correspond with the contractual description. More specifically,
that the ship was not built in the yard which was specified in the contract.
H: The appellants fail to bring the present case within the strictest rules as to "description." The particular
item (shipping yard) does not constitute a substantial ingredient of the thing sold (tanker) and as such,
cannot be treated as a condition. Therefore, the parties got what they bargained for, despite the tanker
being built in a different yard.
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MERCHANTABLE QUALITY: s.15(2)
s.15(2): Implied conditions as to quality or fitness. Subject to this Act and any statute in that
behalf, there is no implied warranty or condition as to the quality or fitness for any particular
purpose of goods supplied under a contract of sale, except... 2. Where goods are bought by
description from a seller who deals in goods of that description (whether the seller is the
manufacturer or not), there is an implied condition that the goods will be of merchantable quality,
but if the buyer has examined the goods, there is no implied conditions as regards defects that
such examination ought to have revealed.
(i) must be a sale by description: this is why we see courts expanding the notion of sale
by description from unascertained goods to specific goods that are bought unseen,
which expands the applicability of s.15(2).
(ii) must be a seller who deals in goods of that description: private parties are not
covered by this provision.
(iii) applied to retailers and manufacturers: s.15(2) makes no distinction among
commercial sellers for the purpose of determining the seller's liability for breach of the
implied condition of fitness. Some feel that it is harsh to hold a retailer liable for a
manufacturer's defects...but large department stores are economically as powerful as
manufacturers who are often quite small in size; the consumer will find it easier to
seek redress from the dealer rather than the manufacturer; and the dealer will be
encouraged to spur the manufacturer to greater responsiveness to consumer
(iv) restriction to merchant sellers, and not private sellers: traditional justification was that
the seller did this for profit and therefore should be able to accept the loss; seller who
deals in goods of this description hold themselves out as having special knowledge
and skill and retailers often have as much knowledge and manufacturers do; and that
because retailers may be liable they will take special care to ensure that they are
suppliers of quality goods.
(v) examination proviso: the buyer is not protected from defects which an examination
should have revealed.
Test For Merchantable Quality Where There is Only One Quality That Matches That Description
where there is only one quality that matches the description, the seller must deliver that quality
(even where the goods match that description, the goods must be of that particular quality).
Test For Merchantable Quality Where There is a Range of Qualities That Matches That Description
1. NORMAL PURPOSE TEST: Were the goods useable for any purpose for which the goods would normally
be used? Goods must have complied with the description in the contract under which they were sold. If
the goods are multipurpose, then provided some buyers would be willing to buy for one of those purposes,
then they are merchantable.
2. PRICE ABATEMENT TEST/COMMERCIAL ACCEPTABILITY TEST: Would a reasonable buyer, acquainted with
knowledge of the defects, purchase goods under that contract description without a substantial abatement
in price? If they would, the seller is discharged from responsibility and the buyer should've been more
specific in their description (ie. if you ordered jeans and the seller ships second-hand jeans, must ask if
there is a reasonable buyer who would buy them under that description and pay a similar price as the
buyer would have. If so, then those goods would be of merchantable quality as the condition would not
have been breached). If the reasonable buyer would not buy the goods under that description without a
substantial abatement, the seller is exploiting buyer and there is a breach of condition.
Johnson prefers this test because it is on a continuum: if seller ships goods worth only a quarter
then seller has breached contract; but if someone is willing to buy goods under that description
the seller is relieved of responsibility.
Hardwick Game Farm v. Suffolk Agricultural and Poultry Producers Assoc . (1969) (HL)
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F: Turkey farmer bought feed that killed his turkeys, and no one would buy the food. Shortly thereafter, the
nature of the toxin was discovered and it was found out that cattle were unaffected. Cattle feeders bought
the product and the price went back up. The turkey farmer claims that there was a breach of
merchantable quality and fitness for purpose. The defendants claim that these goods are still suitable for a
range of purposes under the price abatement test and thus there has not been a breach of condition.
R: The test is whether someone would buy these goods without a substantial abatement in price, knowing
of the defects. Although turkey farmers would not, cattle farmers would and as such, there was no breach
of merchantable quality.
Latent Defect: In ascertaining the nature of the defect, take into account all facts known about the goods
up until trial and then ask whether there is another reasonable buyer, knowing of the defects who would
buy the goods without an abatement. If a cure for the defect is found before trial, this should not be taken
into account. Knowledge of another reasonable purchaser relates only to the defect, and not to the
question of curability.
B.S. Brown & Son Ltd. v. Craiks Ltd. (1970) (HL)
F: A manufacturer ordered considerable quantities of rayon to a detailed specification. There was a
misunderstanding as to the purpose for which they wanted the cloth. The sellers thought it was for
industrial use, when it was really to be used for dresses. The manufacturers sue for damages on the
grounds of a breach of implied conditions under s.15(2).
I: does price abatement apply only to latent defects? Would 25% be considered a significant reduction in
R: There is no grounds for holding that the cloth delivered was not of merchantable quality. The 30%
reduction was not a substantial enough price abatement, and a reasonable buyer would have bought the
cloth under that description without the price reduction. It is not a necessary requirement of
merchantability that there should be no abatement. Thus, the seller is discharged from responsibility and
the buyer should've been more specific in their description. If the contract price is appropriate for the
better quality, the seller does not have to tender a lower quality just because the lower quality makes it
Price offered by buyer is an indication of the quality they expect and should be read as part of the
description of the goods
Noted that the difference between price offered and quality tendered must be substantial in order
to indicate that the wrong quality was tendered.
What is the Court's Message? To Strive For Commercial Certainty...
in order to protect the buyer, the buyer should:
1. describe goods in a way that will narrow the range (s.14).
2. put into the contract a price which suggests a decent quality for those type of goods thereby
signaling to seller the quality of goods being ordered (s.15(2)).
3. be specific with regards to the purpose (s.15(1)).
Merchantability and Motor Vehicles
looks at the dealer's warranty obligations in the sale of used vehicles and at more refined statutory
solutions than those offered in the SGA.
Bartlett v. Sidney Marcus Ltd. (1965) (Eng. CA)
F: Plaintiff bought a used car with a defective clutch. The contract stipulated that the clutch was defective,
but would be fixed at the plaintiff's expense. However, the clutch needed more bleeding which cost an
extra £45. The plaintiff alleged that there was an express term that the car was in perfect condition, except
for minor repairs to the clutch.
Seller did offer to repair the clutch at additional cost—buyer wanted to get it done himself, cost
more than estimated.
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H: A buyer should realize that when he buys a used car, defects may appear sooner or later and in the
absence of an express warranty, he has no redress. This car was drivable and seemed to be running
smoothly with the exception of a defective clutch -- which he knew about. Just because the clutch required
more work does not mean that at the time of sale, it was not fit for use as a car. There is no breach of an
implied condition as the car was reasonably fit for use as a car on the road. Sections 15(1) and 15(2) are
NB: Denning states "The article may have been of some use though not an entirely efficient use for the
purpose. It may not be in perfect condition but yet it is in a usable condition and is then merchantable. On
a sale of a secondhand car, it is merchantable if it is in a usable condition, even though not perfect. This is
similar to the position under s.15(1) as a used car is reasonably fit for the purpose if it is in a roadworthy
Johnson: Denning has inadvertently merged merchantable quality s.15(2) into fitness for purpose s.15(1).
Fit for use has nothing to do with merchantable quality. Johnson thinks the analysis should have stopped
when it was ascertained that the description of the car (used car of merchantable quality with a defective
clutch) was that which the plaintiff received! Section 15(2) was satisfied and there was no need to import
fit for purpose s.15(1) in order to satisfy the merchantable quality provision.
Crowther v. Shannon Motor Co. (1975) (Eng. CA)
F: Plaintiff bought a used jaguar which the dealers added that it would "be difficult to find another 1964
jaguar of this quality inside and out" and that "for a jaguar, it was hardly run." The plaintiff bought the car
but did not take the sales puffery seriously although he did rely upon the seller's skill and judgment. Three
weeks later the engine seized up and when it was taken to a garage, was found to be in bad condition.
The plaintiff sought damages and the trial judge awarded them for breach os s.15(1) fitness for purpose.
The dealers appeal.
H: Found a breach of s.15(1).
R: The relevant time is the time of sale. If the car does not go on for a reasonable amount of time but the
engine seizes up after only a short time, then the car was not reasonably fit for the purpose at the time it
was sold. In this case, the engine was liable to fail at any time. As such, at the time of sale it was not
reasonably fit for the purpose of being driven on the road, and s.15(1) was therefore breached.
Johnson: But car had exceeded 85% of its life when engine blew, yet somehow Denning found a breach
of condition. NB: These cases cannot be reconciled as (I) in Bartlett, Denning merges s.15(1) and s.15(2)
and loses sight of description by focusing on purpose to find a breach of s.15(2) and (II) in
Crowther discusses case in terms of purpose and erroneously imputes a latent defect (which goes to
merchantable quality) to find a breach of purpose in s.15(1).
Used-Vehicle Warranty and Disclosure Legislation
legislation takes two forms: (i) licensing requirement for motor vehicle dealers and salesmen to
sell vehicles and (ii) warranties as to safety of the used car in the form of safety standards
certificate—but this does not go to mechanical reliability.
s.162 of the Quebec Consumer Protection Act is more strict, which results in higher car prices
as the seller is deemed to assume the risk. In New Zealand, the dealer is also deemed to warrant
the vehicle's mechanical fitness for a stipulated time and number of miles unless he has disclosed
the defects and given a reasonably accurate estimate of repair costs.
how long do the goods have to remain of merchantable quality after they are sold?
Mash & Murrell Ltd. v. Joseph I. Emanuel Ltd.
F: Potatoes are shipped from Cyprus and when the goods were put on the ship, they were in good
condition. However, when the goods arrived in London they were rotten.
I: How long does the conditions that "goods must be of merchantable quality" last?
H: There is an obligation to the seller that the goods (potatoes) should last for a reasonable period of time.
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Goods must be in good condition for the duration of the voyage and a good time after the product is
Johnson: Court tries to develop a notion of when to impute quality into time of delivery and upholds the
decision in Beer v. Walker (1918) (KB): the condition that the goods will be merchantable means that they
must be in that condition when relevant to the contract and that they will continue so for a reasonable
time. That does not necessarily mean that goods shall be merchantable on delivery if they have been on a
long and unusual transit.
Durability: Cases have used a lack of durability as evidence of a latent defect at the time of delivery (fact
that potatoes rotted suggests that there was something wrong that they could not see, i.e. latent defect). It
is not an implied warranty that the goods will continue to be fit for purpose -- it is an evidentiary matter (i.e.
when loaded the potatoes seemed fine but when unloaded were rotten).
Schreiber Bros v. Currie Products (1980) (SCC):
F: here non-perishable goods i.e. roofing tiles
Buyers onus is discharged when it is demonstrated that nothing has been done to the goods
which would affect quality.
Burden then on seller to confirm that they were of MQ when they were sold.
Note: all of the above cases use lack of durability as evidence of problem at the time of delivery
Compliance With Public Law of Buyer's Jurisdiction
Sumner, Permain & Co. v. Webb & Co. (1922) (Eng. CA)
F: Defendants sold tonic f.o.b. in England to the plaintiffs. The defendants knew that it was bound for
Argentina where the plaintiffs carry on business. Unknown to plaintiffs, the tonic contained salicylic acid
which is prohibited in Argentina. Plaintiffs argue that the defendants breached an implied condition that the
goods should be of merchantable quality, because the plaintiffs were unable to sell it in the market which it
was intended for.
R: "Commercially saleable" does not mean "legally saleable." The fact that the goods were not saleable in
Argentina does not breach the implied condition of merchantable quality in s.15(2).
Reasoning: The condition had not been breached as the buyers were unable to show that they relied on
the seller's skill and judgment to supply tonic water that complied with Argentina's laws. It is up to the
buyer and not the seller to make himself aware of the laws of the jurisdiction. Merchantable quality means
that the goods comply with the description in the contract -- it does not mean that there shall be persons
ready to buy those goods.
Examination Under s.15(2)
Where goods are bought by description from a seller who deals in goods of that description
(whether the seller is the manufacturer or not), there is an implied condition that the goods will be
of MQ, but if buyer has examined the goods, there is no implied condition as regards defects that
such examination ought to have revealed.
Thornett & Fehr v. Beers & Son (1919) (KB)
F: Plaintiffs were sellers in vegetable glues and sued the defendants for £363, which was the balance of
price the defendants were required to pay. The defendants pleaded that the glue was not equal to the
sample and in the alternative, that the glue was not merchantable. Defendants counterclaimed for the
return of £3000 which they paid the sellers and for damages that the glue was valueless.
I: Was there an implied condition that the goods should be merchantable?
H: For the plaintiff sellers.
R: As the buyers had the opportunity of inspection, they cannot argue that the goods were not of
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Reasoning: (1) Where goods are bought by description... The buyers did not rely on the description
because they had seen the goods and relied on what they saw. (2) ...from a seller who deals in goods of
that description... The plaintiffs were sellers who dealt in glue. (3) ...if the buyer has examined the goods,
there is no implied condition as regards to defects that such examination ought to have revealed... Where
goods have been inspected by the buyer and there is no fraud on the part of the seller caveat emptor
applies. The defendants were satisfied with their inspection of the barrels and were willing to accept the
risk, the price being so low. As such, there is no implied condition that the glue would be of merchantable
IMPLIED CONDITION OF FITNESS: s.15(1)
s.15(1): Implied condition as to quality or fitness. Subject to this Act and any statute in that
behalf, there is no implied warranty or condition as to the quality or fitness for any particular
purpose of goods supplied under a contract of sale, except as follows: 1. Where the buyer,
expressly or by implication, makes known to the seller the particular purpose for which the goods
are required so as to show that the buyer relies on the seller's skill or judgment, and the goods are
of a description that it is in the course of a seller's business to supply (whether the seller is the
manufacturer or not), there is an implied condition that the goods will be reasonably fit for such
purpose, but in the case of a contract for the sale of a specified article under its patent or other
trade name there is no implied condition as to its fitness for any particular purpose.
three components in s.15(1):
o the goods must be used for a particular purpose: must be specified purpose which could
be quite broad in its range, ie. ground nuts to be compounded into animal food; the
broader the purpose, the broader the range will be that satisfy that purpose; but the
highly specific purpose is really an idiosyncrasy which can be used in the seller's defence,
i.e. if mink possessed an idiosyncrasy which made the food unsuitable for them but was
perfectly suitable for other animals, this would be the buyers responsibility unless they
made it known to the seller.
o the particular purpose must be communicated by the buyer to the seller.
o purpose must be communicated in such a way so as to rely on seller's skill or judgment:
partial reliance is sufficient.
in the case of a trade name or patent, there is no implied condition as to its fitness for any
Hardwick Game Farm v Suffolk Agricultural and Poultry Producers Association (1971) (HL)
F: P bought feed for turkeys from SAPPA. The compound included 10% Brazilian ground nuts which were
contaminated by a poison which killed the turkeys. P sued SAPPA who cross-claimed against their
suppliers of ground nuts, Grimsdale who in turn cross-claimed against their suppliers, Kendall. At the time
of purchase, there was no reason to suspect that any ground nut extractions might contain the poison
which killed the turkeys. After the contamination was discovered, some buyers were still willing to buy the
contaminated ground nuts for feeding cattle. It was for this reason that the goods were held to be of
I: Were these goods reasonably fit for the specified purpose?
(I) A particular purpose means a given purpose, known or communicated. The broader the purpose, the
broader the range will be to satisfy that purpose. The particular purpose in this case was "to resell in
smaller qualities to be compounded into food for cattle and poultry." [NB: A broad range of purposes
should not invoke s.15(1) as no particular purpose is being communicated. But a buyer could
communicate a range of purposes and still meet necessary elements of particular purpose in s.15(1).
Width of purpose doesn't matter as buyer relies on seller to provide healthy ingredients].
(II) There is no need for a buyer to formally make known that which is already known. The particular
purpose was therefore communicated to the seller.
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(III) If particular purpose is made known, that is sufficient to infer that the buyer relies on the seller' skill
and judgment unless there is something to displace this inference. Partial reliance will suffice but it must
be substantial and effective inducement into the K because this is a condition. The whole trend of authority
has inclined towards an assumption of reliance wherever the seller knows the particular purpose. Reliance
is not excluded by the fact that the seller has not seen the goods (ie. reliance occurs even if seller did not
see the goods). The willingness of a seller to fill the order will attract this liability. The reason why is
because a seller is assumed to have chosen the goods to suit the buyers purpose. It is therefore besides
the point if Kendall was unaware of the proportions in which ground nuts were to be compounded as the
ground nuts were highly toxic and unfit for the particular purpose of reselling in smaller lots to
compounders for cattle and poultry food.
Q: should width of purpose exclude reliance?
o Answer: no—relying on the supplier to provide healthy ingredients—compounding into
animal feed stuff is sufficiently definite to attract liability.
Q: what if latent defect? I.e. 2 innocent parties.
o Answer: liability on seller—policy choice.
Ashington Piggeries Ltd. v. Christopher Hill Ltd.; Christopher Hill Ltd. v. Norsildmel (1972)
F: P (Udall) was an owner of a mink farm and was an expert of mink farming. He asked the defendant to
compound some mink food for him in accordance with a formula which he had prepared. The defendant
was a well known animal food compounder but had no knowledge and experience with mink. The
ingredients were to be supplied by Hill. The food was fed to a large number of mink who died, and the
cause was identified as toxic Norwegian herring meal, an ingredient of the compound. Udall sued Hill; Hill
sued the Norwegian supplier.
Udall v. Hill: The court holds that the seller is liable.
PURPOSE AND FIELDS OF RESPONSIBILITY
Buyer: A particular purpose was made known by Udall who relied on the seller's skill and judgment. This
was a case of partial reliance (the buyer relies on his own skill and judgment for some purposes and on
the seller for others). Here the buyer is relying on the correctness of the formula and must ensure the
specific suitability of herring meal for mink.
Seller: The seller's field of responsibility was to obtain and deliver herring meal, not unfit by reason of
contamination to be fed to animals including mink. The herring meal was suitable for mink, however the
particular goods supplied were unsuitable due to the toxins.
BURDEN OF PROOF
Buyer: The buyer has the burden of proving a prima facie case of harm. The buyer must show that their
mink died because of some general unsuitability of the herring meal. Any general unsuitability would be
the seller's responsibility. In this case given the range of purposes, herring meal was generally harmful to
all other animals within this range.
Sellers: Must demonstrate that the toxicity is idiosyncratic to mink specifically and the herring meal could
have been fed with impunity to other animals with no deleterious effects. The seller therefore has a high
Hill v. Norwegians: The court holds that the seller and supplier are both liable.
Goods were supplied by the Norwegians under the terms of the contract. The question is whether a term
as to reasonable fitness ought to be implied (s.15(1)). The particular purpose was that the meal was
required for inclusion in animal feed to be compounded. The feeding of herring meal to mink was
communicated to both parties as a normal use for herring meal and that it was sold without any
reservation or restriction as to the use which it might be put. Hill relied on the Norwegians to supply herring
meal suitable for their purposes.
Third Party Suppliers: In the case of third party suppliers (Norwegians), there is a funnel effect such that
(i) the seller is deemed to know all animals within the range to make sure that none will be harmed and (ii)
the seller is deemed as an insurer for all normal usage of their products and will be liable if it harms some
of the animals within the range.
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Policy: If there is a latent defect (thus two innocent parties), there are strong policy considerations that the
seller assume liability. General trend is away from caveat emptor as the seller is the least cost avoider and
can spread the damages across to other clients, whereas the buyer cannot do this.
NB: It is only where you have a range of purposes that idiosyncracy can be a valid defence of the seller.
Diplock's Dissent: Fitness for purpose test does not fit when there is such a wide range of purposes. The
line is crossed when the range is so broad and the communication is so vague that you end up in s.15(2)
because the seller is responsible for supplying goods that fit all purposes in that range even if that means
all different descriptions and qualities (ie. goods fit for compounding purposes for minks is a description of
goods and no longer a purpose). If fitness for purpose is this broad, there is no use for s.15(2). Even
though seller knew that herring meal was normally used for mink, it is buyer's responsibility to draw that
specific purpose to the seller's attention as reliance requires communication of purpose. Diplock therefore
finds a breach of s.15(2) but not s.15(1) as no specific purpose had been communicated.
Johnson: Prefers Diplock's dissent that s.15(1) should be: purposes described by the buyer and s.15(2)
should be: range of qualities answering the buyer's description. Remoteness of damages in UK is
collapsed because the seller now "ought" to have foreseen a particular usage within the range to be held
Johnson: The Norwegians had the option to expressly contract out of the implied conditions and
warranties in the SGA.
NB: After this case, UK changed s.15(1) and expanded purpose to reflect the majority decision which
poses a number of problems: (A) it is now easier to prove liability under s.15(1) than s.15(2) (B) there is no
proviso for examination under s.15(1) so there is an implied condition whether or not the goods have been
examined (at least in s.15(2) the seller could say that since the goods were examined the implied
condition is waived) (C) there is a heavier burden for sellers to discharge their duty (in s.15(2) if one other
purpose is found for the goods to be merchantable the seller is off the hook) and (D) there is now an
encouragement for buyers to be more vague about the purpose.
Ingham v. Emes (1955) (Eng. CA)
F: Plaintiff had her hair dyed by the defendant hairdresser and suffered acute dermatitis. She sues
defendant for damages.
H: For the defendant.
R: There is an implied term that the dye was reasonably fit for the purpose of dyeing hair if the allergy test
was passed. But the plaintiff to her knowledge was not a perfectly normal person as she had a previously
known allergy to the dye.
Thus for the implied term to arise, the plaintiff must make her particular purpose (to dye the hair of a
person known to be allergic) to the hairdresser's attention.
NB: Griffiths v. Peter Conway Ltd. (1939) (Eng. Ct.): The plaintiff suffered from dermatitis from a Harris
tweed coat and she did not recover as Harris tweed is not a dangerous item and is reasonably fit for any
normal person . The seller successfully demonstrated that she was an idiosyncrasy as the jacket was
reasonably fit for millions of other customers. Only where a manufacturer has reason to believe that a
substantial number of persons will develop an allergy or unusual sensitivity to the product is he obligated
to warn of the possibility of harm.
NB: The rule that the implied condition of fitness applies to the normal user of the goods, also applies to
the manner in which the goods are used.
Patent of Trade Name Exception
Exception in s. 15(1)—if it is a K for sale of an article under its patent or trade name, there is no
implied condition as to fitness for its particular purpose.
Court diminishes the instances where this will happen, i.e. where somebody purchases under
trade name will be limited.
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Baldry v. Marshall (1925) (Eng. CA)
F: Buyer wants to buy a "Bugatti" and it ends up being a lemon. He tries to sue for breach of s.15(1) and
the seller argued that the name Bugatti fell under the trade name exception.
H: For the buyer.
R: Mere fact that an article sold is described by its trade name does not necessarily make the sale one
under trade name.
Reasoning: After the buyer communicated the purpose for which he wanted it, there was no evidence to
show that the buyer when describing the car by the trade name meant to suggest that he did not rely on
the seller's skill and judgment.
Test: Did the buyer specify the item under its trade name that would indicate that he was satisfied it would
answer his purpose, and that he was not relying on the seller's skill or judgment however great the skill or
judgment may be?
NB: To use the trade name exception: (i) the buyer cannot give the seller an opportunity to ask his
purpose and (ii) the buyer cannot rely on the seller's skill and judgment as the buyer relies on the trade
name alone. This favours buyers as only in specific cases can the trade name exception be used.
However if the trade name exception is found, the buyer can still sue under a breach of an implied
condition as to merchantability.
Johnson: This case still stands with the end result being that it did away with the trade name exception in
NB: Where the operation of the trade name proviso renders the condition of implied fitness inapplicable,
the implied fitness for quality can still be used for the benefit of the buyer.
Implied Conditions In a Sale By Sample
s.16(1): Sale by sample. A contract of sale is a contract for sale by sample where there is a term
in the contract, express or implied, to that effect.
s.16(2): Implied condition. In the case of a contract for sale by sample, there is an implied
condition, (a) that the bulk will correspond with the sample in quality; (b) that the buyer will have a
reasonable opportunity of comparing the bulk with the sample; and (c) that the goods will be free
from any defect rendering them unmerchantable that would not be apparent on reasonable
examination of the sample.
Steels & Busks Ltd. v. Bleecker Bik & Co. Ltd. (1956) (QB)
F: Steels required rubber for corsets and placed an order with Bleecker, referring to a particular sample
"as previously delivered." Later Steels began getting complaints from customers and an expert was hired
who determined that a chemical found in the rubber caused discoloration and stains in the corsets. Steels
brought an action against the Bleecker claiming that the rubber did not conform in quality with the sample
or that supplied under the previous contract.
H: For the sellers.
R: There is an implied condition that the bulk will correspond to the sample. Quality must be restricted to
those qualities which were discoverable an examination which the buyers might reasonably be expected
to make. Thus, s.16 does not deal with latent defects, but only such qualities as are apparent on an
ordinary examination of the sample as usually done in the trade.
