Modernization amendments were made to the Ontario Personal Property Security Act (the PPSA) on May 29, 20191 that recognize the fact that automotive and other equipment finance companies increasingly conduct business electronically. The amendments bifurcate the definition of chattel paper into "tangible chattel paper" and "electronic chattel paper" and include related amendments that, among other things, address the perfection and priority of security interests in both types of chattel paper. Once in force, the amendments will facilitate and enhance the securitization of electronic chattel paper in the automotive and equipment sectors.
Saskatchewan was the first province to make such amendments to its Personal Property Security Act.2 As of the date of this bulletin, neither the Ontario nor the Saskatchewan government has announced the date on which these amendments will come into force.
Background
Currently, the PPSA defines chattel paper as "one or more than one writing that evidences both a monetary obligation and a security interest in or a lease of specific goods" and is commonly a lease, conditional sale contract or promissory note secured by a security agreement in specific goods. Typically, an automobile or equipment dealer provides financing for its goods then assigns the resulting chattel paper to its lender. Under the PPSA, the chattel paper could be perfected by possession or registration. Perfection requires that a hard copy of the chattel paper actually exists and is a cumbersome process, particularly in a volume business. The alternative is to perfect by registration. With registration, estoppels, subordination agreements or discharges may be needed from other creditors to establish priority. The PPSA amendments recognize that chattel paper is increasingly in electronic form and, with that being the case, permits perfection in that form of chattel paper by control.
Types of Chattel Paper
Once the amendments are in force, the PPSA will include two types of chattel paper:
- electronic chattel paper — chattel paper created, recorded, transmitted or stored in digital form or other intangible form by electronic, magnetic or optical means; and
- tangible chattel paper — chattel paper evidenced by a record or records consisting of information inscribed on a tangible medium.
Perfection
The amendments provide that security interests in electronic chattel paper can be perfected by control. The principal requirements to achieve control are:3
(a) a single authoritative record of the electronic chattel
paper exists that is unique, identifiable and, except for certain
exceptions, unalterable;
(b) the authoritative record identifies the secured party as the
transferee of the record; and
(c) the authoritative record is communicated to and securely
maintained by the secured party or the party's designated
custodian.
Section 22(1)(a) clarifies that a security interest in tangible chattel paper may still be perfected by possession, but a security interest in electronic chattel paper may not.
Priority
Currently, the PPSA deals with the priority of a security interest in chattel paper in two ways:
- by allowing purchasers of chattel paper who take possession without notice a prior security interest to do so free of the prior security interest (section 28(3)); and
- through the priority rule in section 30 of the PPSA, which provides that between two security interests, the security interest that was perfected first has priority.
These provisions have been amended as follows:
- Section 28(3) has been amended to protect a purchaser who in the ordinary course of the purchaser's business and for new value, (a) takes possession of tangible chattel paper or (b) takes control of electronic chattel paper, provided the chattel paper does not indicate that it has been assigned to another transferee.
- Section 30 of the PPSA has been amended by the addition of section 30(3.1):
-
- Where priority is to be determined between perfected security interests in a prescribed class of collateral, priority shall be determined in accordance with the regulations.
The amendments to the Saskatchewan PPSA maintained the "first to perfect" rule for security interests in electronic chattel paper. The Ontario regulations to address this priority rule are not yet available, but presumably the intention is to follow the same approach as in Saskatchewan.
The PPSA amendments also include a new priority rule.4 If the rights arising out of tangible chattel paper are transferred to a purchaser as electronic chattel paper for new value and in the ordinary course of the purchaser's business, and if the tangible chattel paper is transferred to another purchaser who takes possession of it for new value and in the ordinary course of that purchaser's business, the interest of the purchaser of the tangible chattel paper has priority over the interest of the purchaser of the electronic chattel paper if the tangible chattel paper does not indicate that it has been assigned to an identified assignee other than the purchaser of the tangible chattel paper.5
Comment
In some respects, Personal Property Security Act legislation had not been keeping pace with the increasing use of electronic technology in the financing of equipment and automotive goods. The amendments to the PPSA described above will go a long way to facilitate and enhance electronic commerce.
Footnotes
1 Personal Property Security Act, RSO 1990, c P10 (PPSA). The proposed amendments are to sections 1, 5(1), 7(1), 11(2), 22(1)(a), 22.2, 28(3), 30(1), and 74.1 of the PPSA, as amended by Protecting What Matters Most Act (Budget Measures), 2019, SO 2019, c 7, Sched 49, which has not yet been proclaimed in force.
2 Personal Property Security Act, RSS 1993, c P-6.2 (Saskatchewan PPSA), as amended by Bill 151, The Personal Property Security Amendment Act, 2018, 3rd Sess, 28th Leg, Saskatchewan, 2019, which received Royal Assent May 15, 2019 but has yet to be proclaimed in force.
3 PPSA, s 1(3).
4 This will be added to the PPSA as section 28(3.1).
5 Protecting What Matters Most Act (Budget Measures), 2019, SO 2019, c 7, Sched 49, s 7.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
