Review of the Personal Property Securities Act 2009
Consultation Response Template
Consultation Paper 2
Instructions:
Please use the form below to provide feedback with respect to the proposed recommendations and issues listed in each section of the form. Please refer and respond to the proposed recommendation or issue as set out in Consultation Paper 2. The heading and paragraph number of the relevant sections of the consultation paper are included to help guide you.
Please note your agreement or disagreement with the proposed recommendation by deleting either ‘Yes’ or ‘No’ where indicated. Comments can be provided in the box below each proposition. There is no word limit for comments but succinct responses clearly setting out the reasons for agreement or disagreement with the proposed recommendation will be of most use for the purposes of the review.
You may respond to as many or as few propositions as you wish.
Name: Anthony DugganOrganisation: Faculty of Law, University of Toronto
Background/Expertise/Interest in PPSA Review: : I have published widely on secured transactions law in Canada, Australia and New Zealand; I am the principal author of Duggan and Brown, Australian Personal Property Securities Law (LexisNexis, Sydney 2012) and Duggan and Ziegel, Secured Transactions in Personal Property: Cases, Text and Materials (6th ed., Emond Montgomery, Toronto, 2013). I have taught Secured Transactions at the University of Toronto for the past 15 years and I have taught Secured Transactions courses at the University of Melbourne, the University of Auckland and the National University of Singapore. I have been a member of the Ontario Bar Association’s Personal Property Security Law Committee for the past 15 years.
Contact Details:
2.2 Rights in the collateral /
Should bare possession constitute sufficient rights in collateral to support attachment of a security interest and, if so, on what basis?
Comments:
Yes. Any kind of property right, including possession, should be sufficient for attachment purposes. The suggestion that bare possession is insufficient for attachment purposes raises the question whether other kinds of property right, less than full ownership, should also not be sufficient for attachment purposes. If this question is open, it is likely to promote litigation on whether a given kind of property right is, or is not, sufficient for attachment purposes. By contrast, a rule to the effect that any kind of property right, including bare possession, is sufficient for attachment purposes allows for no argument.
The proposition that bare possession should be sufficient for attachment purposes does not lead to radical outcomes. This is because the security interest attaches only to such rights as the grantor has in the collateral and the secured party acquires no larger rights than the grantor herself has. Consider the following example:
SP1 holds a security interest in all Grantor’s present and after-acquired personal property, perfected by registration. SP2 sells Grantor a printing press on retention of title terms and delivers the printing press to Grantor on Date 2. The contract between Grantor and SP2 is subject to the condition that Grantor will be able to arrange alternative finance for the purchase no later than Date 3. Grantor is unable to arrange the finance. On Date 4, SP1 enforces its security interest against Grantor and claims the printing press.
Applying the above analysis, SP1’s security interest attaches to the printing press or, rather, it attaches to such rights as Grantor may have in the printing press. The sale agreement between Grantor and SP2 fails because it is subject to an unfulfilled condition precedent (or subsequent). Therefore Grantor has only a bare right of possession in the printing press. In a competition between SP1 and SP2, SP2 can defeat SP1’s security interest by asserting its ownership and recovering possession of the printing press.
Now consider the following case, which I think represents the scenario the Consultation Paper has in mind:
Grantor owns a printing press. On Date 1, Grantor delivers the printing press to Repairer for repair. On Date 2, Repairer gives SP1 a security interest in all Repairer’s present and after-acquired personal property and SP1 registers a financing statement. On Date 3, Grantor gives SP2 a security interest in the printing press and SP 2 registers a financing statement. On Date 4, SP1 and SP2 both claim the printing press, which is still in Repairer’s possession with Repairer not yet having commenced the repairs.
The Consultation Paper argues that, in a case like this, “common sense suggests that the owner’s secured party [SP2] should win”. But it goes on to argue that under the PPSA, SP1 has priority because it registered first. This is incorrect. It is true that, on the above analysis, SP1’s security interest attaches to the printing press. However, attachment gives SP1 no larger rights in the printing press than Repairer itself has. Repairer has no more than a bare right of possession and SP1’s claim to the printing press is correspondingly bounded. Therefore SP2 can defeat SP1’s security interest by taking possession of the printing press (which, as proxy for the owner – Grantor – it is entitled to do).
A different analysis applies in the following case:
SP1 holds a security interest in all Grantor’s present and after-acquired personal property, perfected by registration on Date 1. On Date 1, SP2 sells and delivers to Grantor a printing press on title retention terms and registers a financing statement. On Date 3, Grantor defaults and SP1 and SP2 both claim the printing press.
The first question is whether SP1’s security interest attaches to the printing press. PPSA, s.19(5) is relevant in this connection and it suggests that the answer is “yes” because Grantor has possession and possession gives Grantor sufficient rights in the printing press for SP1’s security interest to attach. But, at least within the framework of the statute, Grantor has substantially more than a bare right of possession. In substance, Grantor owns the printing press subject to a security interest in SP2’s favour. That is a preferable reason for concluding that Grantor has rights in the collateral and it is the conceptual foundation on which the relevant priority rules are based. Section 19 (5) is misleading because, in the cases where it applies, in substance, Grantor’s rights in the collateral extend well beyond bare possession.
