9. Canadian Property Law
Creditors want assurances that they will be repaid by the debtor. Secured transactions in Canada are contracts between two or more parties in which one party agrees to provide goods or services in exchange for a loan of money or other type of security. This security is usually provided by a third party, such as a bank or other financial institution, and is used to protect the lender in case the borrower fails to pay back the loan. The security can include things such as real estate, vehicles, or other assets, and is used to guarantee the loan. If the borrower fails to repay the loan, the lender can take possession of the security and use it to recoup the money loaned.
Security obtained through agreement comes in three major types: (1) personal property security (the most common form of security); (2) suretyship—the willingness of a third party to pay if the primarily obligated party does not; and (3) mortgage of real estate.
Secured transactions in Canada are governed by provincial and federal laws. The Personal Property Security Act (PPSA) is the main legislation governing secured transactions. The PPSA applies to most security interests in personal property, including equipment and inventory. Each province has its own Personal Property Security Act (PPSA) except for Quebec (secured transactions are administered by the Civil Code of Quebec).
Generally, secured transactions in Canada require the following:
- Creation of a security interest: A secured party must provide the debtor with a security agreement that sets out the terms of the security interest.
- Perfection: The secured party must perfect the security interest by registering it with the provincial registry.
- Priority: Secured creditors must ensure that their security interests are properly perfected to obtain priority over other creditors who may have an interest in the same property.
- Enforcement: Secured creditors must also be prepared to enforce their security interest if the debtor fails to comply with the security agreement. This may include repossessing the collateral and/or selling it to satisfy the debt.
- Discharge: Once the debt has been paid, a secured creditor must discharge the security interest. If the debt is not paid in full, the secured creditor must follow the statutory procedure for realizing the secured property in order to discharge the security interest. This process involves providing notice to the debtor and other interested parties, selling the secured property through public auction, and applying the proceeds of the sale to the outstanding debt. The secured creditor must also comply with any applicable provincial laws governing the discharge of secured transactions.
Other Types of Collateral
Among other forms of collateral that may be used as security is the floating lien. A floating lien is a type of collateral used to secure a loan. It is a lien on all the assets of a borrower, including current and future assets. It is not attached to a specific asset, so if the borrower changes assets, the lien will still remain in place. The lender has the right to seize any of the borrower’s assets if the loan is not repaid. Floating liens are commonly used in business loans, as they offer more security to the lender than other types of collateral.
Attachment of a Security Interest
Attachment is the term used to describe when a security interest becomes enforceable against the debtor with respect to the collateral. There are three requirements for attachment:
- the secured party gives value.
- the debtor has rights in the collateral or the power to transfer rights in it to the secured party.
- the parties have a security agreement “authenticated” (signed) by the debtor, or the creditor has possession of the collateral.
The creditor, or secured party, must give “value” for the security interest to attach. Typically, this is extending credit to the debtor. The debtor must have rights in the collateral. Most commonly, the debtor owns the collateral (or has some ownership interest in it). The rights need not necessarily be the immediate right to possession, but they must be rights that can be conveyed.
Perfection of a Security Interest
In the relationship between a debtor and creditor, attachment of a security interest enables the creditor to repossess the goods and—usually—sell them to satisfy the outstanding obligation if the debtor defaults. However, unless additional steps are taken, the rights of the secured party might be subordinated to the rights of other secured parties; certain lien creditors, bankruptcy trustees, and buyers, who are not aware of the security interest. Perfection is the secured party’s way of announcing the security interest to the rest of the world. It is the secured party’s claim on the collateral.
Perfection of a security interest in Canadian law refers to the steps taken to ensure that the security interest is enforceable and given priority over other creditors. Perfection requires registration of the security interest on the applicable provincial or territorial personal property registry, as well as obtaining control over the collateral (if applicable). In addition, the parties must execute a security agreement that sets out the rights and obligations of the parties with respect to the security interest. Perfection of a security interest in Canada is necessary to ensure that the secured party’s interest is protected and given priority over other creditors in the event of the debtor’s insolvency or bankruptcy.
The steps for perfecting a security interest typically include the following:
- Determine the Type of Security Interest: Security interests can be either fixed or floating. A fixed security interest is an interest in a specific asset, while a floating security interest is an interest in a pool of assets.
- Identify the Creditor and Debtor: The creditor is the person or entity who is providing the loan and the debtor is the person or entity who is receiving the loan.
- Draft a Security Agreement: A security agreement is a contract between the creditor and debtor that outlines the terms of the loan. The security agreement should include the type of security interest, the assets that are to be used as security, the amount of the loan and any other relevant terms.
- Record the Security Interest: The security interest must be recorded in the appropriate registry. In Canada, this is usually either the Personal Property Security Register (PPSR) or the Land Titles Office.
- Perfect the Security Interest: Perfection is the process of making the security interest enforceable. This usually involves filing the security agreement with the appropriate registry and/or obtaining a judgment against the debtor.
- Monitor the Security Interest: The creditor must monitor the security interest to ensure the debtor is current on their payments and that the security interest is not subordinated to the interests of another creditor.