Creation of a Security Interest Under the Personal Property Security Act

AuthorRonald C.C. Cuming/Catherine Walsh/Roderick J. Wood
ProfessionUniversity of Saskatchewan, College of Law/McGill University, Faculty of Law/University of Alberta, Faculty of Law
Pages276-333
276
CHAPTER 4
CREATION OF A
SECURITY INTEREST
UNDER THE
PERSONAL
PROPERTY SECURITY ACT
A. INTRODUCTION
1) “Attachment
In general, the PPSA applies only to consensual s ecurity interests — that
is, security interests 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 vitiating 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 satisfaction of three conditions.2 First, the
secured party must give value. Second, the debtor must have rights
in the collateral or the power to transfer rights in the collateral to the
secured party. Third, the security 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 PPSA277
three evidentiary requirements recognized by the Act.3 Of these three
alternatives, the debtor’s signature on a written security agreement
that describes the collateral is the only one universally available. The
second alternative — delivery of physical possession of the collateral to
the secured party is available only for tangible collateral. The third
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 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 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 rights in the collateral. Satisfaction
of the evidentiary requirement is necessary only for attachment of the
security interest against third parties.
The concept of a security interest attaching only as 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 parties (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 rules governing the reciprocal rights and obli-
gations of the parties in relation to the collateral apply, including the
special default enforcement regime in Part V of the Act.
The formulation of the attachment concept in the Ontario PPSA
does not expressly distinguish between inter partes and third-party
attachment. That Act instead state s simply that a security interest is not
enforceable against third parties 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, the 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 essential 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 priority in
the following situations: (1) priority between two unperfected security
interests;7 (2) the eectiveness of a security interest that is perfected
by advance registration against a buyer who acquires an asset before
a security interest that would otherwise have attached to that 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 and a bank that later takes 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).
10See Chapter 13, Sect ion A(7).

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