Overview of the Ontario PPSA
The Personal Property Security Act, R.S.O. 1990, c. P.10 (PPSA) governs the creation, perfection, and priority of security interests in personal property in Ontario. The PPSA replaced the prior patchwork of common law chattel mortgages, conditional sales, and other security devices with a single, comprehensive statutory regime based on Article 9 of the US Uniform Commercial Code.
The PPSA applies broadly to "every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral" (s.2). This functional approach means that conditional sales, consignments, trusts, and leases of more than one year may all constitute security interests subject to the PPSA even if the parties have not described the arrangement as a security agreement.
The PPSA does not apply to certain transactions including liens arising by statute or rule of law (s.4(1)(a)), interests in real property (s.4(1)(b)), and assignments of accounts for collection only (s.4(1)(e)).
Creation and Attachment of Security Interests
Attachment: Section 11(2)
A security interest attaches — becoming enforceable against the debtor — when three conditions are met:
- Value has been given by the secured party. Value is defined broadly in s.1 to include any consideration sufficient to support a simple contract, an antecedent debt, and a binding commitment to extend credit.
- The debtor has rights in the collateral or the power to transfer rights to the secured party. A debtor who has only agreed to purchase collateral but not yet received it generally cannot grant a security interest in that collateral.
- A security agreement has been authenticated — either a signed written agreement containing a description of the collateral, or the secured party has taken possession or control of the collateral.
Attachment is the precondition for enforceability of the security interest against the debtor. A security interest that has attached but not been perfected is enforceable between the parties but may be subordinate to other claims.
The Security Agreement
The security agreement must: be in writing and signed by the debtor; contain a description of the collateral sufficient to identify it; and be authenticated by the debtor. Generic descriptions such as "all assets" or "all personal property" are permissible. For consumer goods, the description must be specific enough to enable the debtor to identify the collateral.
For accounts and other intangibles, the security agreement must specifically describe the collateral or use a general description that is not misleading. The Ontario Court of Appeal in Re Giffen (affirmed 1998 SCC 14) confirmed that a description of collateral in a financing statement need only describe the collateral in a manner that is not seriously misleading.
Perfection by Registration in the PPSR
A security interest is perfected when it has attached and the secured party has either: registered a financing statement in the Personal Property Security Register (PPSR); taken possession of the collateral; or obtained control of certain types of collateral (investment property, deposit accounts) (s.19).
PPSR Registration
The Ontario PPSR is administered by ServiceOntario and is accessible through the electronic registration system. A financing statement must contain: the name and address of the secured party; the name and address of the debtor; a description of the collateral; and, where applicable, the registration period.
Registration is effective for the period specified, which may be up to 25 years (or infinity for certain transactions). A registration that lapses before the security interest is discharged creates a priority gap — a creditor who registers during the lapse period may obtain priority.
A financing statement describing collateral as "all present and after-acquired personal property" (PAAP) creates a general security agreement (GSA) that captures all personal property the debtor acquires after the date of the agreement, subject to PMSI super-priority and other exceptions.
Errors in Registration
An error in a financing statement does not invalidate the registration unless it is "seriously misleading" (s.46(4)). Courts apply the test of whether a reasonably careful searcher, searching under the debtor's name, would fail to find the registration due to the error. A misspelling of the debtor's name may or may not be seriously misleading depending on whether a reasonable search would retrieve it.
Purchase Money Security Interests: Sections 33-34
A purchase money security interest (PMSI) receives super-priority — the ability to leap-frog a prior perfected security interest in the same collateral — subject to compliance with the notice and perfection requirements in ss.33-34.
Definition of PMSI
Under s.1(1), a PMSI is:
- A security interest taken or reserved by a seller of collateral to secure all or part of its purchase price (seller's PMSI); or
- A security interest taken by a person who gives value for the purpose of enabling the debtor to acquire rights in the collateral, to the extent the value is used for that purpose (lender's PMSI).
A PMSI does not include a security interest taken by a debtor under a sale and leaseback, or a security interest in collateral that is inventory.
PMSI Priority in Inventory (s.33)
A PMSI in inventory takes priority over a conflicting security interest in the same inventory if before the debtor receives possession of the inventory, the PMSI is perfected and the PMSI holder gives written notice to every other secured party with a perfected security interest in the same inventory category.
