Saskatchewan has introduced Bill 151 (the Bill) which amends The Personal Property Security Act, 1993 (Saskatchewan) (the PPSA or the Act) bringing some important changes to the PPSA that will affect secured creditors and borrowers.
Bill 151 received first reading in the Legislature on November 15, 2018 and second reading on March 5th. It passed through the committee stage with some small amendments, and then received third reading on March 12, 2019. As a result, Bill 151 is now law, though it awaits Royal Assent, and a “coming into force” date before it will come into effect. In a new Post, we update that status and discuss the amendments made at the committee stage.
Portions of the Bill appear to be drawn from a Report to the Canadian Conference on Personal Property Security Law on Proposals for Changes to the Personal Property Security Acts (the Report), prepared by a working group of the Canadian Conference on Personal Property Security Law (CCPPSL) and ratified at the CCPPSL Annual Meeting in Edmonton, Alberta, 21-23 June 2017.
The Report has recommended similar changes across Canada, although in some areas, particularly with respect to serial number registrations, the Report treats the recommendations as not relevant for Ontario.
In the discussion below we describe most of the amendments. In many cases we already have published additional posts to discuss certain amendments in greater detail – those posts are linked below. We will publish several more posts over the coming weeks and, as they are published we will update this piece to include links to those additional posts.
Highlights of the Amendments
1. Electronic Chattel Paper
The PPSA defines chattel paper as “one or more writing that evidence both a monetary obligation and a security interest in, or lease of, specific goods.” Because of its unique role in financing, specifically in automobile and equipment financing, important aspects of security interests in chattel paper are governed by special PPSA rules. A security interest in chattel paper may be perfected by registration. However, under the PPSA rules, physical possession of the chattel paper gives the secured party a superior priority status. A secured party not taking possession of the chattel paper can protect its interest by indicating on the chattel paper that it is subject to its security interest.
The increasing digitization of commercial transaction documentation has raised concerns about the lack of rules in the PPSA governing electronic chattel paper or quasi-electronic chattel paper.
The proposed new definitions and amendments in the Bill are designed to provide specific recognition of electronic chattel paper as a special form of chattel paper. An important feature of the amendments adopts the concept of “control” of electronic chattel paper as a substitute for possession of hard copy chattel paper.
We have discussed the details on how security in electronic chattel paper, and perfection by control, will operate here.
2. Purchase Money Security Interest (PMSI) Rules
The Bill will also impact PMSIs. Broadly, the amendments cover, among other things, the following:
- new language for cross-collateralization in the context of purchase-money financing arrangements involving inventory;
- PMSI status to continue through refinancings, whether a refinancing by the original lender or a new third party lender;
- how payments to a specific creditor are to be allocated where not already stipulated by the parties, such that to obligations secured by a PMSI would be the last loans to which payments would be allocated.
Click here for a detailed post on our analysis of the PMSI amendments.
3. Security Interests in Licences
The definition of “licence” is amended to further clarify that statutory licences are included as personal property and can be the subject of PPSA security. Commercial parties in Saskatchewan have long operated on this basis, and licences were already included in Saskatchewan’s PPSA, but the CCPPSL had made recommendations that went beyond Saskatchewan’s existing language and the amendments will bring the PPSA largely into line with the CCPPSL recommendations.
4. Rules Governing Conflicts of Laws, Mobile Goods, Location of Debtor and Related Matters
The Report identified that these are areas that have been the subject of litigation and legislative amendments in numerous jurisdictions. The Report identified that these are areas that have been the subject of litigation and legislative amendments in numerous jurisdictions. There are a substantial number of amendments in the Bill that are too complex to summarize effectively here, so we have prepared a two part piece to address the new conflicts rules (Part 1) and the transition to these new rules (Part 2).
5. Security Interests in Money and Negotiable Collateral and Potential Impact on Deposit-Taking Financial Institutions
The Bill overhauls sections 31 and 41 of the PPSA. Section 31 deals with priority of holders or purchasers of money, the rights of creditors who receive payment of debts, and the purchasers of other instruments or securities. Section 41 sets out the rules dealing with the assignment of intangibles (which includes debts) or chattel paper. The right of set-off that may be asserted by an account debtor, which is particularly relevant for deposit holders or secured parties who take security in cash collateral, is also addressed in the current section 41.
Since sections 31 and 41 are entirely replaced by the Bill, rather than attempt to summarize the changes here, we will address the operation and impact of the amendments in a future post.
