Possible Changes to the Canadian Personal Property Security Acts 2000

Section 9 – Effectiveness of Security Agreements

9.(1) Except as otherwise provided in this or any other Act, a security agreement is effective according to its terms.

9.(2) A security interest in collateral ceases to be valid with respect to that collateral to the extent that and for so long as the security interest secures payment or performance of an obligation that is also secured by a security in favour of that secured party on that collateral created pursuant to sections 425 to 436 of the Bank Act (Canada), or replacements thereof.

9.(3) Nothing in subsection (2) affects:

(a) a security interest that secures payment or performance of an obligation owing by a person who is not a party to an agreement between the debtor and the secured party to which any of sections 425 to 436 of the Bank Act (Canada),or replacements thereof, applies; or

(b) a security interest that is created or provided for in a security agreement executed before this section comes into force.

(4) An account debtor as defined in clause 41(1)(a) may take a security interest in the account or chattel paper under which the account debtor is obligated.

(5) A provision in any other statute which restricts or requires the consent of the grantor to the transfer of a licence or the creation of a security interest in a licence is ineffective but only to the extent that the provision would prevent attachment of a security interest in the license under this Act.


1. Proposed sections 9(1)-(3) above address the problem of "double dipping" on the part of banks purporting to take both Bank Act security and PPSA security to secure the same obligation owing the bank by the same debtor. These provisions are adopted from section 9 of the Saskatchewan PPSA (including a proposed amendment to the current wording of subsection (2) of that Act) which is the only PPSA to directly addresses the problem at present. It is proposed that equivalent provisions be included in the Model Act for potential incorporation in all the provincial PPSAs. The proposed wording reflects the current Saskatchewan sections (with the addition of the words "or replacement thereof" following the reference to the relevant Bank Act sections to accommodate the frequent changes in the section numbering of that Act).

1. The proposed provisions are designed to address the problems described in the following extract from R.C.C. Cuming, "PPSA– Section 178 Bank Act Overlap: No Closer to Solutions" (1991), 18 C.B.L.J. 131 at 139 (footnotes omitted) in which the author comments on the reasoning of Houlden J.A. of the Ontario Court of Appeal in Bank of Nova Scotia v. International Harvester Credit Corporation of Canada Ltd. (1990), 74 O.R. (2d) 738; 73 D.L.R. (4th) 385 [note: all references in the following extract to section 178 of the Bank Act should be read as referring to section 427 to reflect the current numbering]:

Dicta in the decision of Houlden J.A. supports the general proposition that a bank holding a section 178 [now 427] security [under the Bank Act] can rely on its rights as a secured party under the PPSA to improve on the legal position that it occupies under the Bank Act. He observed:

I see no reason why the bank should not be able to perfect its security interest by taking possession of the collateral, even though the bank has failed to comply with the registration provisions of the Bank Act. The security interest of the bank would be invalid under the Bank Act, so that the bank would be unable to claim the benefit of the priority provisions of that statute; but would be perfected under the P.P.S.A., and the bank, like any other holder of a security interest, could claim the benefit of the priority provisions of that statute."

... However, it is not clear the answer is as self-evident as Mr. Justice Houlden suggests it might be. He does not appear to have given full consideration to the constitutional implications of it.

The Parliament of Canada has provided in section 178 of the Bank Act a financing mechanism for use by the chartered bank. The Act specifies the rights of a bank using that system; it also specifies the rights of third parties who acquire interests in the collateral. If a bank fails to comply with the registration requirements of the Act, the bank's security is "void as against creditors of the person giving the security and as against subsequent purchasers or mortgagees in goods faith of the property covered by the security." Implicit in Mr. Justice Houlden's statement is the conclusion that a bank can use the PPSA as a mechanism to avoid the consequences of non-compliance with section 178 of the Bank Act. However, if section 178 of the Bank Act renders "void" a section 178 security as against specified third party interests, is it competent for provincial personal property security legislation to render it valid and enforceable in priority to those same interests? . . .

It is revealing to apply Mr. Justice Houlden's conclusion in the context of situations other than the one that he apparently had in mind. If, for example, Bank A takes a section 178 security but fails to register as required by the Bank Act, can it gain priority over Bank B, which holds a section 178 security, subsequently acquired and properly registered as required by section 178(4), simply by registering a financing statement in the Personal Property Registry and asserting priority under the PPSA on the basis that Bank A has a perfected security interest and Bank B has an unperfected security interest? Can Bank A establish priority over a good faith buyer of the collateral from the debtor by asserting its PPSA priority position? Assume that Bank A does comply with the registration requirements of section 178(4), can it circumvent section 178(7)(a) of the Bank Act, which gives priority to unpaid employees of a bankrupt debtor of Bank A, by basing its claim to priority on the PPSA which gives no similar preferential treatment to unpaid employees? To accept that the answer to these questions is yes is to accept that a bank can invoke its position under the PPSA as a method of frustrating the public policies clearly spelled out in the Bank Act. Even if one concluded that it is constitutional for a provincial legislature to facilitate circumvention of the Bank Act in this way, is there any good reason why it should be seen as having intended this result?

Once again in dicta, Mr. Justice Houlden appears to have accepted without question the efficacy of a bank taking a section 178 security agreement and a PPSA security agreement to secure the same debt from the same debtor. He noted: "I have no doubt that the bank intended and tried to get priority over I.H.C.C. to all the collateral but to succeed in that endeavour it would have had to use a document which purported to give it security on the whole and not just one which on its face and under the Bank Act, R.S.C. 1985, c. B-1, gave it security only on the borrower's interest in the whole." While the Saskatchewan Court of Appeal appears to have sanctioned this practice, there remains considerable doubt that the banks will continue to be able to have the best of both the Bank Act and the PPSA merely through the maintenance of the practice.

. . . A great deal of additional litigation will be required to sort out the implications of the Court's conclusion that banks have been given rights under two conceptually incompatible legal regimes and can "mix and match" rights and obligations to suit their circumstances at any particular time. One might well conclude the unstated objective of the Court was not to provide definitive judicial guidance but rather to demonstrate the need for cooperative federal-provincial legislative action to restore some order to the prevailing chaos.

1. Proposed subsection (4) would confirm that a creditor can take an effective security interest in an account or chattel paper on which it is also obligated as the account debtor (e.g. a bank which takes a security interest in a guaranteed investment certificate issued by it). Although the proposed provision reflects the long-standing Canadian practice and understanding, some doubt was generated by the contrary English decision in Re Charge Card Services Ltd., [1987] Ch. 150 affirmed [1996] Ch. 245, 258 (C.A.). That decision immediately generated strong objections in banking and commercial circles. Legislation was passed in a number of common law jurisdictions to reverse its effect (e.g. Hong Kong and Singapore), and it has now been overruled in England itself by the House of Lords: see Morris and Others v. Rayners Enterprises Inc. [1997] (QL) H.L.J. 45. Proposed subsection (4) would ensure that the issue is removed from debate in common law Canada.

1. The purpose of proposed new subsection (5) is explained above in the comments on the proposed expansion of the definition of “intangible” to include a “licence.”

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