The Effects of Bankruptcy and Insolvency Proceedings on Security Interests

• 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: 425-451

CHAP TER 11

THEEFFECTSOF

BANKRUPTCY

AND INSOLVENCY

PROCEEDINGS ON

SECURITY INTERESTS

A. INTRODUCTION

Whe n a de btor d efau lts on his cred it obl igat ions , it i s ver y com mon t hat

a range of creditors’ claims are affected. If bankr uptcy or insolvency

proceedings have been invoked either by the debtor or by one or more

creditors, a regime dif ferent from that other wise applicable to the regu-

lation of the various clai ms comes into play. This regime dr aws on both

federal bankr uptcy and insolvency law and rules contained in t he PPSA

that expressly apply to insolvent or bankrupt debtors who have given

security intere sts in their property. The most signif‌icant features of thi s

regime are exami ned in this chapter.

However, the chapter has not been designed to be a comprehensive

exposition of all features of bankruptcy and insolvency law that affect

the position of secured creditors. Its i ntended role is to highlight is sues

that directly affect rights that ari se in the context of the PPSA.

425

PERSO NAL PR OPERTY SEC URI TY LAW426

B. THE EFFECT OF BANKRUPTCY L AW ON

THE RIGHTS OF SECUR ED CR EDITORS

1) The Def‌inition of Secured Creditor under the BIA

Prior to enactment of the PPSA, the appropriate characterization of in-

terests created by the transfer or retention of title to secure loan or

sale credit was conceptual ly problematic under the Bankruptc y and In-

solvency Act (BIA).1 At common law, the creditor is the owner of the

goods until the contractual conditions are fulf‌illed. The adoption of a

functional concept of security by t he PPSA has resolved the ch aracteri-

zation problem and the Supreme Court of Canada ha s now conf‌irmed

that the PPSA approach is to be used when interface issues between

the PPSA and BIA are involved.2 The very broad def‌inition of secured

creditor in the BIA3 is subject to one signif‌icant exception. Sections 86

1 R.S.C. 1985, c. B-3 [BIA].

2Re Giffen (1998), 155 D.L.R. (4th) 332 (S.C.C.), rev’g (1996), 16 B.C.L.R. (3d) 29

(C.A.). Until recently, the character ization problem remained al ive in Quebec

since the Civ il Code treat s retention or transfer of tit le as conceptually disti nct

from hypothec ary security in t he strict sense: compare Re Giffen,ibid., wit h

Ouellet (Trustee of), [2004] 3 S.C.R. 348 and Lefebvre (Trustee of ); Tremblay

(Trustee of ), [2004] 3 S.C.R. 326. To resolve th is uncertainty, the def‌in ition of

“secured cred itor” in section 2 of the BIA was a mended to explicitly include

title-base d security arrange ments arising under Quebe c law. See below note 3

for the text of the ex panded def‌inition.

3 Secured cre ditor is def‌ined in s. 2 of the BIA to mea n

a person holding a mor tgage, hypothec, pledge, charge, or lie n on or against

the property of t he debtor or any part of that propert y as security for a

debt due or accruing due to t he person from the debtor, or a person whose

claim is ba sed on, or secured by, a negotiable inst rument held as collateral

security a nd on which the debtor is only indirec tly or secondarily liable, a nd

includes: (a) a person who has a r ight of retention or a prior claim cons titut-

ing a real rig ht, within the meani ng of the Civil Code of Québec or any other

statute of the Prov ince of Quebec, on or against the prop erty of the debtor or

any part of th at property, or (b) any of

(i) the vendor of any propert y sold to the debtor under a conditional or in-

stalment sale,

(ii) the purc haser of any property from t he debtor subject to a right of re-

demption, or

(iii)the tr ustee of a trust constit uted by the debtor to secure the per formance

of an obligation,

if the exerci se of the person’s rights is subject to t he provisions of Book Six

of the Civil Code of Québec entitled Prior Claims and Hypothecs that deal with

the exercise of hy pothecary right s.