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

AuthorRonald C.C. Cuming, Catherine Walsh, Roderick Wood
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).
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
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.

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