Similar to UCC Article 9, PPSA security interests are created and rendered enforceable through attachment. The rules of attachment are the same: attachment occurs when value is given, the debtor has rights in collateral, and a signed security agreement with a sufficient description of collateral is made (or secured party obtains possession of the collateral).
The concept of "attachment" does not exist in Quebec. However, the principles of creation of a hypothec are very similar to the PPSA attachment. A hypothec without "delivery" (i.e., non-possessory security) must be created in an "act constituting a hypothec" (i.e., written security agreement). Typically, pledges are created by physical delivery of the property or title to the creditor; however, we do see written agreements put in place for evidentiary purposes.
The deed of hypothec (i.e., security agreement) must expressly provide that the grantor "hypothecates" its property. The property should be sufficiently described and can essentially consist of (permit us to use the Quebec terminology) a universality (an entire category of) or specific movable (corporeal or incorporeal) property. An "all present and after-acquired personal property" grant clause (i.e., the universality of the grantor's present and after-acquired movable property) is considered a "sufficient description" under the CCQ. As is the case under the PPSA and UCC Article 9, the hypothec will "attach" to the after-acquired property once the grantor acquires "title" to the collateral (title in the CCQ refers to the "right of ownership"), which includes the right to dispose of property. The same deed of hypothec can charge both movable and immovable property (in contrast to the PPSA and UCC Article 9 jurisdictions, where a separate "mortgage" or "debenture" is typically used to charge real property). However, when real property is being charged, the CCQ requires the deed to be notarized (executed in the presence of a notary). The deed of hypothec must describe the obligations secured and--an important distinction from the PPSAs/UCC Article 9--the specific amount, stated in Canadian dollars, for which the hypothec is granted, commonly referred to as the "hypothec amount." This amount corresponds to the maximum amount for which the hypothec can be enforced. Typically, this amount represents the indebtedness amount (i.e., total credit commitment, and perhaps a little buffer to allow for future indebtedness increases, and an additional 20-25 percent "bump-up" targeted to cover enforcement expenses). Interest on the hypothec amount can also be stated (it can be fixed or floating, but must be determinable). As mentioned, the hypothec amount must be stated in Canadian dollars. This necessarily implies that where the indebtedness amount is in a currency other than Canadian dollars, this amount needs to be converted in Canadian dollars (an amount to factor in fluctuations in foreign exchange rated must be added). In some cases, we see "extravagant" hypothec amounts (set in the billions!). However, in a realization scenario, the creditor will only be able to enforce the hypothec for the amount due when enforcement occurs.
Under both the PPSA and the CCQ, a validly created security interest/hypothec in collateral must be perfected so it can gain priority vis-à-vis third party unsecured creditors, including a trustee in bankruptcy. Similar to UCC Article 9, there are three methods of perfection under the PPSA and the CCQ (the CCQ refers to "publication"): registration, possession, and control.
Registration of a financing statement (in CCQ, "application for registration") perfects security interests/hypothecs in all personal property collateral and can be done electronically. Under the PPSA, the lender can choose the length of the filing (from one year to perpetuity). CCQ filings are valid for 10 years and can be renewed. In the PPSA provinces, pre-filing (i.e., filing before execution of the security agreement) is permitted (except for consumer goods). Pre-filing is advantageous in that the lender's security interest will gain priority from the date of filing, even if the security agreement bears a later date. Pre-filing is not allowed in Quebec, where the application for registration must refer to the date the deed of hypothec was signed. To the extent the Quebec assets form a valuable part of the collateral, disbursement should factor in the delays for Quebechypothec filings. The "good" news is that filing processing times are relatively quick at the RPMRR, so, under normal circumstances, one can expect to obtain filing confirmation within a day or two of filing. As previously mentioned, TRD rights (and their assignment to third parties, e.g., a lender financing an installment sale) must also be filed at the RPMRR in order to be enforceable against third parties. (For a more detailed discussion on the topic, see "An Attempt to 'Demystify' Quebec Secured Transactions Law,"Commercial Finance/Uniform Commercial Code Newsletter, Summer 2010, Part I.) Although real property security is not discussed in this article, note that immovable hypothecs are registered in the land registry (as is the case in the other Canadian provinces under the land title and land registration statutes).
