The Concept of Security Interest and Scope of the Personal Property Security Act

• Author: Ronald C.C. Cuming, Catherine Walsh, Roderick Wood
• Pages: 116-179

116

CHA PTER 2

THE CONCEPT OF

SECURITY INTEREST

AND SCOPE OF THE

PER SONA L PROPERT Y

SECUR IT Y ACT

A. THE DEFINITION AND CENTR A L

CONCEPT OF SECURITY INTEREST

1) A Unitary Concept

The concept of security interest is at the core of the PPSA.1 The Act

applies only to transactions that create or provide for security inter-

ests or that are deemed to create security interests.2 In the context of

the PPSA itself, there is no need to determ ine the nature of a security

interest other than to recogn ize that it is an interest that gives to the

secured party t he rights against speci f‌ied kinds of competing claim-

1 Issues rel ating to the creation of a secur ity interest, includin g questions of

rights in t he collateral and attachme nt, are dealt with in Chapter 4.

2 It is clear th at a security agreement is a ne cessary but not suff‌icient cond ition

for the creation of a sec urity interest. All of t he statutory prerequisite s for its

creation must be met : an agreement through which it is re cognized that the

secured par ty has or is to have a “secur ity interest”; the giving of value b y the

secured par ty; and the holding or acquis ition of (or power to trans fer) rights

in the collater al by the debtor. A security intere st is created by a securit y

agreement only in t he sense that a secur ity agreement is a sine qua non of t he

existence of a se curity interest. The ma king of a security agree ment by the par-

ties provide s the legally relevant evidence of t heir intentions that one pa rty is

to have a secur ity interest in property of t he other. Once the existence of thi s

evidence coincide s with the existence of t he other prerequisites, the s ecurity

interest atta ches.

The Concept of Securit y Interest and Scope of the Personal P roperty Security Act 117

ants and against the debtor that are set out in the Act. However, it is

relevant in other contexts to identify t he central concept of the PPSA.

Most pre-PPSA forms of security agreements used in Canada involved

transfers of legal or equitable title.3 The PPSA makes it clear that this

is not required or even relevant.4 Many security interests are created

under transactions t hat provide for nothing more than the recognition

that the secured par ty has or is to acquire a security interest in identi-

f‌ied personal property of the debtor. However, when the rights of a

secured party or debtor come into conf‌lict with t hose of a third-party

claimant in a context not regul ated by the PPSA, it may be necessar y

to determine the nature of a security interest in order to determine the

outcome of the conf‌lict.5

Not all security interest s falling within the scope of the Act are con-

ceptually the same. This i s a product of several factors examined later

in this chapter. The term “security interest” is def‌ined in the Act as “an

interest in personal property that secures pay ment or performance of

an obligation.”6 This def‌inition must be read in t he context of the scope

section of the Act. It provides that the Act applies “to every transaction

that in substance creates a security interest . . .” and then provides a

non-exclusive list of transact ions that are to be treated as cre ating or

providing for security intere sts.7

2) Hypothecation

Standing alone, the def‌inition of secur ity interest is both too broad and

too narrow to def‌ine accurately the concept in the Act. It is too n ar-

row in that it does not describe common law i nterests arising under

3 There are circum stances in which it remai ns important to use tr aditional forms

of charging c lauses in agreements. O f particular impor tance in this respe ct are

title retention cl auses in secured sale s agreements. See, for example, s 8 9(2) of

the Indian Act, R SC 1985, c I-5 (re-en 1988, c 23, s 12) which provides dif ferent

rights depen ding upon whether the securit y agreement is a conditional s ales

contract or another t ype of security agr eement.

4 PPSA (A, M, NB, PEI, S) s 3(1); (BC, NWT, Nu) s 2(1); (NL, NS) s 4(1); O s 2(a); Y

s 2.

5 See for example, Bank of Montreal v Inn ovation Credit Union, 2010 SCC 47; Royal

Bank of Canada v Ra dius Credit Union, 2010 SCC 48; and Chapter 13, Sect ion

A(7)(a ).