Reasoning: The extent to which a sample may be held to speak must depend on the contract and what is
contemplated by the parties in regard to it. A sample may be chemically analyzed, x-rayed, etc. but here
the parties were content with the examination in accordance with the normal trade practice. In this case,
the goods delivered under the last contract were held to be in accordance with the contractual terms.
NB: James Drummond & Sons v. E.H. Van Ingen & Co. (1887): The method of examination in the shellac
trade was visual, and not chemical. If the flaw could not be detected by a visual examination, then a
chemical flaw could not be a breach of s.16. Therefore, the buyer cannot argue that the dye in the bulk
shall contain the same proportion of the same chemical of the sample, unless the defect is apparent upon
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Intermediate Stipulations and S.14, S.15 and S.16
intermediate stipulations ("goods are to be shipped in good condition") only occur when the parties
are trying to interpret the term of the contract and have accepted the goods because under
s.12(3) they have waived the implied conditions (s.14, s.15, s.16).
intention: implied conditions (s.14, s.15, s.16) are implied without regard to the party's
intention...whereas intention is relevant when interpreting the contract term as either a condition or
everything is automatically an implied condition, and if waived then try looking to the term of the
in a consumer transaction, parties cannot contract out of SGA implied terms according to s.34(2)
of the CPA.
The Cost of Borrowing and the Consumer Protection Act
CPA tries to get at the problem of differences in interest rates depending on calculation method,
by forcing lenders into uniform methods of calculation (s.1: Cost of borrowing, s.24, s.19, s.20).
the CPA distinguishes between variable (borrower has the right to demand further extensions of
credit, i.e. credit card) and non-variable credit (usually extended on purchases of fixed items, i.e.
the CPA is divided into two classes with respect to vendor and lender credit. Vendor credit means
that instead of stating the principle lent, the lender must disclose the cash price of the goods less
downpayment. There are remedies available (s.38, s.39 where the maximum penalty is
in the case of a straight consumer sale, implied conditions and warranties cannot be excluded
using s.53 of the SGA.
s.34(1): Definition. In this section, "consumer sale" means a contract for the sale of goods made
in the ordinary course of business to a purchaser for the purchaser's consumption or use, but
does not include a sale, (a) to a purchaser for resale; (b) to a purchaser whose purchase is in the
course of carrying on business; (c) to an association of individuals, a partnership or a corporation;
(d) by a trustee in bankruptcy, a receiver, a liquidator, or a person acting under the order of a
s.34(2): Implied warranties. The implied conditions and warranties applying to the sale of goods
by virtue of the Sale of Goods Act to goods sold by a consumer sale and any written term or
acknowledgement...that purports to negative or vary any of such implied conditions and warranties
is void and, if a term of a contract, is severable therefrom, and such term or acknowledgement
shall not be evidence of the circumstances showing an intent that any of the implied conditions
and warranties are not to apply.
Motor Vehicle Manufacturers' Assoc. v. Ontario (1988)
F: The Motors Vehicle's Assoc. (MVA) wants to seek a declaration that certain promotional schemes by its
members are in violation of the CPA. There are two options for potential sellers. Option 1: Seller
advertises a car for $10,000 or offers installments of $384.84 a month for three years. Option 2: Seller
advertises the same model for $10,000 or $503.47 a month for two years. However, in applying the
constant ratio formula, Option 1 yield s 25% interest, Option 2 yields 18.46% and the Bank yields 20.56%.
The rates are not calculated at face value and without knowledge of the method of calculation by the
lender, the buyer cannot make viable interest rate comparisons. Therefore depending on the method used
by the lender, the borrower gets wildly different interest rates.
I: Is this vendor or lender credit? Is the cost of goods $9000 or $10,000? This makes a difference in how
interest rates are determined as $1000 could be part of the cost of goods (seller) or it could be part of the
loan (lender). If the vendor is the real lender, then under the CPA they have to disclose the cash price of
goods less downpayment.
H: This is vendor credit which falls under the CPA.
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Reasoning: The lender is a seller because the cost of borrowing is defined by the total sum the borrower
is required to pay which exceeds the amount of the cash price of the goods less the sum actually paid as
a down payment or credited. The two ads side by side require the buyer to compare the interest rates
which has the effect of deceiving the buyer.
Johnson: A credit company's contention is that they are extending credit and not behaving as
dealer/vendor. If it is the credit corporation extending credit, then it is lender-credit and interest is
calculated on the total amount paid less principle lent which lets the credit company out of the cost of
goods and the CPA.
NB: In the case of Leon's no money down events at 0% financing, Leon's pushes the price up to
accommodate this so-called great deal such that the consumer already pays for it in the cost of goods.
Whether or not this is a misrepresentation depends on the total amount paid minus the cost of goods.
NB: The CPA is clearly remedial, and not penal in nature.
NB: This problem is avoided today as the dealer make it clear that in both options, they are manufacturing
financing deals and therefore it is not vendor credit because they operate for a financial institution. (Vendor
credit falls within the CPA which mandates that interest be presented). Therefore, they are out of the CPA
because it is now lender credit.
Asset Securitization is a hybrid between factoring & securitization
Issue of Interest:
o Credit card interest rates—interest rates in general have dropped in the last few years,
but credit card interest rates have not dropped, why not?
o Drug store specific cards are becoming common, why?
o Mutual funds—no load up front but when you try to redeem before a given period of time,
then there is a penalty—which is pro rated based on how many years the investment was
kept in, why?
Answer: Securitizing the assets makes them stuck—the FI has securitized the payments i.e. your
mutual funds, and since they can’t get out of it, neither can you
Importance of the field: Financial Institutions
o 1999: US—approximately $400B in mortgage-backed securitizations;
o 1999: Canada—approximately $56B.
Conversion of flow of revenue—e.g. interest-bearing receivables—into securities, at significant
profit to party wishing to raise funds (‘originator’).
o Retailer sells it’s a/r to the FI institution or the SPV (special purposes vehicle) who raises
the money to buy the A/R by issuing debt, bonds or debentures into the capital market,
whereby investors in the capital market purchase these bonds.
Examples of Originators:
o Credit card companies
o Department/drug stores
o Mortgage companies
o Rock stars (“Bowie Bonds”)
Borrowers—are typical\ consumers buying over time
Retailer has provided them with money over time—i.e. something of value, debt.
Basic Model – single seller
Retailers get cash upfront—have sold off interest bearing A/R
Special purpose Trust—very often is a trust—sell bonds or debentures through private
placement on the capital markets to raise the money to pay the originator lump sum for it’s a/r
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assets—thus transfer of receivables into capital market instruments.
o Debentures and bonds—as an investor concerned of default on A/R—these bonds are
asset backed securities i.e. have rights to the A/R (asset), provides guarantee to their
investment—buying relatively safe bonds therefore don’t ask for high interest rate due to
the low risk of the investment.
o SPV collects high interest from the borrower and gives a very low interest rate to the
investors and pocket the difference—retain the 20% difference because of the risk
undertaken by them
o The servicing group may be assigned by the SPV to manage the portfolio as collectors
and so, which eats in on their 20%--servicing group acts an agency for the SPV
o Borrower does not know of these agency relationships—simply borrows the money from
o SPV trust is drained—because give back profit to the originator based on the
arrangements with them.
Summary: borrower borrows money from originator for approximately 28%, originator sells the
A/R to the SPV, who then sells it to the investors for 8%, and pays 2-3% to the servicing group as
fees for their services—and pockets the 17%.
Asset securitization: securities that are issued in the market are backed by an asset, thus low
risk investment—and low return.
2 ways of paying the investors:
Trust purchases the assets using proceeds of one or more issues of debt instruments on capital
Trust pools the revenues flowing from Originator’s account debtors, and pays interest to investors on
cap markets in accordance with terms of debt instruments issued by SPV
All the investor gets is their quarterly interest on their debenture—typical arrangements—holds the
money for a while before the investors are paid, protects them from default by borrower.
Here SPV has undivided ownership interest in the pool of financial assets (a/r)
Entitles holder of debt instrument to receive his or her proportionate share of all cash flows arising
from pool of securitized assets
Get cash flow on a monthly basis—kind of like getting the dividends monthly
Here need to be very sure that the borrower would pay—i.e. low risk of default
Here, Investors have undivided co-ownership interest in pool of financial assets
Note: Structuring as pay-through or pass-through will often depend on legal, tax and accounting
objectives of the seller
Trusts not required to pay large corporations tax or provincial capital gains tax
Structure: Isolation from seller
“true sale”—concern whether the transaction from retailer to SPV is a “true sale” or not.
