Creation of a PPSA Security Interest

• Author: Ronald C.C. Cuming, Catherine Walsh, Roderick Wood
• Pages: 240-295

240

CHA PTER 4

CREATION OF A PPSA

SECURITY INTEREST

A. InT RoduCTIon

1) “Attachment”

In general, the PPSA applies only to consensual security interests —

that is to say, security interest s voluntarily created by a debtor in favour

of a particular creditor pursuant to contract. It follows that for a PPSA

security interest to come into ex istence, the parties must f‌irst conclude

an effective security ag reement.

The effectiveness of a security ag reement as a matter of contract law

depends on such essential elements as the legal capacity of the debtor,

the authority to act of any representatives who enter into the security

agreement on her behalf, and the absence of vitiating factors such as

duress, non est factum, illegal ity, uncertainty, or fraud. All these matter s

are governed by the general law of contract, the supplementar y applica-

tion of which is expressly preser ved by the PPSA.1

Assuming that the parties’ agreement as a m atter of contract law is

effective, the issue of whether that agree ment creates a securit y interest

is determined by the attachment rules of the PPSA.

1 PPSA (M, NWT, Nu, S) s 65(2); (NB, PEI) s 65(1); (NL, NS) s 66(1); A s 66(3);

BC s 68(1); O s 72; Y s 63(1).

Creation of a PPSA Sec urity Interest 241

Attachment requires the satisfaction of three conditions.2 First, the

secured party must g ive value. Second, the debtor must have rights

in the collateral or the power to transfer rights in the collateral to t he

secured party. Third, the secur ity agreement must satisfy one of the

three evidentiary requirements recognized by the Act.3 Of these t hree

alternatives, the debtor’s signature on a w ritten security agreement

that describe s the collateral is the only one universally available. The

second alternative — delivery of physical possession of the collateral

to the secured part y — is available only for tangible collateral. The

third altern ative — “control” — applies only to collateral in the form of

investment property, and even in that context, has different meanings

depending on the type of investment property.

The elements of attachment — and the exceptional inst ances in

which the Act recognizes automatic attachment — are the primary

focus of this chapter. Other issues relevant to the creation stage of the

secured f‌inancing proce ss are also addressed, including the operation

of the principle of freedom of contract in the context of security agree-

ments, and the types of obligations that may be secured by a security

interest.

2) Inter Partes and Third-party Attachment

Except for the Ontario Act, the PPSA disti nguishes between the condi-

tions for attachment as between the parties and as against t hird par-

ties.4 For attachment between the secured part y and the debtor, it is

suff‌icient if value is given, and the debtor has r ights in the collateral.

Satisfaction of the evidentiary requirement is necess ary only for attach-

ment of the security interest agai nst third parties.

2 PPSA (A, BC, M, NB, PEI, Nu, NW T, S) s 12(1); (NL, NS) s 13(1); O s 11(2); Y (s.

11(1).

3 The structure of t he Ontario Act regarding t he evidentiary requ irement and

its relation ship to attachment is somewhat di fferent than the other Act s. The

evidentia ry requirement in the Ont ario Act is incorporated i n the provision on

the requireme nts for attachment, and that prov ision specif‌ies that t he security

interest is not en forceable against third pa rties until all the r equirements for at-

tachment have b een satisf‌ied: OPPSA ss 11(2)(c) and 11(1). In the other Acts, t he

evidentia ry requirement is set out in a st and-alone provision which state s that a

security i nterest is not enforceable again st third parties un less the requirement

is satisf‌ied : PPSA (A, BC, M, NB, PEI, Nu, NWT, S) s 10(1); (NL, NS) s 11(1); Y

s 8(1). In these other Ac ts, that stand-alone prov ision is then incorporated by

cross-referenc e into the provision on the requi rements for third party at tach-

ment: PPSA (A, BC, M, NB, PEI, Nu, NW T, S) s 12(1); (NL, NS) s 13(1); Y s 11(1).

4 Ibid.

PERSO NAL PROPERT Y SECUR ITY LAW242

The concept of a security interest attaching only a s between the

parties may seem puzzling. The principal value of a security i nterest,

like any other property interest, lies in its prima facie opposabilit y to

third part ies (in contrast to “mere” contractual obligations that bind

third part ies only with their consent). However, inter partes attach ment

means that the PPSA r ules governing the reciprocal right s and obliga-

tions of the parties in relation to the collateral apply, including the

special default enforcement regime set out in Part V of the Act.

The formulation of the attachment concept in the Ontario PPSA

does not expressly distinguish between inter partes a nd third-party at-

tachment. That Act instead states simply that a security interest is not

enforceable against third par ties until all th ree components of attach-

ment are completed.5

3) Relationship among Attachment, Perfection, and

Priority

For a security interest to be effective against most important categor-

ies of third part y competing claimants, the security interest must also

be perfected. Perfection is the subject of Chapter 5. This chapter is

concerned with perfection only in sofar as attachment is an es sential

component of achieving perfected status.6

Attachment and priority are also separate concepts under the PPSA.

However, the time of attachment may be determinative of priority in

the following situations: (1) a contest between two unperfected secur-

ity int erests;7 (2) a contest between the holder of a security interest that

is perfected by advance regist ration and a buyer who acquires title to

the collateral before the security interest that would otherwi se have at-

tached to the collateral is created;8 (3) a contest between the holder of

a PPSA security interest in good s that are subsequently aff‌i xed to land

5 OPPSA s 11(1).

6 PPSA (A, BC , M, NB, NWT, Nu, O, PEI, S) s 19, (NL, NS) s 20; Y s 18.

7 See Chapter 8, Se ction B(1).

8 If a sec urity interest has not att ached to an asset at the time of it s sale to a buyer,

the buyer wil l obtain unencumbered tit le to the asset. As the sec urity interest

granted by t he seller to the secured par ty has not yet come into existence, t he

buyer will t ake free of any claim of the sec ured party. This is so regard less of

any prior regis tration by the secured par ty or any knowledge on the part of t he

buyer that a secu rity agreement may be pend ing. This scenario doe s not involve

a competition betwe en the holder of an unperfected secu rity interest and a sub-

sequent buyer, but rather a buyer who ac quires title before the sec urity interest

that other wise have attached is c reated.