Section 19(5) is misleading for the further reason that it fails to address all cases where there might be questions raised about whether the grantor has rights in the collateral. An obvious omission is the case where Grantor has transferred its accounts outright [to SP1] and subsequently transfers the same accounts again [to SP2]. The statute proceeds on the assumptions that: (1) SP1 and SP2 both hold security interests in the accounts; (2) Grantor has rights in the accounts even after transferring them to SP1; and (3) therefore, SP2’s security interest is capable of attaching to the accounts. The basis for the second assumption must be that for the purposes of the attachment, perfection and priority rules, SP1 and SP2 are deemed to hold security interests in the accounts and that, following the transfer to SP1, Grantor remains the owner, subject to SP1’s security interest. This is consistent with the foregoing analysis.
On balance, I’m inclined to think that s.19(5) does more harm than good and that it should be repealed.
2.2 Rights in the collateral /
Proposed recommendation 2.1: That s19(5) be amended to clarify that it applies to all security interests in favour of a secured party that owns the collateral, where the security interest is founded on the grantor's possession of the collateral.
Do you agree with the proposed recommendation? / No
Comments:
I think s.19(5) should be repealed: see above.
2.3 The power to transfer rights in the collateral to the secured party /
Proposed recommendation 2.2: That s19(2)(a) be amended to read:
"(a) the grantor has rights in the collateral; and" /
Do you agree with the proposed recommendation? / Yes /
Comments:
I agree with the analysis in the Consultation Paper. /
2.4 The need for a security agreement /
Should s 19 make explicit that a security interest can only attach if there is a security agreement? /
Comments:
Yes. On first principles, there are 3 requirements for attachment of a consensual security interest: (1) there must be a security agreement; (2) there must be consideration given by the secured party; and (3) the grantor must have rights in the collateral. The omission of the first requirement from s.19 obscures the point that the attachment rules simply restate first principles and it makes it harder – particularly for newcomers to the statute – to grasp the significance of the attachment rules.
Besides, I know of at least one case currently before the Australian courts where it has been argued that “transaction” may cover the creation of non-consensual security interests and that, therefore, the statute is not limited to security interests created by agreement. The omission of the agreement requirement from the attachment provision adds fuel to such arguments.
The Consultation Paper suggests that making this change would add to the complexity of the statute. On the contrary, I think it would improve the clarity of the statute and I think the Consultation Paper over-estimates the associated drafting problems. /
3.1 Section 18 - general rules about security agreements /
Proposed recommendation 2.4: That ss18(2) and (4), and the definition of "future advance" in s10, be deleted. /
Do you agree with the proposed recommendation? / No /
Comments:
Contrary to the suggestion in the Consultation Paper, pre-PPSA law on the creation of security interests in after-acquired property was complex and difficult. There were different rules for the creation of security interests (mortgages) at law and in equity. At common law, attachment of the mortgage depended on: (1) the grantor acquiring rights in the collateral; and (2) a novus actus on the grantor’s part affirming the agreement. In equity, the courts waived the novus actus requirement and the mortgage attached automatically as soon as the grantor acquired rights in the collateral. PPSA, s.18(2) makes it clear that: (1) the old common law and equitable rules governing mortgages of future property no longer apply; (2) in their place, there is a simple statutory rule, as set out in the provision; and (3) a security interest in future property is a statutory security interest and the pre-PPSA distinction between legal and equitable mortgages is no longer relevant.
Section 18(4) makes it clear that a security agreement may cover future advances and that there are no formal requirements that need to be satisfied, beyond a statement in the security agreement that future advances are covered. Additionally, the provision, read in conjunction with the definition of “future advance” in s.2, makes it clear that a security interest may secure a future advance whether or not the secured party was under an obligation to make the future advance. This point is particularly important in relation to a security interest which secures a line of credit or the like and if s.18(4) were repealed, it would be left unstated in the Act. The omission would be more likely to create uncertainty than to reduce complexity. /
3.5 Proposed recommendation - Sections 3.2 to 3.4 /
Proposed recommendation 2.5: That s20(2) be recast along the lines set out above, and that ss20(4) and (5) be deleted. /
Do you agree with the proposed recommendation? / No /
Comments:
I agree that s.20(4) and (5) are unhelpful and should be deleted. I also agree with proposed new s.20(2)(b)(ii). But I have concerns about para.(i) because it is likely to provoke arguments over what “terms of the security interest” means. Strictly speaking a security interest doesn’t have terms, so I suppose the reference should be read as meaning the terms of the security agreement. But what terms must the writing contain: all the terms or just the essential terms and, if the latter, what are the essential terms? My preference would be to say simply that the agreement must be evidenced by writing and that the writing must contain a description of the collateral that is sufficient to enable it to be identified. /
3.6 Situation where collateral is transferred /
Proposed recommendation 2.6: That s20 be amended to make it clear that only the original grantor of a security interest over collateral needs to comply with s20(2), not a person who becomes the grantor as the result of the collateral being transferred to it. /
Do you agree with the proposed recommendation? / Yes /
Comments: /
4.2.1 Seizure or repossession /
Proposed recommendation 2.7: That the language "(other than possession as a result of seizure or repossession)" be deleted from s21(2)(b). /
Do you agree with the proposed recommendation? / Yes /
Comments: /
4.2.2 Bearer investment instruments /
Proposed recommendation 2.8: That s24(6) be amended to clarify that it only applies to a security interest over registrable investment instruments. /
Do you agree with the proposed recommendation? / Yes /
Comments: /
4.3.2.2 Have we jumped the gun? /
Should the Act make specific provision for intermediated securities despite the issues identified in the discussion? /