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December 4, 2015

New Location Of Debtor Rules Under Ontario Personal Property Security Act

NEW LOCATION OF DEBTOR RULES UNDER ONTARIO PERSONAL PROPERTY SECURITY ACT COME INTO FORCE DECEMBER 31, 2015

The Change

Ontario has fixed December 31, 2015as the date on which the rules that determine the “location of the debtor” under the Ontario Personal Property Security Act (“OPPSA”) will change.

What Does the Change Mean

The “location of the debtor”set out in the OPPSA determines where a secured party should search and registerto perfect a security interest in collateral consisting of:

(a)  intangibles (e.g., accounts receivable);

(b) mobile goods(e.g., tractor, trailer); and

(c)securities, instruments, negotiable documents of title and chattel paper not in the possession of the secured party5

(collectively, the “Affected Collateral”).6

The Current Rule

Currently, the OPPSA provides that a debtor is located:

(a)at the debtor’s place of business, if there is one;

(b)at its chief executive office,if there is more than one place of business; and

(c)otherwise at the debtor’s principal place of residence.

 

The New Rule

The new location of the debtor rules can be summarized in the following chart:

Type of Debtor

Jurisdiction for Registration

Individual

Debtor’s principal residence.8

Partnership (not limited partnership) whose partnership agreement states that the agreement is governed by the laws of a province or territory of Canada.

That province or territory.

Corporation, limited partnership or organization incorporated, continued, or amalgamated under the law of a province or territory of Canada, which law requires the incorporation, etc. to be disclosed in a public record.9

That province or territory.

Corporation incorporated, continued or amalgamated under the federal law of Canada, which law requires the incorporation, etc. to be disclosed in a public record.10

(a) The jurisdiction of the registered or head office of the debtor as set out in its incorporating instrument; or

(b) As set out in the debtor’s by-laws if (a) does not apply.

Organization organized under the law of a U.S. State, which law requires disclosure of the organization of the debtor in a public record.11

That U.S. State.

Organization organized under the law of the United States of America, which law requires disclosure of the organization of the debtor in a public record.12

(a) The U.S. State designated by the law of the United States as the debtor’s location;

(b) The U.S. State that the organization designates as its location if the law of the United States authorizes the organization to designate its location in a U.S. State; or

(c) District of Columbia if neither (a) nor (b) applies.

Trustees acting for a trust where the instrument governing the trust states that the trust is governed by the laws of a province or territory of Canada.13

That province or territory.

Trustees acting for a trust where the trust instrument governing the trust does not state that the trust is governed by the laws of a province or territory of Canada.

Where the administration of the trust by the trustee is principally carried out.14

Debtor does not fall within any of the foregoing categories.

Debtor’s chief executive office.15

 

Transitional Rules

The amendments contain a set of transitional rules that require a secured party to file a new financing statement before certain dates in order to maintain the continuity of the perfection of its security interest in the Affected Collateral.16 The following is a summary of the transitional rules:17

1. As noted, a secured party must file a new financing statement to maintain the continuity of the perfection of its security interest in Affected Collateral prior to the earlier of: 

(a) The expiry of its registration under the current law; or 

(b) December 31, 2020.18

2. Subject to #3, the current law applies with respect to amendments, renewals or extensions of security agreements entered into before, on, or after December 31, 2015 with respect to the Affected Collateral.19

3. The new law applies with respect to Affected Collateral added to a security agreement by an amendment, renewal or extension to a security agreement entered into after December 31, 2015.20

4. A security interest not perfected under the current law prior to December 31, 2015 must be perfected using the new location of the debtor rules.21

The policy objective of the transitional rules is to simplify the determination of the jurisdiction in which searches should be conducted after December 31, 2020.

Were It So Simple

The proclamation into force of the new location of the debtor rules signals a renewed interest by Ontario in modernizing its commercial laws.  This interest is reflected in the June 2015 Business Law Agenda: Priority Findings and Recommendations Report and the October 2015 solicitation by Ontario of expressions of interest for persons interested in being appointed to a new Ontario Advisory Council on Business Law.  Additional changes to the OPPSA can be expected.

While Ontario has taken the initiative in amending the location of the debtor rules, the other common law provinces and territories22 have yet to follow suit.

The full benefits of the improvements in the certainty of searching and filing under the new regime may not be realized pending the enactment by the other common law provinces of location of the debtor rules that parallel the new Ontario rules due to the conflict of laws rules in the various provincial personal property security acts.

The dreaded situation sought to be avoided is the application of the principle of renvoi.  Under this principle, after December 31, 2015, the location of the debtor rule of one province (e.g. Ontario) may direct that the filing of a financing statement to perfect a security interest in Affected Collateral be in another province (e.g. Alberta).  However, the location of the debtor rule of the other provinces (e.g. Alberta, which is like the current Ontario location of debtor rule) may direct the issue back to Ontario.

The OPPSA addresses the issue by providing that in the OPPSA reference to the laws of a jurisdiction is a reference to the internal laws of that jurisdiction, excluding its conflict of law rules.23

However, the comparable provisions of the personal property security acts of the other common law provinces and territories (except for Saskatchewan and Northwest Territories) do not expressly state that the reference to the laws of another jurisdiction for the purposes of determining the location of the debtor (and other conflict of law rules) is solely to the internal laws of that jurisdiction.24 A court has not expressly considered whether renvoi would be avoided in such circumstances.