Whether under the PPSA or the CCQ, the general rule is similar: priority between competing registered security interests is determined from the date of filing. This "first-in-time" rule does not always guarantee the secured party's priority on the debtor's collateral. Certain rights can defeat the secured party's priority (e.g., statutory liens, and PMSIs in all Canadian provinces, except Quebec). A lengthy discussion of priority rules and the methods of possession and control as methods of perfection is beyond the scope of this article. As for possession, note that it is available for collateral similar to what is provided under UCC Article 9 (e.g., negotiable documents of title and instruments).
Control perfects security interests in investment property. The PPSA and CCQ rules relating to control on investment property were modeled on UCC Article 9. One important distinction between UCC Article 9 and the PPSA/CCQ: "control" is not available for the perfection of security interests/hypothecs on deposit accounts. The method for perfecting security interests in deposit accounts remains the filing of the security interest in the jurisdiction where the debtor is located (see next section for "debtor location" rules). Funds on deposit in a bank account are "intangibles" under the PPSA and "incorporeal property" under the CCQ. Changes to the Ontario PPSA are on the horizon to make available perfection by control for deposit accounts.
In addition to filing with the provincial personal property registries, some collateral falls under federal jurisdiction and filings with certain federal registries would be commendable (e.g., filing of security interests in the intellectual property registries) or even necessary (e.g., registered vessels under the Canada Shipping Act).
Now that we have a better handle on the basics of "how" to create and perfect security in Canada, let's turn our focus on the "where" and "why" queries. The answers lie in the conflict of laws provisions relating to security.
Conflict of Laws
Seeing how the PPSAs are very similar to UCC Article 9, counsel to the U.S. lender may be tempted to use a U.S.-law governed general security agreement to create and perfect a security interest in the PPSA provinces (Ontario and BC in our example). While this may seem appropriate at the outset, counsel should be wary of Canadian conflict of law rules relating to the validity and perfection of security interests, as well as the costs that may be related to proving U.S. law before a Canadian court (assuming, of course, that the Canadian court will accept to apply U.S. law). Under the PPSA, security interest enforcement matters are generally governed by the lex fori (i.e., law where enforcement procedures are taken). We say "generally" because the PPSA distinguishes between procedural (steps involved in the enforcement) and substantive (right to enforce) matters. In fact, the PPSA provides that "procedural" enforcement issues are governed by the lex fori. However, "substantive" matters are governed by the law of the contract between the secured party and the debtor. Considering all this, it may be wiser to use a security agreement governed by the law where the lender may ultimately conduct enforcement. In contrast to the PPSA, the CCQ contains no express conflict of law rule regarding enforcement. However, the analysis tends to be similar to the one made under the PPSA. In practice, when Quebec assets are involved, given the specificities of the Quebec "hypothec," lenders typically require a deed of hypothec to charge the Quebec assets.
So, which law applies to the validity and perfection of a security interest/hypothec? The PPSA and CCQ conflict of law rules relating to the validity and perfection of a security interest or hypothec are essentially the same. The conflict of laws provisions relating to security interests or hypothecs apply to the validity, perfection and effect of perfection of the security (in contrast to UCC Article 9, which sets out the rules for perfection and effect of perfection, but section 1-301 of the UCC provides the rule for validity of the security, i.e., law of contract). It is also important to note that a reference to the law of a jurisdiction in the conflict of law provisions of the PPSA and the CCQ is a reference to the internal law of that jurisdiction, excluding its conflict of laws rules (which is also the case under UCC Article 9). This has the obvious advantage of avoiding the renvoi. The renvoi could result in the application of laws of different jurisdictions--this approach would be contrary to the goals of certainty and predictability pursued by secured transactions laws.
The lex situs (law of jurisdiction where charged property is situated at the time the security interest/hypothec attaches) governs the validity and perfection of a security interest/hypothec in tangible property (and possessory security interests/hypothecs). This rule is similar to what existed under former section 9-103 of the UCC, with multiple filings being required if the debtor's inventory is located in many jurisdictions. As we pointed out earlier, in Quebec, the security conflict of law provisions may not apply to TRDs. