Creation of a PPSA Security Interest

AuthorRonald C.C. Cuming, Catherine Walsh, Roderick Wood
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
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.
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.
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
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.

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