ABS provides Originator with opportunity for funding at low interest rate
Why would investor invest in ABS debt instrument at lower rate than they would buy Originator’s
corporate debt securities?
Payment made under ABS will not be adversely affected by bankruptcy / insolvency of Originator
The SPV wants to relate itself to the borrower rather than the retailer i.e. is not concerned if the
retailer goes bankrupt or not.
E.g. typically Canadians carry 3-month debt on tehri credit cards i.e. take 3 months to pay off their
credit card debt, therefore when investors invest into the CT know that the debt will be paid in 3
months—i.e. then know that their investment is reasonably certain and similar to sovereign t-bills
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but because getting a higher return than t-bills therefore 8% rate of return is pretty good for their low
risk that they are taking—the investors are not very concerned if the CT retailer went bankrupt
because their investment is protected by A/R of the originator.
Thus, securitizations are “bankruptcy remote”
This securitization is independent of the survival of the originator.
If it not bankruptcy remote—i.e. if SPV making a loan to the originator, and use A/R as a collateral
for the loan, if originator becomes bankrupt, there will be series of competing creditors looking for
those A/R because now the A/R remains the asset of the originator—investors do not go near those
types of the bonds because investment is dependent on the survival of the originator.
Therefore it’s very important that the transaction be a “true sale” for the purposes of the capital
market—i.e. that the deal has been structured properly, and want to see a distance between SPV
and originator; not buying bonds in a retailer but rather buy an investment in a company that does
ONLY one thing i.e. manages the portfolio of A/R of another entity, therefore really investing in the
SPV based on the assets of the retailer.
Originator could also issue bonds, but because already have a diverse set of activities, increases
the risk for the investors—this risk is “hived” out to the SPV in the true sale of the A/R.
Becausey remoteness is crucial to the transaction
Legal opinions required as to becausey remoteness
Summary (a summary from the lawyer of the implications) required as to implications of insolvency or
reorg of Originator, Servicer (if different) and trust entity
Off-balance sheet treatment under GAAP – important
The company has managed to a financial transaction which will not be reflected in the balance sheets
Off-balance sheet transactions are becoming more and more popular
Recall: a balance sheet shows the snapshot of the companies’ financial health at a specific point in
time, includes its assets, liabilities and equity—2 columns in balance with each other i.e. A = L+E; not a
true picture of the FMV of the assets of the company (other sheets are income statement and
Recall: definitions of CA, CL, inventory, historical value of land, etc.: assets – liabilities = equities,
where equity is the owners interest in the entity.
When a company is going insolvent, the companies liabilities > assets at which point there is not equity
and the business is bankrupt—the owner no longer has interest left in the equity.
Now the creditors own more than what the assets are worth—shows the impact of the transactions
over the last 12 months.
See previous year’s from last year to see the changes in the companies position.
Off-balance transaction is a contractual obligation of a company that does not show up on the
balance sheet—with asset securitization is an off-balance sheet financing.
I.e. company is getting financing in a way that has an impact on the balance sheet but does not show
up on the balance sheet.
In the agreement between the lead lender and retailer, have covenants of classifies as default—i.e.
maintain certain ratios whereby the debt ratio and current ratios are maintained at a certain level.
Question: if retailer paid by SPV upfront then showing the A/R is really inflating the assets, which then
inflates its ratio with the lead lender…how is that accurate and reflective of a companies performance?
Answer: no because when A/R are sold to SPV, the SPV buying rights to A/R for a certain period of
time; i.e. if SPV buying rights for a year, then pay for the A/R for a year, retailer no longer has A/R
because sold, and have the cash received by SPV on hand, i.e. their liquidity has increased, which
also increased the shareholder’s equity—such that their share price has now also risen
significantly—as well their ratios are also very healthy from the perspective of the lead lenders
therefore in better position to borrow more money.
Now, none of the transactions between originator and the borrower will show up on the originator’s
Assuming sale of accounts receivables, Originator entitled to remove securitized assets from
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balance sheet and use the proceeds to reduce liabilities, or repay equity
Off-balance sheet treatment
Repayment of liabilities with proceeds of ABS will improve Originator’s debt-equity ratio and
interest coverage ratios
Reduced debt – equity ratio may allow Originator to repurchase equity. If profit from securitized
assets is retained by Originator, this will increase earnings per share
Other financial advantages:
Separates the value of package of assets from default risk of Originator
This lowers risk to investors – they don’t have to deal with Originator’s other creditors—therefore
willing to take a lower rate of return.
This in turn means they will lend / invest at lower rate
Query: by hiving off the a/r, will other creditors increase their rate, making the transaction a wash?
LL Look to proceeds of securitization—now their interest have shifted from A/R of originator to an
interest in cash on hand for the originator.
Also, securitization provides access to money markets in sitns where companies would not enjoy
Money market rate is usually lower than rate at financial institution
ABS Transaction Participants:
Securitizations usually structured to ensure that Originator retains substantially all the on-going
economic returns from the assets
Get an infusion of cash;
SPV and its beneficiary
In order to have becausey remoteness, crucial that assets sold to ‘clean” third party, which has no
other business activities or encumbrances. Usually a trust.
Restrictive covenants placed on trust
Originator must avoid exercise of control over SPV – or else transaction will not be considered as
Therefore, beneficiary of trust usually a disinterested third party – non-corporate charity, named by
lawyer or controlling shareholder of originator. Beneficiary does not play active role in the
Cannot look like the beneficiary trust pay-up; the 3 party guards the distance between the
originator and SPV.
Issuer trustee usually delegates by contract specific duties to Originator, who acts as
“administrator” of SPV
Ability to sell debt securities to the capital market depends on ability to achieve “investment grade”
ratings for the debt instruments – typically highest grades such as “triple A” or “R-1 (high)”
It is this high rating with slightly higher return than comparable securities that attracts investors
Ratings set by rating agency
Over-collateralization or 3 party enhancement
3 party – high rated financial institution agrees to repurchase delinquent or defaulted financial
assets from SPV at net book value; or letter of credit; or guarantee
Arranged through contract between Originator and SPV
Servicer provides customary administrative services – collects payments, maintains accounts and
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This arrangement – essentially the same as non-notification factoring – preserves the impression
on part of account debtors that they are still dealing with Originator
SPV will not find investors unless appropriate rating for cap mkt instruments
Rating performed by rating agencies
OSC has list of approved rating agencies
Rating agencies perform due diligence and risk analysis to come up with rating for the debt
instruments of SPV
True sale (as against loan with a/r as security)
Low rate paid by investors is dependent on becausey remoteness of the assets underlying the debt
Thus, becausey remoteness is critical to the deal
b./cy remoteness depends on the transfer of assets from Originator to SPV being a true sale, and not
a loan with security
Asset securitization: beneficiary generally nominated at arms length.
Common legal issues re structure: 6 issues
Those with viable revenues are doing this; those without viable revenues are issuing
shares as dot companies do.
1. Asset Transferability
2. Set-off rights
3. “True Sale”
4. Bankruptcy and fraudulent conveyances
6. Consumer Protection legislation
1. Asset Transferability
chose in action - right to payment of a sum of money (either present or future) for goods supplied,
services rendered (visa is services rendered) etc
– at common law, can be assigned unless underlying contract precludes assignment, or requires
obligor’s (debtor’s) consent ex. One creditor assigning to another creditor.
– However, the assignment is equitable until obligor notified in writing - and therefore assignee cannot
sue solely in its own name until that moment because until that moment the relationship between
assignee and obligor is a principal-agent relationship until the notice is giving in writing then
– S.53(1) Conveyancing and Law of Property Act
– Note: assignment must be absolute and not by way of discharge to fall within s53(1) CLPA –also says
assignment of choses of action have to be in writing.
– See also s40, PPSA—recall definition of chattel paper; that is what translates through in the choses of
action; you are not assigning simply the rights of the A/R but rather the whole contract and the obligor
looks to the assignee in the same way that they could look to the assignor if something goes wrong;
payment can be made to assignor until person receives notice s. 40(2)
– Obligor is the customer who purchased the car; assignor is the seller/creditor (car dealership);
assignee who receives the right or buys the right to that credit (in our situation FI).
– Assignor is the originator, and assignee is the SPV and obligator is the borrower in asset
– S.40.2: talks about notice by the assignor
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– 40.3: what happens if the obligor payment has not been earned by performance
2. Set-off rights
– until notification, account debtor (e.g. retail customer / “obligor”) entitled to set up equities arising
under all dealings between it and the assignor, whether before or after assignment, up to the time
when debtor has received notice of assignment
– this is the risk of non-notification financing
– what kind of rights arise? Reps, warranties etc that have to do with goods / services provided
- all dealings between account debtor and assignor – may not be related to the assigned contract.
