Introduction and General Considerations

• 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: 1-57

CHAP TER 1

INTRODUCTION

AND GENERAL

CONSIDER ATIONS

A. EVOLUTION OF PERSONA L PROPERT Y

SECUR IT Y L AW

1) The Idea of Secured Credit

The idea of secured credit has been around as long as the concepts of

private property and fre edom of contract. The basic premise i s straight-

forward. A debtor gives her creditor a proprietar y interest in one or

more of her assets on the understand ing that if she defaults the creditor

can look to the value of those asset s to satisfy the debt.

The proprietary character of a security interest t ypically confers

three basic rights on the secured party, namely: (1) the right to enforce

the security interest against the collateral in the event of default; (2)

the right to preference in payment, to the extent of the value of the col-

lateral, over unsecured creditors upon an insolvency of the debtor; and

(3) the right to follow the collateral and to assert the sec urity interest

against a third pa rty to whom it has been tran sferred.

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 (S.O. 1967, c. 73, in force 1 April

1976, replaced by S.O. 1989, c. 16, in force 10 October 1989); Manitoba, 1978 (S.M.

1

PERSO NAL PR OPERTY SEC URI TY LAW2

2) Ba c kgro und 2

The oldest and most widely recognized consensual secur ity device

is the classic pledge or pawn, con stituted by the debtor’s transfer of

possession of the collatera l to the secured part y on the understanding

that the secured party is entitled to sel l the collateral if the debtor de-

faults on her loan obligation. In some legal systems (an ever decreasing

number), the pledge is still the only device available to secure personal

property. However, Canadian (and English) common law long ago re-

jected the presumption of fraud historically associated with the grant

of a security interest w ithout a transfer of posses sion of the collateral

to the secured part y. This paved the way for the recognition of two

additional forms of secur ity, both of which enabled the debtor to re-

main in posse ssion of the collateral. The f‌irst was the chattel mortgage,

constituted by the transfer of title to the collateral to the secured party

on condition that title would be tran sferred back to the debtor upon

satisfaction of the secured obligation. The second was the equitable

charge. Unlike the mortgage, the charge did not depend on the formal

transfer of title to the collateral. It was purely hypothecary in charac-

ter. The secured party’s proprietar y interest was created simply by the

agreement of the debtor that the secured party could appropriate the

value of the collateral to satisfy the secured obligation in the event of

the debtor’s default.

The widespread availability of non-possessory security dev ices

supported the early development and steady growt h of secured f‌inanc-

ing in the common law colonies that were to become Can ada. By 1849,

non-possessory security had become suff‌iciently commonplace to

cause the Legi slative Assembly of the Prov ince of Canada to enact leg-

islation requiring t he public f‌iling of chattel mortgages. By the tur n of

1973, c. 5, in force 1 September 1978, see now R.S.M. 1987, c. P35); Saskatchewan,

1981 (S.S. 1979–80, c. P-6.1, in force 1 May 1981, replaced by S.S. 1993, c. P-6.2,

in force 1 April 1995); Yukon Territory (O.Y.T. 1980, c. 20, 2d Sess, in force 1 June

1982, see now R.S.Y. 1986, c. 130); Alberta (S.A. 1988, c. P-4.05, in force 1 October

1990); British Columbia (S.B.C. 1989, c. 36, in force 1 October 1990); New Bruns-

wick, 1995 (S.N.B. 1993, c. P-7.1, in force 18 April 1995); Nova Scotia, 1997 (S.N.S.

1995-96, c. 13, in force 3 November 1997); Pri nce Edward Island, 1998 (S.P.E.I.

1997, c. 33, in force 27 April 1998); Newfoundland, 1999 (S.N. 1998, c. P-7.1, in

force 13 December 1999); Northwest Territor ies (S.N.W.T. 1994, c. 8, in force 7

May 2001); Nunavut (Nunavut Consol idated Acts, in force 7 May 2001).

2 On the pre-PPSA legal f ramework for personal propert y security, see, for

example, Jacob S. Ziegel, “Ca nadian Chattel Secu rity Law: Past Exper ience

and Current Development s” in J.G. Sauveplanne, ed., Security over Corporeal

Movables (Leide n: A.W. Sitjhoff, 1974).

Introduction and General Considerations 3

the twentieth century, chattel mortgage legislation had come into force

in all the common law provi nces and the Northwest Territories.

By this point in history, the English f‌loating charge had come into

common use in the corporate f‌inancing sector in both England and

Canada. The distinctive feature of the f‌loating charge was that it ena-

bled a non-specif‌ic charge to be taken over all of the undertaking of

a corporation or over generic categories of circulating assets such a s

inventory and accounts receivable. Ultimately, separate regist ry sys-

tems were established for charges and mortgages — f‌ixed or f‌loating

— granted by corporations to secure bonds or debentures.

The statutory recognition of assig nments, begin ning with Ont ario

in 1872, gave added legal eff‌icacy to the assignment by a business of its

accounts receivable by way of sale or securit y. By 1913, Saskatchewan

had enacted legislation requi ring the regist ration of security and non-

security as signments of book debts by merch ants and traders (other

than those al ready subject to the registration regime for secured bonds

and debentures granted by corporations). Assignment of Book Debts

Acts were ultimately brought into force throughout common law Can-

ada and in the terr itories.

Historical Can adian secured f‌in ancing patterns were not merely

a copy of English common law practices. The best ex ample of this is

the conditional sales contract. Like the mortgage, the eff‌ic acy of the

conditional sales contract depended on the secured party holding title

to the collateral. Unlike the mortgage, it was based on the retention of

title by the secured party rather than the transfer of title by the debtor.3

Of only recent vintage in England, the condit ional sales contract had

come into widespread use in Canada and the United State s as early as

the 1860s and 1870s to f‌inance the acquisition of both consumer and

business as sets. Beginning in 1882, the common law provinces and the

territories adopted legi slation to provide for the public registration of

both conditional sales contracts and hire purch ase lease s.

3) T he Personal Property Security Act

The ad hoc evolution of personal property f‌inancing in Canada eventu-

ally led to a highly fragmented legal framework. There was no single

law of personal propert y security. Each security device was i nstead gov-

erned by its own pec uliar mix of st atutory, common law, and equitable

3 On the pre-PPSA di fferences between the rete ntion and grant of title for secu rity

purposes, s ee Michael G. Bridge et al., “Formalism, Funct ionalism and Under-

standing t he Law of Secured Transact ions (1999) 44 McGill L .J. 567 at 597–98.