On December 31, 2015, amendments (enacted in 2006) to the conflicts of law rules in the Ontario Personal Property Security Act (“PPSA”) will be proclaimed into force. In order to perfect security in certain types of collateral, these new rules will need to be considered by creditors in order to determine the appropriate jurisdiction of registration. Failing to follow the new rules could adversely affect a creditor’s priority.
The perfection, validity, and priority of a security interest in intangibles, mobile goods (i.e., inventory or equipment that is leased or held for lease and normally used in more than one jurisdiction) and non-possessory security interests over negotiable documents of title, securities, instruments, and chattel paper, is governed by the law of the jurisdiction where the debtor is located at the time that the security interest attaches.
The location of the debtor under the PPSA is currently determined as follows (the “Existing Laws”):
- a debtor is deemed to be located at the debtor’s place of business;
- if there is more than one place of business, the debtor is deemed to be located at the debtor’s chief executive office; and
- if neither (a) nor (b) apply, the debtor is deemed to be located at the debtor’s principal place of residence.
However, “chief executive office” is not defined in the PPSA and there is little judicial consideration of how the location of the chief executive office is determined. The lack of a clear definition has led to considerable confusion, increased costs, and unnecessary searches in certain multijurisdictional secured lending transactions.
The New Standard to Determine the Location of the Debtor
The 2006 amendments to the PPSA create a clear test to determine a debtor’s location by specifying the following rules for the following types of debtors (the “Amended Laws”):
- Individual: In the jurisdiction where the debtor’s principle residence is located;
- Partnerships (other than a limited partnership): In the province or territory in which the partnership agreement states the agreement is governed;
- Corporation, Limited Partnership and Organization incorporated/continued/amalgamated under Provincial or Territorial Law: In the province or territory that the debtor is incorporated, continued, amalgamated or otherwise organized;
- Corporation, Limited Partnership and Organization incorporated/continued/amalgamated under Federal Law: In the jurisdiction where the registered office or head office is located;
- Registered Organization under the law of a U.S. State: In that U.S. State or territory;
- Registered Organization under federal U.S. law: In the (i) U.S. State designated by the federal law of the United States of America or (ii) in the U.S. State that the registered organization designates; and if (i) and (ii) do not apply, in the District of Columbia;
- Trustee(s) acting for a trust: In the province or territory by which the trust instrument is governed.
Note: If none of the above apply, the debtor is deemed to be located in the jurisdiction where its chief executive office is located.
The amendments also include transitional provisions that specify whether Existing Laws or the Amended Laws govern a security interest pursuant to a security agreement entered into prior to December 31, 2015.
Generally, if a security agreement was entered into before December 31, 2015, then Existing Laws continue to apply when ascertaining the location of the debtor, even if such a security agreement is amended, renewed, or extended on or after December 31, 2015. However, if such an amendment grants security in additional collateral not previously described in the security agreement, the Amended Law will govern with respect to the additional collateral.
Security interests perfected under the Existing Laws will continue to be perfected until the earlier of:
(a) the day the perfection ceases under prior law; and
(b) December 31, 2020.
If a prior security agreement is re-perfected on or after December 31, 2015 in accordance with the Amended Law, but before the earlier of the days referred to in (a) and (b), the security interest will be deemed to be continuously perfected from its original date of perfection.
Existing Laws will continue to govern the effect of perfection or of non-perfection and the priority of a prior security interest, unless the security interest is first perfected on or after December 31, 2015, in which case the new rules for determining the law governing the location of the debtor will govern.
Investment Property and Non-Investment Property Rules
Section 7.1 will continue to govern the conflict of laws rules for investment property. If the location of debtor provisions are applicable to a security interest in investment property, the security interest will need to be re-perfected under the new rules before the earlier of (i) the day perfection ceases under Existing Laws and (ii) December 31, 2020, in order to be continuously perfected.
The PPSA amendments create a clear test to determine a debtor’s location and alleviate the ambiguity created by the reliance on the obscure “location of the chief executive office.” We strongly encourage secured parties to review the new PPSA amendments when registering a security interest.
Ontario is the first province to add these amendments, but it is expected that other provinces will follow with similar amendments in the near future in order to provide uniformity throughout Canada. This also means that until there is such uniformity, it may be prudent for creditors to register in multiple jurisdictions because the laws in various provinces may establish a different jurisdiction as the location of the debtor. Parties who intend to register a security interest must also ensure that they search in all jurisdictions where the debtor is deemed to be located under both the old and new rules.