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

• 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: 58-117

CHAP TER 2

THE CONCEPT OF

SECURITY INTEREST

AND SCOPE OF THE

PER SONAL PROPERT Y

SECUR IT Y ACT

A. THE DEFINITION AND CENTR AL

CONCEPT OF SECURITY INTEREST

1) A Unitary Concept

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

plies only to transactions that cre ate or provide for securit y interests or

that are deemed to create secur ity interests.2 In the context of the PPSA

itself, there is no need to determi ne the nature of a security interest

other than to recogni ze that it is an interest that gives to the secured

party the rights against speci f‌ied kinds of competing cla imants and

1 Issues rel ating to the creation of a secu rity interest, includi ng questions of

rights in t he collateral and attachme nt, are dealt with in chapte r 3.

2 It is clear th at a security agreement is a ne cessary but not suff‌icient c ondition

for the creation of a se curity interest. Al l of the statutory prerequis ites for its

creation must be met : an agreement through which it i s recognized that the

secured par ty has or is to have a “secu rity interest,” the givin g of value by the

secured par ty, and the holding or acquisition of r ights in the collateral by t he

debtor. A security int erest is created by a secur ity agreement only in the se nse

that a secur ity agreement is a sine qua n on of the existence of a secur ity interest.

The making of a sec urity agreement by the pa rties provides the legal ly relevant

evidence of thei r intentions that one part y is to have a security i nterest in

property of the ot her. Once the existence of this e vidence coincides with the

existence of t he other prerequisites, the se curity interest attac hes.

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Concept of Secur ity Interest and Scope of the Personal Property Security Act 59

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

other contexts to identify the central concept of the PPSA.3 Most pre-

PPSA forms of security agreements used in Canada involved transfers

of legal or equitable title.4 The PPSA makes it clear that this is not

required or even relevant.5 Many security interests are created under

transact ions that provide for nothing more th an the recognition that

the secured part y has a security interest in identif‌ied p ersonal property

of the debtor. However, when the rights of a secured party or debtor

come into conf‌lict with those of a third-party claimant in a context not

regulated by the PPSA, it may be necess ary to determine the nature of a

security interest i n order to determine the outcome of the conf‌lict.

Not all security interests falling w ithin the scope of the Act are

conceptually 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 secure s payment or perform-

ance of an obligation.”6 This def‌inition must be read in the context of

the scope section of the Act that prov ides that the Act applies “to every

transaction that in substance creates a s ecurity interest …” and that

provides a non-exclusive list of transactions that are to be tre ated as

creating or providing for security interests.7

3 The authors do not agree th at the approach described b y Professor Grant

Gilmore, one of the arch itects of Article 9, applies to t he PPSA. Professor Gil-

more concluded that the de f‌inition of “security int erest” in UCC § 1-201(37)

is “essenti ally a declaration of fait h.… What is important to rememb er is that,

ultimately, the Ar ticle 9 security intere st f‌loats, unmoored, in a void. Whether

any partic ular transaction c reates ‘an interest … which se cures … an obligation’

is a question for judic ial determination.” See G. Gilm ore, Security Interests in

Personal Property, vol. 1 (Boston: Little, Brown, 1965) at 334–35.

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

of charging c lauses in agreements. O f particular import ance in this respe ct are

title retention cl auses in secured sale s agreements. See, for example, s. 89(1)

of the Indian Act, R. S.C. 1985, c. I-5 (re-en. 1988, c. 23, s. 12) which provides

different r ights depending upon whether th e security agreement is a c onditional

sales contra ct or another type of secur ity agreement. See als o chapter 14, A.7.a

“The Bank Act Priority Provisions.”

5 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.

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

7 Above note 5. The def‌inition and t he scope section are tied toget her in the

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

securit y interest.” PPSA (A, BC, NWT, Nu, O, Y) s. 1(1); (M, NB, PEI) s. 1; (NL,

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

PERSO NAL PR OPERTY SEC URI TY LAW60

2) Hypothecation

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

too narrow to def‌ine accurately t he concept in the Act. It is too nar-

row in that it does not descr ibe common law interests ar ising under

transact ions such as conditional sales contracts and s ecurity leases that

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

applying to non-consensual security interest s that are not within the

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

characterizes the great bulk of interests to which the Act applies.

This central concept has the followi ng features.9 It assumes that

the debtor has or will acquire a proper ty interest in pers onal property.

By agreement between the debtor and the creditor,10 that interest is

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

in favour of the creditor11 for the purposes of securing performance of

an obligation of a debtor.12 This concept is not new — it was a feature

of Roman law (hypothec)13 and was recognized in Equity (equitable

8 The Act applies only to inte rests arising under a c onsensual arra ngement (con-

tract) and those t hat are given by the PPSA it self. Except to the extent th at it

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

by operation of law. See Can adian Imperial Bank of Commerce v. 64576 Manitoba

Ltd. (1990), 79 C.B.R. (N.S.) 308 (Man. Q.B.), aff’d (1991), 2 C.B.R. (3d) 4 (C.A.).

The Ontario PPS A is an exception to this gener alization. See s. 20(1)(a)(i).

9 The conceptualiz ation of a security intere st under the Act applies only to

transac tions that function as s ecured f‌inancing ar rangements (above note 5),

not to those that do not b ut are deemed to be security ag reements in order to

bring them w ithin the publication and pr iority regimes of the Act (see PPS A (A,

M, NB, PEI, S) s. 3(2); (NL, NS) s. 4(2); (NWT, Nu) s. 2(2); (O, Y) s. 2(b); BC s.

3). The common law characteri stics of these tran sactions remain undi sturbed

except to the ver y limited extent it is neces sary to deem them to have ch aracter-

istics of sec urity agreements for cle arly limited purpose s.

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

A securit y interest can secure pay ment or performance of any obli gation.

11 The interest can b e one that is recognized i n law or equity. Consequently, a con-

tractual e quitable assignment (i.e., an agreement t o assign or transfer a fut ure

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

soon as the debtor acqui res a property interest in t he property described i n the

agreement. See 356447 British Columbia Ltd. v. Canadia n Imperial Bank of Com-

merce, [1998] 9 W.W.R. 59 (B.C.C.A.).

12 The transaction may involve two “debtors”: a principal debtor and a guarantor.

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

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

13 See P. Van Warmelo, An Introduction to the Princ iples of Roman Civil Law (Cape

Town: Juta, 1976) at 116–19.