ArticlesUnexpected Change to the Personal Property Security Act (Ontario): Estoppel Letters Now Always RequiredPublished: 09/18/2007 By Jason Arbuck, Jonathan Fleisher SummaryDue to recent changes in the implementation of Bill 152, an Act to amend the Personal Property Security Act (Ontario) (“PPSA”), unless a purchase money security interest has been obtained, it is now prudent practice to obtain estoppels or waiver letters from each prior registered secured party, whether or not such a secured party has included a collateral description. Separately and unrelated, it appears to be possible to obtain a purchase money security interest for sale leaseback transactions. This matter has been brought to the Minister’s attention and they are currently reviewing it. While it is generally believed that these changes will be reversed when the house resumes sitting after the provincial election, this may be several months from now. DiscussionSome time ago, our firm had advised you as to certain amendments to the PPSA. Certain of these amendments were to take effect on August 1, 2007 and others at some later date. One of the amendments that was to take effect at a later date was the removal of the ‘check-the-box’ system. This system is unique to the Ontario PPSA in that the secured party is not required to describe the collateral in which they are taking a security interest, but merely indicate a class of collateral by checking the relevant box. Often, under the ‘check-the-box’ system, a secured party could, but was not required to, enter a collateral description. When a collateral description was provided in the financing statement, the secured party’s collateral was limited to what was set out in the financing statement. The legislative authority for this provision was subsection 46(3) of the PPSA. It has been acknowledged that the ‘check-the-box’ system which the PPSA utilizes is not the most efficient manner of describing a collateral interest and is not in conformity with other jurisdictions. The proposed amendments under Bill 152 were to cause Ontario to align with other provinces’ systems. It was understood that this elimination of the ‘check-the-box’ system could not be implemented immediately as there would have to be a significant number of retroactive changes to the computer system which runs the registration system. It was believed that when this changed occurred, Section 46(3) would be replaced. (See the end of this e-LERT for the old and new provisions provided.) Much to the surprise of many PPSA practitioners, Section 46(3) was replaced on August 1, 2007 with the proposed amendment which was anticipated only to take effect when the ‘check-the-box’ system was replaced. The new Section 46(3) does not provide for the collateral being limited to that which is set out in the collateral description box. The implication of this change is that a searcher of the system can no longer rely on a secured party’s security interest being limited to that which is set out in the general collateral box. Accordingly, unless a purchase money security interest is obtained, a prudent secured party will be required to obtain waivers from all prior registered parties. This is an unexpected consequence of the amendments to the PPSA and is likely to cause more paper work than was previously the case. To the extent that it was a finance company’s practice to always obtain waivers regardless of whether there was a collateral description, then no change to practice need occur. If, on the other hand, as was a more common practice, waivers were only required to the extent that there was not a general collateral description (subject to certain exceptions with respect to the “other” box), then there will have to be a change in practice. There is also some debate as to whether this change will be retroactive in nature. While uncertain, the better view appears to be that the change is only effective with respect to financings that occurred from August 1, 2007 forward. It should also be noted that there was another minor change that was unexpected: the removal of sale leasebacks as an exclusion from a purchase money security interest. There was no commentary as to why this change was implemented. Notwithstanding the changes to the PPSA, our firm’s view would still be not to rely on any purchase money finance obligations with respect to a sale leaseback as there may be certain bankruptcy act issues of concern that would need to be addressed. It is also not entirely clear how a purchase money security interest could be achieved as there would have to be a significant analysis of the meaning of subsection 33(2)(a)(i)’s words, “within 10 days after (i) the debtor obtained possession of the collateral as a debtor”. It is beyond the scope of this e-LERT to discuss this matter. Section 46(3): Old Classification of Collateral (3) Except with respect to rights to proceeds, where a financing statement or financing change statement sets out a classification of collateral and also contains words that appear to limit the scope of the classification, then, unless otherwise indicated in the financing statement or financing change statement, the secured party may claim a security interest perfected by registration only in the class as limited. R.S.O. 1990, c.P.10, s. 46(3). Section 46(3): New Note: On a day to be named by proclamation of the Lieutenant Governor, subsection (3) is repealed by the Statutes of Ontario, 2006, chapter 34, Schedule E, subsection 15(1) and the following substituted: Authorized person (3) A financing statement or financing change statement in a required format may be tendered for registration by direct electronic transmission only by a person who is, or is a member of a class of persons that is, authorized by the registrar to do so. 2006, c.34, Sched. E, s. 15(1) See: 2006, c.34, Sched. E, ss. 15(1), 26(1) |