Creation of a PPSA Security Interest

• Author: Ronald C.C. Cuming/Catherine Walsh/Roderick J. Wood
• Profession: University of Saskatchewan, College of Law/McGill University, Faculty of Law/University of Alberta, Faculty of Law
• Pages: 161-199

CHAPTER 4

CREATION OF A PPSA

SECURITY INTEREST

A. INTRODUCTION

1) “Attachment”

For a security interest to come into exi stence, the parties must f‌i rst

conclude a security agreement. The formation of an effective security

agreement depends on such essential elements as the existence and

legal capacity of the debtor, the authority to act of the debtor’s repre-

sentatives, and the absence of any vitiating factors s uch as duress, non

est factum, illegality, uncertainty, or fraud. All these m atters are gov-

erned by the general law of contract, t he supplementary application of

which is expressly preserved by the PPSA.1

The formation of the security agreement as a m atter of contract

law is disti nct from the creation of the secur ity interest contemplated

by that agreement. The PPSA uses the term “attach ment” to denote the

creation of the security interest itself.

Attachment requires the satisfaction of three condit ions.2 First, the

secured party must give value. Second, the debtor must have rights in

the collateral. Third, the parties’ agreement must satisfy the eviden-

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

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

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

Y (s. 11(1).

161

PERSO NAL PR OPERTY SEC URI TY LAW162

tiary requirements imposed by the Act: that is, either pos session of the

collateral by the secured pa rty or completion of a security agreement

signed by the debtor that describes the collateral. The elements of at-

tachment are the focus of th is chapter.

2) Inter Partes and Third-party Attachment

Except for the Ontario Act, the PPSA distinguishes b etween the condi-

tions for attachment as between the parties and as against third par-

ties. For attachment between the sec ured party and t he debtor, it is

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

Satisfaction of the evidenti ary requirement is necessary only for third-

party enforceabilit y of the security intere st.

The concept of a security interest attaching to propert y only as be-

tween the part ies may seem anomalous. The principal value of a secur ity

interest, like any other propert y interest, lies in it s prima facie oppos -

ability to third parties (in contrast to “mere” contractual obligations

that bind third parties only with their consent). However, until the evi-

dentiary requirement is s atisf‌ied, the securit y interest attaches only in

the limited sense t hat the PPSA rules governing t he parties’ right s and

obligations in relation to the collateral apply. This is most signif‌icant at

the enforcement stage where the Act seeks to balance the need for an ef-

f‌icient liquidation process again st the need to protect the debtor against

a purely self-interested enforcement by the secured party.

The formulation of the attachment concept in the Ontario PPSA

does not disting uish between inter partes a nd third-party attachment.

That Act instead states simply t hat a security interest is not enforceable

against third parties unles s all three components of attachment have

been satisf‌ied.3 However, it is well accepted that once value is given a nd

the debtor has rights in t he collateral, the securit y agreement becomes

enforceable between the parties and the enforcement regime in Part 5

of the Ontario Act applies. In ot her words, the difference in formula-

tion does not affect the result.

3) Relationship among Attachment, Perfection, and

Priority

To acquire the best rights possible again st third parties, the secur ity in-

ter est mu st al so be perf ected . Perf ecti on is t he su bject o f cha pter 5. This

3OPPSA s. 11(1).

Creation of a PPSA Se curity Interest 163

chapter is concerned with per fection only insofar as t he attachment of

a valid security i nterest is an essent ial component.4

Except for the fact that attachment is a precondition to the per-

fected status of a secur ity interest, attachment, a nd priority are al so

separate concepts under the PPSA. However, the time of attachment

may be determinat ive of priority in the following situations: (1) a con-

test between two unperfected security interest s;5 (2) a contest between

the holder of a registered securit y interest that has not yet attached and

a buyer of the collateral;6 and (3) a contest between the holder of a PPSA

security interest in goods that are subsequently aff‌ixed to real property

and a person with an intere st in the real propert y.7

B. “VALUE IS GIVEN”

1) “Val u e”

The secured party must have given value in order for a PPSA secur-

ity interest to attach.8 The value must be real value. A cheque that is

dishonoured on present ation does not qualify.9 On the other hand, the

secured party is not required to actually advance loan funds or pur-

chase money credit for attachment to occur. The Act def‌ines “value”

to mean “any consideration suff‌icient to support a si mple contract.”10

Thus, value is given as soon as the secured party m akes a binding com-

mitment to extend credit to the debtor.11 Similarly, a security interest

continues to exist under a line of cred it arrangement even if there is no

indebtedness outstanding at a given time so long as the secured party

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

5 See chapter 8.

6 See chapter 7.

7 See chapter 12. And s ee Business Development Ba nk of Canada v. S & S Mobile

Refrigeration (1996), 12 P.P.S.A.C. (2d) 298, 28 O.T.C. 48 (Ont. Ct. Gen. Div.);

Cormier v. Federal Business Develo pment Bank (1984), 25 B.L.R. 194, 3 P.P.S.A.C.

161 (Ont. Co. Ct.).

8 PPSA (A, BC, M, NB, PEI, Nu, NWT, S) s. 12(1)(a); (NL, NS, Y) s. 13(1)(a);

O s. 11(2)(b).

9Dale Tingley Chrysler Plymouth L td. v. Chris & Don Enterprises Ltd . (1994), 8

P.P.S. A.C. (2d) 191 (Sask. Q.B.), r ev’d on other grounds (1995), 10 P.P.S.A.C.

(2d) 112 (Sask. C.A.).

10 PPSA (S) s. 2(1); (A, BC, N WT, Nu, O, Y) s. 1(1); (M, NB, PEI) s. 1; (NL, NS) s. 2.

11 For judicial conf‌i rmation, see Agricultural Credit Corp. of Sa skatchewan v.

Pettyjohn (1991), 1 P.P.S.A.C. (2d) 273 at 282 ff (Sask. C.A.).