– assignee responsible for the warranties etc.; obligor has the right to set off the amounts that they are
owed by the assignee or assignor for the breach of the contract
– does the obligator have the right to hold back the payments in case of the damage suffered because of
assignor or assignee?
– Aside: as an investor would want to know about these rules because securities can evaporate if
something goes wrong depending on what rights are set off.
– Ex. If the tail of a plane falls off, killing many, and if the SPV that has securitized the payments for the
plane to be made by the airline is now in trouble, and the investors that bought those debentures see
their investments evaporate and now SPV not only receiving anything any longer, but are also set-off
until they receive notice for the tort liability because bought the right to the payments.
– Recall: when the borrower borrows money from the originator, who sells rights to the A/R to the SPV,
who sells securities to Investorsnotification to the borrower is made in some cases, and not in other
cases; now before the notice is given to the borrower, he/she has a claim against the originator; and
after the notice is given to the borrower, only has a claim against the SPV and no claim against the
originatori.e. if notice is given before the breach occurs, then only claim against SPV, but if notice
given after breach, then first claim against the originator until notice occurs at which time, claim against
– Notification and non-notification give rise to the assigment of liability—and that the assignor warrants
that the goods were “fit for purpose”, where the assignor is the borrower, and the assignee is the FI.
Until such a time that the account debtor (borrower) is notified of the assignment to the SPV
(assignee), account debtor has the right set off all debts owed to the assignor (originator) against
all the amounts owed to the originator whether they arise out of the debt or not—i.e. assignee is
on the hook for a much larger liability than anticipated until notification occurs.
After notification, borrower can only set of f amounts owed in connection to the debt that gives
right to the receivables—i.e. limits liability of the assignee.
FOR EXAM: understand diagram, indicia—right of redemption (none here), profit (assignee
shouldn’t account for profit to assignor), and assignee should not have right to sue assignor for
deficiency (different from right of recourse)here get the payment but it’s not as much as the
SPV thought it would be worth, whereas, recourse says that assignor is guaranteeing that the
account debtor (borrower) will pay, does not mean that this is not a sale.
3. a. “True Sale” - Factoring:
– Factor: notification and non-recourse
– purchases accounts receivables;
– causes notice of assignment to be given to obligor;
– collects accounts itself;
– usually buys on a non-recourse basis.
Must receive the contract as a true sale, i.e. the assets of bankruptcy are remote from the
originator i.e. cannot be linked by to the originator.
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Factoring arrangement with the A/R
Big issue here is what gives rise to lack of bankruptcy remoteness.
SPV no different from any factoring agency buying A/R at a discount; in a factoring relationship, to
buy the rights to the A/R at a discount, when the originator goes bankrupt and SPV competing
with the other creditors for the A/R who claim that this was not a “true sale” but a loan backed by
security (often unregistered), as per PPSA, other creditors also have a charge over the A/R as
welli.e. other creditors have prior interest in the A/R; SPV claims not a loan but a sale with
payments over time by the borrower.
if loan then SPV assets evaporate, where they go to the creditors of the originator or the trustee in
if true sale, with transfer showing a chose of action, SPV’s assets are remote from Trustee in
Bankruptcy or the originator’s creditors because they no longer have a claim.
Notification of the assignment not done such that the borrower keeps paying the originator, who
then keeps money in trust for the SPV—factoring component of Asset securitization.
Causing notice may or may not happen.
At the time of the assignment, assignee had the assignor sign a notice address to the customers
but did not send it, to be sent later when the obligor gets in trouble, still non-notification; assignor
continues to collect the payments on behalf of the assignor.
Non-recourse means: if the borrower defaults in a non-recourse the SPV cannot go back to the
originator for the default, and SPV assuming the risk and therefore, charge a higher rate of
discount for the A/Rtherefore only accept “good” loans i.e. contracts dealing with a particular
kind of customer; if the customer does not look good to SPV, then send them to other creditors
because without recourse therefore set parameters to protect themselves accordingly.
If assignment of a chose of action with recourse, then the SPV can go back to the assignor
guaranteeing that the obligor will pay, in this case, usually SPV charges a lower discount rate for
the A/R because not assuming risk for the default.
3. b. “True Sale” vs. Loan
other end of the spectrum: charge on receivables
– charge would be taken pursuant to PPSA, in return for loan granted to retailer
– charge contains a right of redemption -see, eg. PPSA s. 66
At any time before the secured party, under s. 63, has disposed of the collateral or contracted for
such disposition or before th secured party under ss. 65.6 shall be deemed to have irrevocably
elected to adccpt the collateral, any person entitled to receive notice under ss 63.4 may, unless
the person has otherwise agreed in writing after default redeem the collateral by tendering
If no right of redemption, then one step closer to a true sale, but if there is a right of redemption,
then one step closer to it being a loan.
3.c. “True Sale” - securitization
– asset securitization falls in between Factoring and Security on a Loan
– if the transaction is by way of a charge as security, then it is available to other creditors of the assignor
upon a bankruptcy;
– Thus, key concern is “bankruptcy remoteness” - only occurs when there is “true sale” (in contrast to
assignment as security)
– if not true sale then, e.g., PMSI party will usually take priority over accounts receivables financier (the
assignee) i.e. Trustee in Bankruptcy will have the rights to the intangibles in the hands of the SPV, if
– and, if charge, unless registered, trustee in bankruptcy will also take priority over assigneeeven if
registered may lose out to the PMSI party.
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– necessary for “bankruptcy remoteness”between the investors and the SPV is the rating agency,
which rates the securities being sold, and the only way to get a AAA rating is that the rating agency will
want to see a true sale and bankruptcy remoteness, to determine this look at the creditors of the
– primary consideration for rating analysts and investors
– once a true sale is effected, investors can look to credit underlying the assets themselves
– rather than credit of the assignor
– true sale opinions include discussion of implications of insolvency or reorganization of seller and
intermediary trust in pay through structure
– in general: to qualify as a true sale document:
– should contain conveyance language consistent with absolute sale;
– should ensure that seller does not retain “equity of redemption” or similar right to regain ownership (if
retain an equity of redemption, then probably a loan)i.e. if get profits then probably not a true sale
– what about recourse against the seller / assignor, and similar rights on breach of covenant etc - does
this indicate charge?
– No: a number of British cases have held that the seller’s obligation is such instances is not to REPAY
an advance (loan); but rather to pay a sum in discharge of a recourse obligation
– Olds Discount v John Playfair  1 All E.R. 275; Chow Yoong Hong v Choong Fah
Rubber Manufactory  A.C. 209; Lloyds & Scottish Finance v Cyril Lord Carpets
(1979) 129 N.L.J. 366
3.d. “True Sale” Case law:
– provided transaction is genuine not a sham (e.g. collateral agreement that contradicts the written
– are the documents what they purport to be; are there side agreements which constitute the
true transaction or they are a sham?
– Presumption that it is not a sham, then:
– substance over form –
Re: George Inglefield, Limited  Ch I
common factoring arrangement
the dealership was Inglefield who was a furniture manufacturer; HP (higher purchasing party i.e.
consumer); and the Financial institutions (in the money lending business)
A/R would be factored to the FI; who purchased them for the 75% of the face value of the transaction;
and paid the balance 25% in installments to the dealership as the payments from the “higher
Eventually, the dealer did get 100%, and FI kept the interest plus the payments over time where the
borrower may have paid 150% of the purchase price due to installment interest.
This transaction labeled as an “absolute assignment”—dealer did sign a notice to the HP that the A/R
had been assigned, which the FI held onto until they thought that the dealer would default, when it
would send the notice to the HP.
The assignment notice had to be accompanied by a receipt to the HP and signed by the HP.
Dealer went bankrupt and the transaction between FI and dealer not registered; TIB came in and said
the A/R were theirs, reasoning: 75% was a loan and the transaction was not a sale since the FI did not
keep any of the profit, and only kept the interest at the end therefore a loan.
At Trial: courts said that it was a loan; therefore TIB got rights to the A/R
At Appeal to HL: Therefore said that it was a true sale; reversed the judgment from trial level
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testin transactions of this sort the court must consider whether or not the documents really
mask the true transaction—if they do merely mask the transaction, the court must have regard to
the true position, in substance and in fact, and for this purpose tear away the mask or cloak that
has been put upon the real transaction.