Consequently, in the absence of express judicial authority, until the location of the debtor rules are harmonized, it can be expected that the secured parties will adopt the counsel of caution and search and file in the location of the debtor as determined using both the new Ontario location of the debtor rules and the current location of the debtor rules of the other common law provinces.


[1] The amendment was contained in Schedule E to the Ontario Ministry of Government Services Consumer Protection and Service Modernization Act, 2006, S.O. 2006, C-34. Proclamation into force was delayed to permit other common law provinces to pass similar amendments.  To date, only British Columbia and Saskatchewan have passed, but not yet proclaimed, conforming amendments.  The implications of this are discussed below. The  location of the debtor rules in the other common law provinces parallel the current Ontario rules.

[2] Ontario Personal Property Security Act, RSO 1990, c. P.10, section 7(3) [“OPPSA”].

[3] Location of the debtor determines the validity, the perfection, the effect of perfection or non-perfection, and the priority of a security interest (or non-possessory security interest as the case may be) in Affected Collateral. OPPSA, section 7(1).

[4] Goods that are of the type that are normally used in more than one jurisdiction, if the goods are equipment or inventory leased or held for lease by a debtor. OPPSA, section 7(1)(a)(ii).

[5] The validity, perfection and effect of perfection of a possessory security interest in such collateral is determined by the law of the jurisdiction where the collateral is situated when the security interest attaches.  OPPSA, section 5(1)(b).

[6] The location of the debtor also determines (a) the perfection of a security interest in investment property by registration, (b) perfection of a security interest in investment property granted by a broker or securities intermediary where the secured party relies on attachment of the security interest as perfection; and (c) perfection of a security interest in a futures contract or futures account granted by a futures intermediary where the secured party relies on attachment of the security interest as perfection.  OPPSA, sections 7.1(5) and 7.1(3)(a).  This note deals primarily with the amendment as it relates to “Affected Collateral.”  The amendments also contain transitional rules with respect to collateral comprising investment property in the circumstances described above that parallel those described below, new OPPSA section 7.3.

[7] OPPSA, section 7(3). The OPPSA does not define “chief executive office”.  The determination of the “chief executive office” of a debtor is a factual matter which at times does not admit to a clear answer, thereby creating uncertainty as to where to search and register to perfect a security interest in Affected Collateral.  However, as noted below, the amendments will not entirely eliminate the “chief executive office” issue and may create issues in circumstances in which the “chief executive office” of certain debtors, such as banks, is readily determinable under the current rule. See notes 10 and 15, below.

[8] No change from the current rule. This leaves open the factual issue for individuals with multiple places of residence.  Similar to §9 -307(b)(1) of the Uniform Commercial Code.

[9] Examples would include a business corporation formed under the business corporations act of a province.

[10] Examples would be banks, federally incorporated insurance companies, and trust and loan companies, Canadian National Railway and Air Canada, but not Westjet which is incorporated under the Alberta Business Corporations Act. Presumably the disjunctive reference to “registered” or “head office” assumes that the federal corporation has either a “registered” office or a “head office”. This rule has the potential to raise issues with respect to banks. The location of the “head office” of a bank is set out in Schedule I or II to the Bank Act. This could result in such a debtor being located either in a province that has not yet enacted and proclaimed similar amendments or in a province that does not use the personal property secured act model. This issue is discussed further under “Where It So Simple”, below.

[11] These rules parallel the location of the debtor rules for entities whose jurisdiction of organization require disclosure of the organization of the debtor in a public record found in the Uniform Commercial Code §9-102(a)(70); 9-301; 9-307(e).

[12] The United States includes the District of Columbia, Puerto Rico and the US Virgin Islands.

[13] An example could be an income trust.

[14] This requires a factual determination.

[15] The “chief executive office” is a default location of the debtor if none of the other rules apply. For example, this rule would apply for organizations organized under the laws of England or a European country.

[16] New OPPSA, section 7.2(7).

[17] This note summarizes the highlights of the transitional rules. There are additional transitional rules not discussed in this note.

[18] New OPPA, section 7.2(7); hence, a registration under the current law that expires after December 31, 2020, must be re-perfected by December 31, 2020 to remain continually perfected.  Examples may be trust indentures in respect of which the registration period is up to 25 years or possibly perpetuity, as permitted under the Minister’s Order (section 3(4)(b)) made under the OPPSA. Don’t expect a credit for filing fees previously paid. Also note that the re-filing required may apply to transactions that are deemed to be a security interest under the OPPSA (an absolute assignment of accounts or chattel paper and a true lease for a time of more than one year).

[19] New OPPSA, section 7.2(3).

[20] New OPPSA, section 7.2(4).

[21] New OPPSA, section 7.2(12).

[22] See note 1.

[23] OPPSA, section 8.1

[24] The conflict of law rules in Quebec appear in the Quebec Civil Code.

Thornton Grout Finnigan LLP, Suite 3200, 100 Wellington Street West, P.O. Box 329, Toronto-Dominion Centre, Toronto, ON M5K 1K7 Canada T 416.304.1616 E info@tgf.ca

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