Introduction and General Considerations

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
1) The Idea of Secured Credit
The idea of secured credit has been around as long as the concepts of
private property and freedom of contract. The basic premise is straight-
forward. A debtor gives a creditor a proprietary interest in an asset on
the understanding t hat if the debtor defaults, the creditor can look to the
value of that asset to satisf y the debt.
The proprietary character of a security 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 asset given as collateral security on
the debtor’s default; (2) the right to apply the proceeds realized from
the collateral to satisfy the obligation secured by it in preference to the
claims of the debtor’s unsecured creditors; and (3) the right to enforce
the security interest against any person to whom the debtor transfers
rights in the collateral.
This book examines t he legal framework for secured credit set out in
the Personal Property Security Act (PPSA). First proclaimed by Ontario
in 1976, the PPSA is in force today in all nine common law provinces
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);
Manitoba, 1978 (SM 1973, c 5, in force 1 September 1978, CCSM c P35);
2) Pre-PPSA Law2
The oldest and most widely recognized consen sual security device is the
classic pledge or pawn, constituted by the debtor’s transfer of physical
possession of the collateral to the secured party on the understand-
ing that the secured party is entitled to sell the collateral if the debtor
defaults on the obligation secured by the pledge. Historically, the pos-
sessory pledge was the only security device for personal property rec-
ognized by the common law. A security agreement in which the debtor
remained in posse ssion of the collateral was viewed as presumptively
fraudulent to protect third persons who might rely to their detriment
on the debtor’s apparent ownership.3
In response to the demand for a form of secured financing that
would enable businesses to retain possession of their encumbered
assets, Anglo-C anadian common law long ago rejected the presumption
of fraud historically associated with the grant of a non-possessory sec-
urity interest. The debtor’s retention of possession came to be regarded
merely as a circumstance to be considered in determining whether a
transaction was fraudulent. Evidence that the transaction involved the
grant of security was sucient to refute that contention.4 This develop-
ment paved the way for the recognition of non-possessory security
One was the chattel mortgage, constituted by the transfer of owner-
ship of the collateral to the secured pa rty subject to the equitable right of
the debtor to redeem ownership on satisfaction of the secure d obligation.
Saskatchewa n, 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, R SY 2002, c 169); Alberta, 1990 (SA 1988, cP-4.05,
in force 1 October 1990, RSA 20 00, c P-7); British Columbia, 1990 (SBC 1989, c
36, in force 1 October 1990, RSBC 1996, c 359); New Bruns wick, 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); Newfoundland and L abrador, 1999 (SNL 1998, c P-7.1,
in force 13 December 1999); Northwest Terr itories, 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 Corp oreal Movables (Leide n: AW Sitjho, 1974); RCC Cuming, “Harmoniz-
ation of Canadi an Personal Property Se curity Law” in Harmo nization of Business
Law in Canada (Toronto: Universit y of Toronto Press, 198 6).
3 Twyne’s Case (1601), 76 ER 809 (Star Chambe r).
4 Cookson v Swire (1884), 9 App Cas 653 [Cookson]. And see above note 2.
Introduction and General Considerations 3
The chattel mortgage diered from the pledge in two respect s.5 First, the
creditor acquired the debtor’s entire property in the encumbered asset
(albeit subject to the mortgagor’s right to redeem ownership on payment
of the secured debt) whereas a pledge transferred on ly a special property,
the general ownership remaining in the debtor. Second, possession by
the mortgagee was not essentia l to the constitution of a chattel mortgage
and generally would be inconsistent with that characterization.
Despite the mellowing of judicial attitudes to non-possessory
secured tran sactions, the chattel mortgagee still faced the risk of e x post
litigation on whether the arrangement was tr uly a mortgage or intended
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 if the sel ler or mortgagor remained in possession.6
While registration conclusively preser ved the eectiveness of the sale or
mortgage against third pa rties, failure to register automatically avoided
the transact ion as against the seller’s or mortgagor’s creditors and subse-
quent purchasers and mortgagees w ithout notice of the sale or mortgage.
The first Bills of Sale and Chattel Mortgages Act in what was to become
Canada was enacted in 1849 by the Legislative Assembly of the Prov-
ince of Canada.7 By the turn of the t wentieth century, similar legislation
had come into force in all the common law provinces and Northwest
Territories.8 The legislation solved the secrecy concerns that arose out
of the debtor’s retained possession bec ause registration gave the debtor’s
other creditors, and subsequent purchaser s and mortgagees, the means
to discover whether property in a person’s possession already had been
mortgaged or sold.
In the latter part of the nineteenth century, a second type of sec-
urity 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
could appropriate the value of the collateral to satisfy the secured obli-
gation on the debtor’s default.9
5 See, for example, Re Shap iro; Ex parte Wright Indust ries Ltd, [1949] OWN 606
(Sup Ct).
6 Cookson, above note 4 (Lord Black burn).
7 Bills of Sale and Chattel Mortgage Act, 1849 (U K), 12 Vic, c 74. By the tur n 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.
9 Ibid. But see Gordon Mackay & Co, Ltd v Capital Trust Corp Lt d, [1927] SCR 374
[Gordon Mackay & Co].

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