Introduction and General Considerations

• Author: Ronald C.C. Cuming, Catherine Walsh, Roderick Wood
• Pages: 1-115

1

CHA PTER 1

INTRODUCTION

AND GENER AL

CONSIDER ATIONS

A. INT RODUCTION

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);

PERSO NAL PROPERT Y SECUR ITY LAW2

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.