C. Special Security

• Author: M.H. Ogilvie
• Profession: LSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
• Pages: 160-165

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First introduced in the 1890 Bank Act,⁶⁷the "special security"⁶⁸is a form of taking security in Canada unique to banks and for which provision is made uniquely in the Bank Act. This security has enjoyed a significant role in facilitating the exploitation of Canada’s natural resources and economic growth generally over the past 120 years or so. This is because by means of this security, banks have provided the capital necessary to recover and manufacture natural resources for domestic and international trade.⁶⁹

The law relating to the special security is especially complex not only in itself but also because there have been historically and continue to be significant problems in relation to priorities in securities between those taken pursuant to the Bank Act and those taken pursuant to the myriad and similarly complex provincial legislation relating to secured transactions. Harmonization of the Bank Act and provincial personal property legislation continues to elude the law in Canada. The Law Commission of Canada had recommended that after a three-year transition period, the special security be abolished and that banks take securities for loans pursuant to provincial legislation.⁷⁰

However, the 2007 amendments to the Bank Act contain the special security provisions with a few minor changes, so the special security is likely to be a part of the business of banking for another few years. Since banks increasingly take security pursuant to provincial legislation for loans because that legislation is easier to understand and enforce, a brief overview of the special security provisions is sufficient.⁷¹

The Bank Act permits banks to lend money to any wholesale or retail dealer in various natural products, including agriculture, aquaculture, forestry, mining and fishing, and to borrowers engaged in those busi-

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nesses, for the purpose of carrying out those businesses, including the purchase of equipment and materials and the purchase and care of animals, fish, seeds, pesticides, fertilizers, feed, and so on.⁷²

The security may be taken on these, as well as on the finished or marketable products, and must be in writing and signed by or on behalf of the party giving the security.⁷³

The prescribed forms are set out in the regulations,⁷⁴and descriptions of the property need not be given in any great detail.

The Act sets out certain conditions which must be met before a bank may take a special security: (i) the person giving the security must be the owner of the security document at the time of delivery of the security document or at any time thereafter prior to the release of the security by the bank;⁷⁵(ii) the bank loan must be made at the time the security is taken, that is, the exchange must be contemporaneous;⁷⁶ and (iii) when one type of security is exchanged for another, the bank must receive in exchange another security document in relation to the loan.⁷⁷

A special security cannot be taken for past indebtedness, only for present indebtedness and for after-acquired property. Third parties are alerted to security for after-acquired indebtedness by virtue of the registration which expressly refers to such.

The legal nature of the security taken by the bank is unclear from the Act, which provides for the nature of the security taken in two convoluted provisions that distinguish the nature of the security taken on the basis of the type of property on which it is taken. For some property, the legal nature of the security is similar to that under a warehouse receipt or bill of lading,⁷⁸but for other property, the security gives a first and preferential lien on the property for the sum secured and the interest thereon.⁷⁹

Some courts have likened the special security to a pledge, but others think it is like a chattel mortgage.⁸⁰

Essentially, the bank acquires legal title in all present and after-acquired property covered by the security, while the borrower is left in possession and may deal with the property on a day-to-day basis, as if it were a floating charge.

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Thus, a special security appears to have some of the characteristics of a floating charge and of a chattel mortgage, so that it seems best to describe it as a unique type of security whose legal justification is found in the Bank Act.

Although the special security is assigned to the bank, it is not the assignment itself that is registered but a notice of intention as prescribed by the regulations, which simply records the borrower’s intention to give a special security to the bank.⁸¹

Registration is a prerequisite for the validity of the security.⁸²

The notice must be provided to the bank by the person giving the security and registered not more than three years prior to the date the security is given.⁸³

Registration, which constitutes constructive notice of the bank’s interest, takes place at a provincial office of the Bank of Canada or its authorized representative,⁸⁴ and on payment of a prescribed fee, any person is entitled to have access through an agent to the register to see if the bank has a secured interest on any property.⁸⁵

Security taken against certain types of property (for example, aquacultural equipment, agricultural equipment, or forestry equipment affixed to real property) must also be registered in the appropriate land registry or land titles office.⁸⁶

Registration of the notice of intention must be made prior to giving the security; otherwise, the bank’s interest will be void.⁸⁷

Registration may be cancelled by subsequent registration of a certificate of release stating either that the security has been released or that no security was ever taken.⁸⁸

The notice of intention is uninformative; it does not contain the amount borrowed or details of the security taken by the bank, only the name of the person giving the security and the date on which the notice was filed. A searcher learns almost nothing from this document and must rely on the borrower to provide other details voluntarily.

Under the Bank Act, a bank that has taken a special security has power to enforce it in the event of non-payment of the loan, failure to care for the property given as the security, any attempt without the bank’s consent to dispose of the property, or the seizure of the property covered by

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the security.⁸⁹

No prior judicial authorization is required,⁹⁰and the bank may do so using its own officers...