6 PPSA (A, BC, NB, NWT, Nu, O, Y) s 1(1); (M, PEI) s 1; NS s 2; (NL, S) s 2(1).

7 Above note 4. The def‌inition and t he scope section are tied together i n the

def‌inition of sec urity agreement — “an agreeme nt that creates or provides for a

security i nterest.” PPSA (A, BC, NB, NWT, Nu, O, Y) s. 1(1); (M, PEI) s 1; NS s

2; (NL, S) s 2(1).

PERSO NAL PROPERT Y SECUR ITY LAW118

transactions s uch as conditional sales contracts and securit y leases that

are within the scope of the Act. It is too broad in that it can be read as

applying to non-consensual sec urity interests th at are not within the

scope of the Act.8 However, it does describe the central concept that

characterize s the great bulk of interests to which the Act applies.

This central concept has the following features.9 It assumes that

the debtor has or will acquire a proper ty interest in personal property.10

By agreement between the debtor and the creditor,11 that interest is

charged or is to be charged with or encumbered by an interest granted

in favour of the creditor12 for the purposes of securing per formance of

an obligation of a debtor.13 This concept is not new — it was a feature

of Roman law (hypothec)14 and was recognized in equity (equitable

ch ar ge).15 In traditional legal terms, a PPSA security i nterest has most

of the characterist ic of an interest arising under a hypothecation agree-

8 The Act applies only to interest s arising under a consen sual arrangement (con-

tract) and thos e that are given by the PPSA its elf. Except to the extent that it

provides a prior ity rule for repairers’ lien s, it does not apply to interest that a rise

by operation of law. See Cana dian Imperial Bank of Commerce v 64576 Manitoba

Ltd (1990), 79 CBR (NS) 308 (Man QB), aff’d (1991), 2 CBR (3d) 4 (Man CA). The

Ontario PPSA i s an exception to this genera lization. See s 20(1)(a)(i).

9 This conceptualiz ation applies only to trans actions that function as s ecured

f‌inancing a rrangements, not to those t hat do not but are deemed to be securit y

agreements i n order to bring them withi n the publication and priority r egimes

of the Act (see PPSA (A, M, NB, PEI, S) s 3(2); (NL, NS) s 4(2); (NWT, Nu) s

2(2); O ss 2(b) & (c); Y s 2(b); BC s 3). The common law charac teristics of these

transac tions remain undist urbed except to the limited e xtent it is necessary to

deem them to have ch aracteristics of sec urity agreements for clea rly limited

purposes.

10 A security i nterest can also come into e xistence when the debtor does not have

a property inte rest in goods, but has the power to c reate an interest in the prop-

erty that i s opposable to the owner of the proper ty. See Chapter 4, Section C(2).

11 The term “creditor” is u sed although the obligation sec ured need not be a debt.

A security i nterest can secure pay ment or performance of any obligat ion.

12 The interest can be one th at is recognized in law or e quity. Consequently, a con-

tractual e quitable assignment (i.e. an agre ement to assign or trans fer a future

chose-in-action) is a s ecurity agreement th at gives rise to a secur ity interest as

soon as the debtor acqu ires a property interes t in the property descr ibed in the

agreement. See 3564 47 British Columbia Ltd v Can adian Imperial Bank of Com-

merce, [1998] 9 WWR 59 (BCCA).

13 The transaction may i nvolve two “debtors”: a principal debtor a nd a guarantor.

See the def‌init ion of debtor: PPSA (A, BC, NB, NWT, Nu, O, Y) s 1(1); (M, PEI) s

1; NS s 2; (NL, S) s 2(1).

14 See Paul Van Warmelo, An Introduc tion to the Principles of Roman Civil Law

(Cape Town: Juta, 1976) at 116–19.

15 See, generally, Edward I Sykes & Sa lly Walker, The Law of Securities, 5th ed

(Sydney: Law Book Co, 1993) at 193–99.