Creation of a Security Interest Under the Personal Property Security Act

• 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: 276-333

276

CHA PTER 4

CREATION OF A

SECURITY INTEREST

UNDER THE

PERSONAL

PROPERT Y SECUR IT Y ACT

A. INTRODUCTION

1) “Attachment”

In general, the PPSA applies only to consensual s ecurity interests — that

is, security intere sts voluntarily created by a debtor in favour of a

creditor pursuant to contract.

The eectiveness of a security agre ement as a matter of contract law

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

the authority to act of a representative who enters into the security

agreement on the debtor’s behalf, and the absence of viti ating factors

such as duress, non est factum, illegality, uncertainty, or fraud. These

matters are governed by the general law of contract, t he supplementary

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

If the parties’ agreement as a matter of contract law is eective, the

issue of whether that agreement create s a security interest is determined

by the attachment rules of the PPSA.

Attachment requires the s atisfaction 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

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).

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).

Creation of a Secu rity Interest Under the PPSA 277

three evidentiary requirements recogni zed by the Act.3 Of these three

alternatives, the debtor’s signature on a written security ag reement

that describe s the collateral is the only one universal ly available. The

second alternative — delivery of physical possession of the collatera l to

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

alternative — “control” — applies to collateral in the form of invest ment

property, and has dierent meanings depending on the type of invest-

ment property. Under the 2019 SPPSA amendments and equivalent

2019 amendments to the Ontario Act, “control” — again with a context-

specific definition — is also available for security interests i n “electronic

chattel paper.”

The PPSA requirements for attachment — and the exceptional

instances in which the Act recognizes automatic attachment — are the

primar y focus of this chapter. Other issues relevant to the creation of an

eective security intere st are also addressed, including the scope of the

principle of freedom of contract in the context of security agreements

and the type s of obligations that may be secured by a security interest.

2) Inter Partes and Third-Party Attachment

Except for the Ontario Act, the PPSA distinguishes between the condi-

tions for attachment as between the pa rties and as against third p arties.4

For attachment between the secured par ty and the debtor, it is sucient

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

of the evidentiar y requirement is necessar y only for attachment of the

security interest against third part ies.

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

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

like any other property interest, lies in its presumptive opposability to

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

3 The structure of th e Ontario Act regarding t he evidentiary requi rement and

its relationsh ip to attachment is somewhat di erent than the other Acts. The

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

on the requirement s for attachment, and that prov ision specifies that t he sec-

urity intere st is not enforceable against th ird parties until a ll the requirements

for attachment have b een satisfied: OPPSA ss 11(1)–(2). In the other Acts, the

evidentia ry requirement is set out in a sta nd-alone provision that 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 provi sion is then incorporated by

cross-referenc e into the provision on the requir ements 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 SECURI TY LAW278

third part ies only with their consent). However, inte r partes attachment

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

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

special default enforcement regime in Part V of t he Act.

The formulation of the attachment concept in the Ontario PPSA

does not expressly dist inguish between inter partes a nd third-party

attachment. That Act instead state s simply that a security interest is not

enforceable against third par ties until all three components of attach-

ment are completed.5

3) Relationship Between Attachment, Perfection, and

Priority

For a security interest to be eective against most important categories

of competing claimants, t he security interest must also be perfected.

Perfection is the subject of Chapter 5. This chapter is concerned with

perfection only insofar as attachment is an essenti al component of

achieving perfected status.6

Attachment and priority are a lso separate concepts under the PPSA.

However, the time of attachment may be determinative of prior ity in

the following situations: (1) priority between two unperfected security

intere sts;7 (2) the eectiveness of a security interest that is perfected

by advance registration again st a buyer who acquires an asset before

a security interest t hat would otherwise have attached to t hat asset is

created;8 (3) priority between the holder of a PPSA security interest in

goods that are subsequently a xed to land and a person with an interest

in the land;9 and (4) priority between the holder of an unperfected PPSA

security interest a nd a bank that later take s security under section 427

of the Bank Act with knowledge of that interest.10

5 OPPSA s 11(1)–(2). See above note 3.

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

7 See Chapt er 8, Section B(1).

8 As the s ecurity interest gra nted by the seller to the secu red party has not yet

come into existe nce, a buyer will take free of any c laim of the secured par ty.

This is so rega rdless of any prior regist ration by the secured part y or any know-

ledge on the part of t he buyer that a security agr eement may be pending. This

scenario do es not involve a competition between the holder of a n unperfected

security i nterest and a subsequent buyer, but rather a buye r who acquires title

before the secur ity interest that would other wise have attached i s created.

9 See Chapter 11, Section D(2). And see Business Development Bank of Canada v S & S

Mobile Refrigeration (1996), 12 PPSAC (2d) 298 (Ont Ct Gen Div); Cormier v

Federal Business Development Bank (1983), 3 PPSAC 161 (Ont Co Ct).

10 See Chapter 13, Sect ion A(7).