Late in 2018, the Saskatchewan Legislature introduced Bill 151, which amends The Personal Property Security Act, 1993 (Saskatchewan) (the PPSA). To inform you about the upcoming changes and how they may impact you, our Saskatchewan Financial Services team have been tracking the progress of Bill 151 and have brought you a number of posts that discuss the amendments.
To follow our posts, you need only to go to one place, this Financial Services & Insolvency Communiqué, which includes broad descriptions of various aspects of the amendments and links to all of our posts covering many of the amendments in detail – we have been updating it with new links and status reports on the progress of Bill 151 on an ongoing basis.
Bill 151 was passed into law on March 12, 2019. It awaits Royal Assent and a date to be set for it to come into force.
This post will explain the changes in Bill 151 concerning serial number goods. The amendments fall into several categories.
Treatment of Consumer Goods vs Equipment
Until now the PPSA has distinguished between the requirements for registration for serial number goods held as “consumer goods” and those held as “equipment”.
The current rules (pending Bill 151 coming into force) are that for serial number goods that are consumer goods, failure to register by serial number at the Personal Property Registry (PPR) invalidates the registration, thereby rendering the security interest unperfected. The result is loss of priority against perfected secured creditors, buyers/lessors, trustees in bankruptcy and judgment creditors.
Conversely, secured parties in respect of serial number goods held as equipment have had an option to register against the debtor’s name only, as a failure to register by serial number would cause a secured party to lose priority only to other secured creditors who do register by serial number or to a bona fide purchaser/lessor. That registration against the debtor’s name only would still provide priority over a non-bona fide buyer/lessor, a trustee in bankruptcy, and judgment creditors.
There are secured parties who decide to accept the risks of registration by debtor name only, particularly where financing large fleets of equipment or vehicles which will turn over in relatively brief cycles. They do so to reduce the administrative burden of managing the serial number registrations, in the hopes that the losses to other secured creditors and bona fide purchasers will be minimal.
Bill 151 amends sections 30(6) and (7), 35(4) and 43(7) of the PPSA so that consumer goods will be receive substantially the same treatment as serial number goods held as equipment. Specifically:
- the buyer/lessor priority rule in Section 30(6), which is discussed in greater depth below in this post, is amended to apply to both consumer goods and equipment as opposed to solely equipment; and
- the perfection rules contained in Section 35(4) regarding equipment would likewise be amended to also apply to consumer goods.
We do not expect this to affect the practices of most secured parties. The considerations that lead some secured parties to omit serial numbers with respect to goods held as equipment would not apply to consumer goods where an individual debtor usually purchases one vehicle at a time. Serial number registration will continue to be crucial with respect to vehicles held as consumer goods.
Buyer/Lessor Priority Rule
Under the existing section 30(6) of the PPSA a buyer or lessor of serial number goods held as equipment would take an interest in the goods free of a registered security interest where:
- the goods are bought or leased without knowledge of the existing security interest; and
- the security interest was not described by serial number in the registration.
In addition to the amendment to provide the same treatment to both equipment and consumer goods, Bill 151 eliminates the “knowledge of the security existing security interest” element. If a debtor sells serial number goods that the secured party has not registered by serial number, the purchaser will be able to take free of the security interest even if he or she is aware of it.
Serial Number Must Appear in Specified Field of Registration
Although not specifically stated in the PPSA or its regulations, it has been generally accepted that the serial number needed to be inserted into the field specified for serial numbered goods, and that including a serial number only in the general collateral description would leave the registrant at serious risk of an invalid registration or loss of priority.
Bill 151 adds an express rule that a registration needs to describe the serial number in the field of the registration specified for serial numbered goods to achieve perfection of the security interest.
Elimination of the “Seriously Misleading Error” Rule and Registrations Appearing as Inexact Matches in a PPR Search
The PPSA currently provides that a registration is invalid if there is a “seriously misleading defect, irregularity, omission or error” in the name of the debtor or, as applicable, the serial number. Under the current provisions, most practitioners would likely expect that if a registration is disclosed by a search on the correct name, it would clear the “serious misleading” threshold and not be treated as an error.
Saskatchewan appears to have a robust system for producing inexact matches in our search results. In our experience, a search at Saskatchewan’s PPR will be more likely to generate inexact matches that are not very close to the search parameters than to miss close matches that one would intuitively expect to be caught.
That contrasts with disputes that we have seen from other provinces where it sometimes seems that relatively close variations of names do not show up on searches as inexact matches.[i]
Bill 151 replaces section 43(7), which contains the “seriously misleading” formulation, with provisions similar to what is currently used by Yukon and several of the Atlantic provinces. Under the new provisions, a registration will be invalid if it is not disclosed by a search of the correct name or serial number, as applicable.
Further, Bill 151 introduces a rule in section 43(7.2) that the fact that a result shows up as an inexact match does not automatically cause an erroneous registration to be valid. This amendment seems likely to produce more litigation around the validity of registrations.
Secured parties will need to be vigilant to ensure that their registrations correctly set forth debtor names and serial numbers – no secured creditor will wish to be caught up in a test case about when an erroneous registration that shows as an inexact match will be invalid pursuant to section 43(7.2).
[i] For example, see Toyota Credit Canada Inc. v. MNP Ltd., 2018 MBQB 57. Toyota Credit Canada Inc. had financed the purchase of a vehicle by the debtor and registered against the name “R Argentina Gonzalez”. The legal name of the debtor on her citizenship documents was “Rosa Argentina Gonzalez”. A search against the name of Rosa Argentina Gonzalez did not disclose a similar match.