Introduction and General Considerations

AuthorRonald C.C. Cuming, Catherine Walsh, Roderick Wood
1) The Idea of Secured Credit
The idea of secured credit has been around a s long as the concepts of
private property and freedom of contract. The basic premise is straight-
forward. A debtor gives her creditor a proprietary i nterest in one or
more of her assets on the understandi ng that if she defaults the creditor
can look to the value of those asset s to satisfy the debt.
The proprietary character of a secur ity interest typically confers
three basic right s on the secured party: (1) the right to seize and sell
or otherwise realize the value of the collateral given as security on the
debtor’s default; (2) the right to apply the proceeds realized from the
collateral in satisfact ion of the obligation secured by it in preference to
the claims of the debtor’s unsecured creditors; and (3) the right to en-
force the security interest agai nst third parties who acquire proprietar y
rights in the collatera l from the debtor.
This book examines the legal framework for secured credit set out
in the Personal Property Security Act (PPSA). First proclaimed by On-
tario in 1976, the PPSA is in force today in all nine common law prov-
inces and the three federal territories.1
1 In order of implementat ion, see: Ontario, 1976 (SO 1967, c 73, in force 1 April
1976, replaced by SO 1989, c 16, in force 10 October 1989, RSO 1990, c P.10);
2) Pre-PPSA Law2
The oldest and most widely recognized consensual security device i s
the classic pledge or pawn, constituted by the debtor’s transfer of physi-
cal posses sion of the collateral to the secured party on the understand-
ing that the secured party is entitled to sell t he collateral if the debtor
defaults on the obligation secured by the pledge. Historica lly, the pos-
sessory pledge was the only form of security device for personal prop-
erty recognized by the common law. A security agreement in which
the debtor remained in posse ssion of the collateral was viewed as pre-
sumptively fraudulent because it might deceive others to extend cred it
or enter into transactions based on the debtor’s apparent ownership.3
In the face of demands for a form of secured f‌ina ncing that would
enable businesses to ret ain possession of their encumbered assets, An-
glo-Canadia n common law long ago rejected the presumption of fraud
historically as sociated with the grant of a non-possessory securit y in-
terest. The debtor’s retention of possession came to be regarded merely
as a circumsta nce to be taken into account in determining whether
a transaction was fraudulent. Evidence showing that the tran saction
involved the grant of security was suff‌icient to refute that contention.4
This development paved the way for the recognition of non-possessory
security devices.
One was the chattel mortgage, constituted by the transfer of title to
the collateral to the secured party subject to the equitable right of the
Manitoba, 1978 (SM 1973, c 5, in force 1 September 1978, CCSM c P35); Sas-
katchewan, 1981 (SS 1979–80, c P-6.1, in force 1 May 1981, replaced by SS 1993,
c P-6.2, in force 1 April 1995); Yukon Territory, 1982 (OYT 1980, c 20, 2d Sess,
in force 1 June 1982, RSY 2002, c 169); Alberta , 1990 (SA 1988, c P-4.05, in
force 1 October 1990, RSA 20 00, c P-7); British Columbi a, 1990 (SBC 1989, c 36,
in force 1 October 1990, RSBC 1996, c 359) ; New Brun swick, 1995 (SNB 1993,
c P-7.1, in force 18 April 1995); Nova Scotia, 1997 (SNS 1995-96, c. 13, in force 3
November 1997); Prince Edwa rd Island, 1998 (SPEI 1997, c 33, in force 27 April
1998, RSPEI 1988, c P-3.1); Newfoundl and and Labrador, 1999 (SNL 1998, c
P-7.1, in force 13 December 1999); Northwest Territor ies, 2001 (SNWT 1994, c
8, in force 7 May 2001); Nunavut, 2001 (in force 7 May 2001, SNWT (Nu) 1994,
c 8).
2 On the points m ade in this section regar ding the pre-PPSA legal framework for
personal prop erty security, see: Jacob S Ziegel, “Can adian Chattel Secur ity Law:
Past Exper ience and Current Developments” in JG Sauvepla nne, ed, Security
over Cor poreal Movables (Lei den: AW Sitjhoff, 1974); RCC Cuming, “H armoniza-
tion of Canadi an Personal Property S ecurity Law” in Harm onization of Business
Law in Canada (Toronto: University of Toronto Pres s, 1986).
3 Twyne’s Case (1601), 76 ER 809 (Star Chamber).
4 Cookson v Swire (1884), 9 App Cas 653. And se e above note 2.
Introduction and G eneral Considerations 3
debtor to redeem her title on satisfaction of the secured obligation. The
chattel mortgage differed from the pledge in two respects.5 First, the
creditor acquired the debtor’s entire property in t he encumbered asset
whereas a pledge transferred only a sp ecial property, the general own-
ership remaining in the debtor. Second, possession by the mortgagee
was not essential to t he constitution of a chattel mortgage and generally
speaking would be inconsi stent with that character ization.
Despite the mellowing of judicial att itudes towards secured tra ns-
actions in which the debtor remained in possession, the chattel mort-
gagee still faced the risk of prolonged ex post litigation on whether the
arrangement was tr uly a mortgage or in fact intended to operate as a
fraud on creditors. The solution was found in the enactment of bills of
sale legislation requir ing the public registration of both absolute sales
and chattel mortgages where the seller or mortgagor remained in pos-
session .6 While registration conclusively preserved t he effectiveness of
the buyer or mortgagee’s right against third par ties, failure to register
avoided the transaction as against the seller or mortgagor’s creditors
and subsequent purchasers and mortgagees without notice of the prior
sale or mortgage.
The f‌irst Bills of Sale and Chattel Mortgages Act in what was to be-
come Canada was enacted in 1849 by the Legislative Assembly of the
Province of Canada.7 By the turn of the twentieth century, similar leg is-
lation had come into force in all the common law provinces and t he
Northwes t Terr itories.8 The legislation solved the secrecy concerns t hat
arose out of the debtor’s retained possession because registration gave
the debtor’s other creditors, and subsequent purchasers and mortga-
gees, the means to discover whether property in a person’s possession
already had been mortgaged or sold to another.
In the latter part of the ni neteenth century, a second type of se-
curity device — the equitable charge — came into common use in the
corporate f‌inancing sector. Unlike the mortgage, the charge did not
depend on the formal transfer of title to the collateral from the debtor
to the chargee. It was purely hypothecary in character. The charge was
created simply by the agreement of the debtor that the secured party
5 See, for example, Re Shap iro; Ex part e Wright Industries Ltd, [1949] OWN 606
(Sup Ct).
6 Cookson v Swire, above note 4 (Lord Blackburn).
7 Bills of Sale and Chattel Mor tgage Act, 1849 (UK), 12 Vic, c 74). By the turn of the
twentieth cent ury, similar legislat ion had come into force in all the common
law province s and the Northwest Territories. S ee above note 2.
8 See above note 2.

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