No evidence that the real agreement was different from one recorded.
Elements of a true sale: 3 elements
1. No right of redemption
2. in a true sale, you would not expect the assignee to account to the assignor for
profit; if a loan, the FI has to account for profit; i.e. purchaser keeps profit
3. in a sale, no right to the deficiency; i.e. if the house does not appreciate, then if
loan bank can sue borrower for the deficiency but if sale, then bank takes risk for
the loss; no right for the assignee to sue the assignor for the deficiency in profit.
– Last element is different from the right of Recourse
block discounting arrangement characterized as sale (Re: George Inglefield) - substance not form
what is block discounting? - master agreement between ret and financier, for sale of batches of
hire-purchase agreements or conditional sales—works similar as in Welch
Block Discounting: seller goes out in market to sell goods, finds buyer, goes to finance company
to ask for financing, finance company purchases goods to resell to buyer—in effect, finance
company becomes seller, and seller becomes an agent for the finance company and picks up a
commission for the finding the buyer.
No direct contract between the ostensible seller and buyer—master agreement between finance
company and seller—selling to any buyer that the seller has is considered a “master agreement”
saying if you find any buyers out there, tell me, I’ll sell to them and I’ll pay you a commission—
refer to Welsh.
“Direct Collection” is where seller sells to buyer and subsequent to that transaction, then shop
their A/R to finance company i.e. contract between seller and buyer is a sale and contract
between seller and finance company is sale of A/R—here, finance company charges a service fee
for their services.
agreement usually specifies that if financier accepts agreements offered, it will pay retailer the
collection value of agreements, , less a security retention and a discount calculated by reference
to period for which Financier will be out of money;
in thjs case, agreement contained a guarantee of obligor’s commitments by assignor / originator
note the Dealer entitled to surplus
On appeal – excerpt to be distributed
assignment/agency sales agreement characterized as sale despite “floating” discount and right of
Welsh Development Agency v. Export Co. Ltd.  BCLC 936 (Welsh Development)
Facts: parrot has gone bankrupt and has a/r owed to them, welsh is a creditor of parrot, parrot has also
assigned its assets to ExFinco, who didn’t register its interest in a/r—was this a charge or a true sale.
Welsh says that the a/r are owed to them under floating charge over a/r, and furthermore, welsh
says that another creditor here who has not registered their interest therefore Welsh has priority
over all a/r coming in from customers.
Claim transaction between Parrot and ExFinco over the a/r was a security for a loan, didn’t
register, and so Welsh has priority because of floating charge.
Trial level: this was a charge, and Welsh would take the a/r
HL: said this is a sale, and Welsh has no interest in these a/rthey are saying that in essence, look at the
proceeds coming in from ExFinco to Parrot.
Contract that was drafted with a standing agreement between E and P, where E would purchase
all the goods sold to foreign buyers (block discount)—when P finds a customer, sell to E, title
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transferred to E, given back to P on consignment, who then ships them as agents to buyers, and
E has right to a/r flowing in over time, E retains title until full payment (classic conditional sale)
3 step process: P finds customer, P sells to E, P ships to buyer.
This standing offer in master agreement—is a unilateral offer, whereby, P accepts the offer by
invoicing the buyer or shipping to buyer i.e. performance of the contract; E had a small “holdback”
on the money sent to P i.e. 10% held back in case of default by buyer and the 90% was
guaranteed by another agency
Welsh said since had the holdback, and settlement agreement, giving back goods to P at
termination therefore a loan.
Courts held that using the Inglefield test the documents appear to be what they are on prima facie,
not a sham;
o See a right of redemption?—NO
o See an accounting for profit?—NO, once goods sold E then no accounting for profit only
o See if right to sue for deficiency?—NO, only right for recourse in case of default.
Therefore, nothing in the agreement that proves that this was not a “true sale”—Welsh was not
able to prove that this was a charge on a loan.
Key thing here is if there was a right of redemption—none here therefore sale not a loan.
POLICY: Courts still use the Inglefield 3 indicia—even when close to a loan, still say this is a “true
sale”—because an important form of financing for seller and courts will not turn around to call it a
Negative covenants in Welsh’s floating charge, brought about this case—but P didn’t assign their
rights to a/r to E but rather sold the goods to E—got around the negative covenant with Welsh.
4. Bankruptcy and fraudulent conveyances
– provided true sale, and provided assignor not insolvent at time of assignment, transfer of
receivables will not be avoided in favour of bankrupt’s creditors.
– Note: under BIA and CCAA, secured creditors can be subject to stays - so don’t want to be
classified as secured creditor
– Note s 71(2) BIA - on issuance of receiving order, bankrupt ceases to have capacity to dispose of
– presumably, right to future debt has already been transferred in equity - vested prior to becausey,
and FMV proceeds in return
– also concerned about consolidation - merger of two entities - seller (originator) and SPE—like piercing
the corporate veil, don’t want to look like a merged entity, where the 2 entities collapse.
– Investors do not want to see the originator and SPV consolidate because increases the risk for them—
i.e. true sale between those 2 entities creates bankruptcy remoteness which is eliminated if the two
entities were to merge.
– assignments of accounts, even when true sales, must be registered - see s. 2 PPSA:
– Subject to subsection 4(1), this Act applies to…
– (b) a transfer of an account…even though the transfer may not secure payment or performance
of an obligation.
– In Canada, must register, because if not registered then will lose interest to other creditors or
TIB—even though transfer of an account based on the PPSA of each province
– ExFinco did not register their interest in Welsh Case—unperfected interest.
6. Consumer Protection Legislation (not on exam)
– suitability of assets in light of:
ability of customers to prepay unsecured indebtedness and mortgage loans extending beyond
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validity of certain non-PMSI’s taken to secure consumer debt
validity of certain reps, warranties and conditions regarding sales of consumer goods
inability of credit grantors to assign consumer debt obligations free of equities
“cooling off” periods
limitation on enforcement remedies on secured consumer debt
- worry about consumer sale as a lawyer—sale of a/r on consumer transactions.
Summary – the big picture
– Risk assessment—allowing people to assess the risk and understand where they stand going into
the transactionthey care about their principal, cost and interest back if default, who else has an
interest in these assets; can I discover the terms of the other transactions; where do I rank vis-à-
vis other institutions (do I have a 1 or a 2 mortgage) over what assets; facilitating creditor
lending to parties to small businesses, large businesses (incl. Bonds and debentures)
– Consensual lien – the security agreement—in contrast to statutory lien; created between parties
through security agreement; used to be title based i.e. who had title at what stage; now, non-title
based system and integrates the registry system; umbrella act sitting over all other transactions.
– Non-title based
– Integrated registry system—used to be different registry system, now integrated; took conditional
sale Act, bill of sale act, assignment book act and integrated them.
– Integrated priorities—sift out who goes first, look at parties, look at situation, and priorities created
before PPSA; PMSI has super-priority, etc.; general rules and exceptions which include fixtures,
etc. (on exam!!!)
– Efficient enforcement system—it goes back and forth, things you can’t opt out
– monitored by creditors, with recourse to courts in last instance—subsequent creditors make sure
that the first creditor stays honest; s. 68-69
- all about sales and financing.
– Application: sale of goods for money price—s. 2 applies to sale or not (know this section) i.e.
scope of the act—sale of goods for consideration usually money but includes bartering.
– Contrast labour and materials – includes sale of services
– Focused on implied conditions and warranties—conditions are set up by s. 12what can happen
with conditions and warranties; implied conditions are implied unless expressly excluded pursuant
to s. 53; refer to s. 13,
– In all instances, these implied conditions are there to keep the seller honest
– Description; MQ; Fitness for purpose; Sample—refer to s.13seller to supply things that comply
to the description, broader the description the more flexibility that the seller has; merchantable
quality—Price abatement Test especially for latent defects; fitness for purposego back and
forth with MQ; sampleproduct doesn’t correspond to sample, s. 19
– Range of purposes – “stark policy” issue:
– Not so different – seller is the one with the info from distributors, agents etc-- are courts
trying to push it to who can bear the loss? not really, Diplock, sellers have the control
over the knowledge because know the market, buyers don’t have that knowledge.
– Consumers—overrides the commercial sense of these acts.
PPSA: various consumer protection provisions—know these provisions, s. 12, s. 45.
CPA – itinerant sellers; formation; cooling off; cost of borrowing; implied conditions—aimed at
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itinerant sellers i.e. sell goods outside the usual place of business, formation of contracts when
consumer contracts s. 19, cooling off period of 10 days, state the cost of borrowing in a particular
way s. 24-28; s. 34.2—cannot contract out of the implied conditions and warranties under the
Business Practices Act – unfair representations—overriding interests over regular sales, unfair
practices in the form of the contract, as a salesperson go beyond mere puff and state mistruths
which prejudices the buyer.
