Changes to Ontario’s Personal Property Security Act (the PPSA) may have an effect on M&A transactions that involve certain security interests. This two-part post will explore how the PPSA’s changes affect security agreements entered into both before and after December 31, 2015.
On December 31, 2015 new rules came into force (the New Rules) that determine a debtor’s location for the purposes of choosing the jurisdiction in which to register a security agreement. As these amendments to the PPSA were first proposed in 2006, they come as no surprise to practitioners but secured parties should be aware of the New Rules’ implications. The good news is that the New Rules make very clear what used to be a sometimes challenging determination.
A security interest gives a creditor certain rights over the assets of a debtor, including the right to sell the assets to satisfy unpaid obligations of the debtor to the creditor. However, security interests must be registered in the personal property security registries of the relevant jurisdiction in order to be effective against third parties, such as other creditors of the debtor. In the case of certain collateral (the Affected Collateral), the jurisdiction is determined by reference to a debtor’s location. Affected Collateral includes:
- intangibles (g., accounts receivable);
- mobile goods (g., automobiles); or
- non-possessory security interests in instruments, negotiable documents of title, money and chattel paper (g., cheques).
The New Rules
Under the old regime, the location of the debtor for PPSA registration purposes was deemed to be:
- the debtor’s place of business;
- if there was more than one place of business, the debtor’s chief executive office; or
- the debtor’s place of residence.
The New Rules were introduced to address the practical difficulties in determining the location of the debtor, particularly where there was more than one place of business with management offices, or where the debtor was a trust or partnership.
The New Rules now determine the jurisdiction of the debtor based on the debtor’s organizational form. Generally, the location of the debtor can be determined as set out below.
|Organizational Form||Location of the Debtor|
|Corporation incorporated under a provincial statute (such as the Business Corporation Act (Ontario))||Jurisdiction of incorporation|
|Corporation incorporated federally under the Canada Business Corporations Act||Registered office or head office as set out in articles (or, if not in the articles, in the by-laws)|
|Partnerships (other than limited partnerships)||Governing law of partnership agreement (if it is the law of a province or territory of Canada)|
|Limited partnerships||Province or territory where the limited partnership declaration was filed|
|Trusts||Governing law of the trust instrument (if it is the law of a province or territory of Canada)|
The New Rules also set out directions regarding other types of debtor entities, such as those formed in the United States. As a catch-all for any other entities, the location of the debtor is deemed to be the jurisdiction where the chief executive office of the debtor is located.
As a result of the introduction of the New Rules, all security agreements that charge Affected Collateral must now be registered in the jurisdiction determined by the New Rules.
In a future post we will discuss how the New Rules affect security agreements entered into before December 31, 2015 and what steps, if any, you need to take in order to continue perfection of the security interested created by that agreement.
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