6. Impact on Priority of a Security Interest that Becomes Unperfected After Another Party Commences Enforcement
The CCPPSL was concerned about what happens if an enforcement proceeding has been commenced and the perfection status of a secured party is subsequently altered, i.e., because of lapse without renewal. Should the time for determining priority be the date of enforcement, or some other date? The amendments in the Bill introduce a provision stating that the priority status of a security interest will not be affected by another secured party’s enforcement measures. We have discussed this further in the following post.
7. Notice of Enforcement to be Served on All Secured Parties
Currently, the PPSA requires that a secured party intending to dispose of collateral give notices of such steps to creditors whose interests are subordinate to that of the enforcing secured party. The Bill will change that so that all secured parties, including those who hold a security interest with priority over that of the enforcing secured party, must be served with a notice of disposition of the collateral.
8. Transferees of Goods or Intangibles That Are Subject to Unperfected Security Interests – Removal of the Knowledge Rule
The PPSA contains an odd anomaly where in some circumstances a transferee of goods would take the goods free of a perfected security interest even if the transferee is aware of the interest (i.e., a purchaser for value in the ordinary course of business), but currently that same transferee would not take the goods free of an unperfected security interest if they had knowledge of it.
Bill 151 introduces language that clearly subordinates an unperfected secured creditor (in addition to a perfected secured creditor) to a buyer or lessee who acquires an interest in the collateral for value.
9. Effect of Future advances on Buyers and Lessees
The CCPPSL identified a situation that they determined is not addressed by legislation or settled by any court decision in Canada. Essentially, they asked what should happen where a secured party has an arrangement with a debtor that contemplates periodic advances. Following the perfection of the secured party’s security interest, the debtor then sells or leases collateral to a third party outside the ordinary course of the debtor’s business. At the time of that sale, the secured party has advanced little or nothing. Then, with knowledge of the sale, the secured party makes a subsequent advance and claims priority over the third party buyer.
Bill 151 attempts to address that scenario by introducing language stating that “The priority that a security interest has pursuant to another provision of this Act applies to advances, including future advances, made after the interest of a buyer or lessee arises.”
One would expect that this would have an impact on M&A asset sales. While it is not the current prevailing practice in any event, it will not be enough to confirm that the current secured party is not owed anything. It will be necessary for the third party purchaser to obtain a “no interest” letter or some other subordination from the secured party.
10. Deemed Trusts Under The Pension Benefits Act, 1992
It appears that the Bill will create a superior (or PMSI like) priority for amounts deemed to be held in trust by employers under The Pension Benefits Act, 1992. It is clear that employee contributions that are made or withheld from payroll, and employer contributions that are required to be made under a pension plan, will be subject to this priority and it appears that this priority will also apply to unfunded pension liabilities. Click here to find a more detailed post on our analysis of this super priority.
11. Serial Number Registrations
Bill 151 makes several amendments to the rules governing serial number registrations, in respect of serial numbered goods that constitute “consumer goods”, errors in respect of serial number registrations, and where a secured party has registered the serial number only in the general collateral field and not the serial number field. Click here for a post on the details of these amendments.”
12. Growing Crops – Elimination of the Requirement to Take a New Security Agreement Every Year
Bill 151 eliminates the requirement to take a fresh security agreement every year with respect to growing crops. This change will be particularly welcomed by lenders who do not have the ability to take Bank Act (Canada) security. Currently, a security interest only attaches to crops that start to grow within a year after the security agreement was entered into. This rule will be removed entirely by the amendments. The change will increase the efficiency of secured lending to farmers, and will eliminate an existing disparity, in that no similar rule exists with respect to offspring of livestock.
13. Effect of Discharge or Lapse of Registration
Currently, where a secured party’s registration is discharged by error or lapses due to a failure to renew, the secured party maintains its priority against subsequent secured interests registered at PPR provided that the secured party re-registers within 30 days of the discharge or lapse. Amendments introduced through Bill 151 will allow this same priority to the secured party against a trustee in bankruptcy if the bankruptcy of the debtor occurred after the lapse or discharge and before the re-registration; or an enforcement charge that, immediately before the lapse or discharge, had a subordinate priority position. Click here for a detailed post on these amendments.
Bill 151 proposes to amend many important provisions of the PPSA and introduce several new concepts. We have attempted here to broadly describe several of the amendments but many will warrant their own separate post. Watch for future posts from us on many of the topics discussed above, and others that we identify. We intend to provide our readers with comprehensive analysis of the proposed amendments as Bill 151 makes its way through additional readings and debates at the Legislature, along with updates where amendments may be made to the Bill.
As always, we invite you to connect and talk with any of our Saskatchewan Financial Services Team lawyers about these amendments, how they may affect your processes, future transactions and even your current lending portfolio, and how we can help you to prepare for the changes to come.