PMSI Priority in Non-Inventory Collateral (s.34)
A PMSI in collateral other than inventory (typically equipment) takes priority over a conflicting security interest if the PMSI is perfected no later than 15 days after the day the debtor takes possession. No advance notice to prior secured parties is required for equipment PMSIs.
Priority Rules: Section 30
The general rule under PPSA s.30(1) is that priority between competing perfected security interests in the same collateral is determined by the order of registration or perfection — whichever occurred first — and is not affected by the order in which value was given or the security interests attached. This is the "first-to-register-or-perfect" rule.
A creditor who registers a financing statement before a security interest attaches — called "pre-registering" — obtains priority as of the date of registration, even over a creditor whose security interest attached first but was perfected later.
Priority Between Perfected and Unperfected Interests
An unperfected security interest is subordinate to a perfected security interest in the same collateral (s.30(3)). Where two security interests are both unperfected, priority is determined by order of attachment (s.30(2)).
Liens Arising by Statute or Operation of Law
Section 4(1)(a) exempts liens arising by statute or rule of law from the PPSA. However, s.31 addresses priority between PPSA security interests and certain statutory liens. Unpaid supplier liens under the Repair and Storage Liens Acttypically take priority over prior perfected PPSA security interests while the repairer retains possession.
Deemed Trusts: Income Tax Act and ETA
Federal deemed trusts for unremitted source deductions under Income Tax Acts.227(4) and for unremitted HST under Excise Tax Act s.222 take priority over PPSA security interests, including perfected PMSIs. The deemed trust for unremitted source deductions attaches to the debtor's assets in an amount equal to the deductions not remitted to the CRA, and takes super-priority over all other creditors including secured creditors. Ontario corporate lawyers and insolvency counsel must always check for outstanding source deduction and HST arrears before relying on a security interest to recover.
Enforcement: PPSA Part V
Part V of the PPSA (ss.58-67) governs enforcement of security interests upon default.
Default
The PPSA does not define default — it is governed by the security agreement. Common default triggers include failure to pay, insolvency, breach of covenant, material adverse change, and cross-default provisions.
Seizing Collateral
Upon default, a secured party may seize collateral (s.62). Seizure may occur by taking possession of the collateral or, in the case of a debtor business, by appointing a receiver. A secured party may enter premises to seize collateral but must not breach the peace. If the debtor does not consent and a breach of the peace is apprehended, the secured party must obtain a court order.
Disposal of Collateral (s.63)
After seizing collateral, the secured party must provide written notice to the debtor, any guarantors, and any other secured parties with an interest in the collateral at least 15 days (for consumer goods) or 10 days (for other collateral) before disposing. The notice must describe the collateral and state the time and method of sale.
The disposition must be conducted in a commercially reasonable manner. The secured party may sell at public auction or by private sale; the proceeds are applied first to enforcement costs, then to the secured obligation, then to any surplus (payable to the debtor or subordinate creditors).
Deficiency (s.67) and Redemption (s.66)
Where the proceeds of disposition are insufficient to satisfy the secured obligation, the secured party has a right to a deficiency judgment against the debtor, subject to any restrictions in the security agreement. The debtor has the right to redeem the collateral at any time before disposition by paying the full amount owing plus enforcement costs.
Practice Points for Ontario Commercial Lawyers
- Always search the PPSR before closing any secured financing or asset purchase to identify prior registrations — a missed registration can result in the client taking collateral subject to a prior perfected security interest.
- For equipment financing with a lender PMSI, register within 15 days of the debtor receiving possession to preserve super-priority under s.34.
- For inventory PMSIs, give written notice to all prior perfected secured parties in the same inventory category before the debtor receives possession (s.33).
- Search for outstanding CRA source deduction and HST arrears before relying on a general security agreement to recover — the federal deemed trusts take priority over PPSA security interests.
- Ensure security agreements contain after-acquired property clauses to capture collateral the debtor acquires after the date of the agreement.
- When drafting financing statements, describe collateral specifically enough to avoid a "seriously misleading" error argument (s.46(4)) while remaining broad enough to capture all intended collateral.