Lenders Beware Article

Lenders Beware

As start-up and growing entrepreneurial businesses continue to dominate the Canadian landscape, both as a result of the Canadian entrepreneurial spirit and retraction in opportunities within big business, the need for commercial securitized lending from all tiers is at a peak.

With this need and opportunity comes enhanced scrutiny within the secured lending world as it relates to competing priorities, perfection dates, prequalifications and the solidification of the borrower. As many companies grow, they leave the back end structure, such as a proper incorporation, minute books, partnership and shareholder agreements as afterthoughts that will be handled once they make it. This, as we all know, is not prudent and in most cases, afterthoughts are never addressed until something wrong happens.

This is where RJS LAW comes in.

We act for lenders of all sizes (including vendors on commercial VTB transactions) to solidify and verify the corporate set-up. We also act to ensure continuity and enforceability of borrowing security for the benefit of lenders. This is essential as many companies have competing goals. In a tough economic climate, the last result a lender is looking for are PPSA defects or perfection issues, which could stop or hinder a lender’s ability to realize on security or allow a subsequent party to snatch priority.

PPSA Registrations: Lenders Beware!

Recent cases have highlighted how important it is to “get it right the first time” when ensuring a properly perfected secured claim. Failure to use the correct information and follow the proper steps may leave the secured party unperfected and subordinate to the debtor’s bankruptcy trustees and other PPSA creditors. The PPSA database is searched by debtor name and by “VIN” for vehicles, so incorrect information in a registration will mislead the public, who will not be able to find your registration if they search using the correct name.

To properly perfect your security interest, you should make sure your interest is:

Identifiable: make sure you have named the debtor correctly. Many PPSA court decisions deal with problems arising from use of the wrong debtor name and wrong birth dates.

  • The Newfoundland case Re: Hoskins (2014) 2 PPSAC (4th) 130, for example, dealt with issues concerning the correct legal name of the debtor in question. The debtor, Mr. Hoskins, bought a motor vehicle pursuant to a conditional sales agreement, which was assigned to Honda Canada Financing Inc. (“Honda”). The debtor provided a valid driver’s license showing his name as “Thomas E. Hoskins” and he signed a document confirming that his full legal name was Thomas Edgar Hoskins.
  • This became problematic because Hoskins’ name under his birth certificate was listed as “Edgar Thomas Geoffrey Hoskins.” When the debtor went bankruptcy and the trustee in bankruptcy contested the PPSA registration in favour of Honda, the Court held that the PPSA registration was not perfected properly, and thus not effective as against the trustee-inbankruptcy because it did not show the name of the debtor as stated in the debtor’s birth certificate. Courts have been continuing to take stricter approaches to PPSA requirements in general, serving as a general reminder to all secured parties that they should insist on receiving a copy of the debtor’s birth certificate prior to preparing and registering a financing statement under the PPSA since driver’s licenses and other information provided by debtors regarding their correct legal names can be oftentimes inaccurate.
  • By the same token, for an individual born outside of Canada, a copy of his or her Canadian citizenship papers is needed: CIBC v Melnitzer (1994) 23 CBR (3d) 161 (Ont. Ct. of Justice (Gen Div.). In this case, Hermann Julius Melnitzer was born outside of Canada and his Canadian citizenship papers gave his name as “Herman Julius Melnitzer.” The Court held that the registration was correct when the name on the Canadian citizenship (“Herman”) papers was used by the secured party.

Registrable: Was the registration properly processed?

  • Bank of Montreal v Innovation Credit Union [2010] 3 SCR 3 emphasizes the stringent requirements for banks to practice due diligence in lending to prospective borrowers. In response to this case, Parliament has amended the Bank Act. Now, state registries under the Bank Act will take priority over unperfected security interests, except where a bank is already aware of their existence.
  • Royal Bank of Canada v Komtech Enterprises Ltd (2014) 2 PPSAC (4th) 234 illustrates how important it is for secured parties to ensure their security documentation and for PPSA registrations to be kept up-to-date with changes to the corporate debtor.
  • CFI Trust (Trustee of) v Royal Bank of Canada [2013] BCJ No. 2049: the ruling of this Court is another example of increasing strictness—the secured party should ensure that the priority agreement is always drafted clearly. It must set out the respective priorities of the two secured parties to their respective collateral and any proceeds that arise.

Perfection: Check if the security in question has been pledged.

  • In Canada, a perfected security interest refers to the attachment of the security interest to the underlying asset. As a legal concept, perfection must be distinguished from attachment. Perfection relates to the additional steps required to be taken in
    order to make a security interest effective against third parties or to retain the security interest’s effectiveness in event of default by the grantor of the security interest.

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