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: 1-122

1

CHA PTER 1

INTRODUCTION

AND GENER AL

CONSIDER ATIONS

A. INTRODUCTION

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);

PERSO NAL PROPERT Y SECURI TY LAW2

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

devices.

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].