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Secured Transactions in Canada

Originally published: Aug-26-2008

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Security Padlock and ChainWhile certainly not mirror images of each other, there are many similarities between Canada and the United States. As neighboring countries and major trade partners, both have developed along similar lines technologically and economically. Both have legal systems based primarily on English common law, as well as areas influenced by France and the French civil law system (Quebec, Canada and Louisiana, US).

The similarity continues in terms of business/commercial law. In Canada jurisdiction falls under the provinces and territories, in the US it falls under the individual states.

To simplify commercial transactions between internal jurisdictions, both countries have bodies that develop model legislations to improve consistency. In the US, this is the National Conference of Commissioners on Uniform State Laws (NCCUSL), established in1892. The Uniform Law Conference of Canada (ULCC), founded in 1919, serves the same purpose in Canada.

Secured transactions is one area of business law that has been of concern to both the ULCC and the NCCUSL. While the focus here is on Canada’s law concerning secured transactions, we’ll also look at similarities and differences in the US legislation.

What is a Secured Transaction?

A secured transaction is a loan or credit transaction in which the lender acquires a security interest in certain collateral owned by the borrower. The lender has the right to foreclose on or repossess the collateral in the event of the borrower's default. The terms of the relationship are governed by a contract or security agreement. Commercial creditors wishing to sell to customers that do not meet their normal credit standards can benefit by taking a security interest in the goods being sold.

Secured Transactions in Canada – The Personal Property Security Acts

The general intent of the Canadian Personal Property Security Acts (PPSA) is to allow lenders and sellers to register their interest in the personal property of a debtor/buyer in order to secure payment, and to establish a priority position among other creditors.

Prior to 1976, myriad laws, each with its own rules concerning formality, registration, priority and enforcement, governed personal property security transactions in Canada.

Although Canada began the process of reforming its secured transactions legislation in the 1960s, it wasn’t until 1976 that actual legislation began to appear. By 2001, all Canadian common law provinces and territories (nine of the 10 provinces and all three territories) had developed Personal Property Security Acts (PPSAs). The only province that has not enacted a PPSA is Quebec. (The last section of this article briefly describes Quebec’s secured transaction law.)

The various Canadian PPSAs are largely based on the original version of Article 9 of the United States Uniform Commercial Code (UCC 9) drafted in the 1950s.

However, because the Canadian provinces began reforming their secured transaction legislation in the 1960s (a decade after the U.S. model legislation was drafted), the PPSAs addressed more advanced business practices, including computerization, which were not at issue when UCC 9 was drafted. Many of the improvements incorporated into a revised version of the U.S. UCC 9 (effective July 1, 2001), in fact, were those originally written into the Canadian PPSAs.

As a result, there are more similarities than differences between Canada’s PPSAs and America’s revised UCC 9. Perhaps the most significant difference is that the revised UCC 9 was adopted basically “as is” by all 50 states. Thus, in the United States there is practically total conformity among the states in terms of secured transaction legislation.

In Canada, on the other hand, the provinces did not adopt a “model” PPSA, but developed their own versions. While the PPSAs have strong similarities, they also have distinct differences, in particular with reference to registration standards.

It is essential, therefore, that any commercial creditor seeking to secure a transaction with a Canadian buyer seek out the services of a law firm well versed in the PPSA legislation applicable to the province where the debtor is registered.

Note: the similarities and differences listed below are not intended as a detailed analysis of either legislation, but as a brief comparison of the commonalities of the PPSAs and revised UCC 9.

Some Similarities between the PPSAs and Revised UCC 9

Both Canada and the United States operate on the legal principle that a secured creditor has priority in payment over an unsecured creditor, regardless of the size of the debt or the date the debt was incurred. Some other similarities between the PPSAs and UCC 9 include:

Scope

The PPSA applies to every transaction that creates a security interest, without regard to its form. Similarly, UCC 9 applies to any interest (regardless of form) created by a contract in personal property which secures payment or performance of any obligation.

Terminology of Primary Concepts

Attachment: This term is used in both the PPSAs and UCC 9 to mean that all the events necessary for the creation of a security interest have taken place. The requirements for attachment are virtually identical under both laws.

Financing Statement: Under both the PPSAs and UCC 9, the form registering the security interest in the states/provinces/territories is referred to as the financing statement.

Perfection: As in UCC 9, perfection under the PPSAs means that the secured party has taken the necessary steps to establish and protect its security interest. In terms of credit transactions, perfection occurs, both in Canada and the U.S., when the security interest is actually registered/filed.

Choice of Law

Both the PPSAs and UCC 9 require financing statements on registered entities (including corporations, limited liability companies, limited partnerships) be made in the province (or state) where the company is incorporated.

Some Differences between the PPSAs and Revised UCC 9

Term of Registration

Under UCC 9, registration of a security interest is valid for five years with the option to file renewals for further five-year periods. The PPSAs permit registrants to tailor the term to the particular transaction. Security under the PPSAs can therefore be in effect from one year to infinity. In order to deter the use of excessive terms, registration fees under the PPSAs are tied to the length of the selected term.

Debtor Signature

On the surface, it appears that the PPSAs and revised UCC 9 agree that no debtor signature is required on the financing statement (the form required to file the secured transaction with the appropriate jurisdiction). However, that is not strictly the case.

Under the PPSAs, no debtor signature is required on the financing statement – period. Under the revised UCC 9, no debtor signature is required on the financing statement either. However, under revised UCC 9, in the event there is no debtor-signed Security Agreement between the parties, the creditor must have in its possession a debtor-signed Proof of Authentication, giving the creditor authority to file the financing statement.

Leases

The PPSAs apply to leases, whereas UCC 9 specifically does not extend to leases.

Secured Transactions in the Canadian Province of Quebec

Quebec differs in many respects from the other provinces and territories of Canada. It is French-speaking and governed by a civil code rather than common law. Quebec, therefore, did not draft a PPSA. It did, however, develop legislation intended to be both the conceptual and functional equivalent of security interest as legislated under the PPSAs and UCC 9. The Quebec legislation can be found in Book Ten on Private International Law of the CCQ (Canadian Province of Quebec).

A primary difference between Quebec’s Civil Code provisions and the PPSAs is the meaning of the term “security”. In Quebec’s civil law, a secured interest only provides the creditor a conditional right to extract the value of the secured property, and to receive preference in payment. It does not comprise a right to take possession or to foreclose on such property. Whereas, under the PPSAs and UCC 9, the rights to take possession or foreclose are inherent in the "security" interest.

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Disclaimer: This information is provided by ABC-Amega Inc., a U.S. commercial receivable management firm, for informational purposes only and is not intended to be legal advice and is not a substitute for competent legal advice on the referenced subject.