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SUMMARY OF THE DEALERSHIP AND PPSA RULES
Lead Lender (AAP, FA, GSA) and if LL is a bank then s.427 charge
GM (PMSI) DEALER (Debtor) Consumer
$ to dealer
s.1(a)-(e), s.3, s.4: parties taking an interest in personal property are creditors and all other parties are
s.2: the scope of the interests are defined, intention to create security interests, transfer even though there
is no payment.
s.9(1): every security interest is effective according to its terms.
s.11(2): attachment occurs when (a) secured party obtains possession and signs a security agreement that
contains description of the collateral (b) value given (c) debtor has rights in collateral.
s.12: after-acquired property clause may be made except in the case of crops and consumer goods until
after 10 days.
s.13: future advances may be secured.
s.16: acceleration clauses must be performed in good faith and on commercially reasonable grounds.
s.17: a secured party must use reasonable care in the custody and preservation of collateral.
s.18(1)(d): debtor has a right to demand a true copy of the security agreement in order to find out its terms.
s.9(2): if there are any errors pertaining to the security agreement then s.9(2) states a subjective test.
s.46(4): if there are any errors in the financing statement or financing change statement, s.46(4) states an
s.19: perfection cannot occur unless (a) it has attached or (b) all steps required for perfection under the Act
have been done.
s.22 (possession), s.23 (registration), s.24 (temporary perfection) are the steps necessary for perfection.
s.20: unperfected priorities, and what happens when there is no s.19(b). Unperfected security interests in
collateral are subordinate to (i) those who have a lien (ii) judgement creditors (iii) Creditors Relief Act parties.
Unperfected security interests in collateral are ineffective against trustees in bankruptcy.
s.25: if you have a right in the goods, you have a right in collateral and proceeds unless you are authorized
to deal with goods free of that security interest.
s.28(1): last defence, "but I bought those goods in the ordinary course of business!" unless the buyer knew
that the sale constituted a breach of the security agreement.
s.28(3): when the financial institution purchases chattel paper in the ordinary course of business, security
interest continues through to proceeds to the extent that purchaser gives value (if financial institution
purchased chattel paper from dealer worth $10 for $8, financial institution must pay $2 difference to PMSI as
purchaser has priority only to extent that value is given).
consumer goes bankrupt, the dealer takes a new security interest that moment.
s.21(2): allows the financial institution to take the security interest of dealer as the assignee may take the
s.30: basic priority rules, when the dealer goes bankrupt parties fight it out under s.30(1)-(6).
s.30(7): a security interest in an account or inventory and its proceeds is subordinate to beneficiaries of
s.31: The Repair and Storage Liens Act trumps the PPSA.
s.33(1): PMSI in inventory or proceeds has priority over other security interests in same collateral given by
the same debtor if (a) the PMSI was perfected before or at the time the debtor or third party received
possession of inventory (b) notice was given in writing to prior lenders (c) notice must state that SP2 has a
PMSI interests and describe inventory.
s.33(2): PMSI in equipment or consumer goods has priority if it was perfected within 10 days after debtor
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obtains possession of the equipment or consumer goods.
s.34(1): in the case of a security interest in goods that attached (a) before goods became a fixture, the
personal property creditor has priority as to the fixture (b) after goods became a fixture, the personal property
creditor loses to real property creditor who has a registered land interest when the security interest in the
goods attached (provided real property did not subordinate themselves in advance).
s.34(2): the PPSA party only has priority over a subsequent real property mortgagee (purchaser for value) if
the PPSA party has registered their interest under the Real Property Registry.
s.54(1): allows for double registration in the land registry where (a) the collateral is fixtures (b) security
interest is one in a right to payment under a lease, mortgage or charge of real property.
s.38: subordination agreement may be made between parties which is effective according to its terms,
although it must state the type of charge, and the class of plaintiffs before it will be held effective.
s.45(1): a financing statement must be registered.
s.45(2): in the case of consumer goods, the financing statement cannot be registered until the debtor signs
the security agreement, and if this is not done the registration of the financing statement does not constitute
registration or perfection.
s.45(3): where collateral is not consumer goods, the financing statement may be registered before or after
security agreement is signed by the debtor.
s.45(4): except for consumer goods, one financing statement may perfect one or more security interests
created in one security agreement.
s.48(1): sale out of the ordinary course of business protects the creditors of the transferor's company from
the creditors of a transferee's company. With prior consent of the secured party, security interest in transferred
collateral becomes unperfected 15 days after transferred unless secured party files a financing change
s.48(2): where no prior consent is obtained by secured party, security interest in collateral becomes
unperfected 30 days.
s.5(1): conflict of laws is governed by the law of the jurisdiction where collateral is situated at the time of
s.5(2): for goods bought in Ontario, if perfected remain perfected if registered in Ontario (a) within 60 days
from when brought in (b) within 15 days after secured party receives notice of goods in Ontario (c) before
perfection date ceases under the old jurisdiction...whichever is earliest but security interest is subordinate to a
buyer of consumer goods purchased in good faith and without knowledge of a security interest perfected in
s.6(1): where parties understand that the goods will be removed to another jurisdiction within 30 days of
attachment, then perfection, validity and effect is governed by law in new jurisdiction where the goods are
headed (exception to s.5(1)).
s.7(1): validity, perfection and effect of perfection of (a) a security interest in an intangible or goods normally
used in more than one jurisdiction (b) a non-possessory security interest in a security, chattel paper, money,
negotiable instruments, are governed by law of jurisdiction where debtor is located at time of attachment.
s.7(2): if a debtor changes locations, a security interest continues perfected in Ontario if perfected in Ontario
(a) within 60 days (b) within 15 days of secured party receiving notice (c) prior to the date perfection ceases in
old jurisdiction, whichever is earliest.
s.8: procedural and substantive issues.
s.58: if a party takes one route, they are not prevented from taking another.
s.59(1): if debtor makes creditor feel insecure about the way he runs his business, the creditor is permitted
the right to appoint a receiver, appoint directors to your corporate board, etc.
s.59(2): a secured party may enforce a security interest under any method permitted by law.
s.59(5): parties may not waive or contract out of sections 17 and 63 to 66 , which give rights to the debtor
and impose duties on the secured party. Any clause which does so is invalid.
s.60(1): a Receiver is the agent of the secured creditor (usually the lead lender) who hires him and does not
owe a fiduciary duty to the rest of the creditors. The Receiver has the right at law to collect monies that are
coming into the business. A receiver and manager has the right to manage the business as well as collect the
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s.61(1): the secured party is entitled to notify any person who makes payments to the secured party that
they now have an interest, and must give notice so other creditors can ensure the price is commercially
s.62: stipulates the right to take possession and the notice requirements (a) secured party has the right to
take possession of collateral (b) if collateral is equipment and the security agreement was perfected by
registration, the secured party may render the equipment unusable and shall be deemed to have possession
(c) secured party may dispose of the collateral in accordance with s.63.
s.63(1): disposition of collateral, secured party may dispose of collateral or do any commercially reasonable
repairs in order to resell it. Commercial reasonableness ensures that lead lender only takes whatever they are
owed, and the remainder funnels down to the other creditors.
s.63(2): the creditor can sell property together or separately in a public or private sale so long as it is
commercially reasonable, for example, advertise the sale of property within the field that deals wit that type of
s.63(4): secured party shall not give less than 15 days notice in writing to dispose of the collateral to the
debtor, every person who is known by the secured party as owner of the collateral, and all registrants under
the PPSA who have a perfected security interest in the collateral.
s.63(5): Notice mentioned in subsection shall set out, (a) description of the collateral; (b) the amount
required to satisfy the obligation secured by the security interest.
s.63(9): Purchaser takes title clear of any security interest. Debtor's title gets transferred by state to the
s.64(1): If there are any proceeds, the party who disposed of it can take what they are owed, and then has
to pay off any surplus to the other creditors in the chain, then the debtor.
s.65: Secured party's right to foreclosure: choosing not to sell goods, but accepting goods as payment.
Foreclosure constitutes full satisfaction of the debt secured. If secured party forecloses, they are deemed to
have extinguished the debt and cannot recover for any loss sustained once they foreclosed. But other
creditors then have no claim and can force the secured party to not foreclose and force a sale.
NB: A true lease and consignor take ahead of creditors as the PPSA does not apply to true leases.
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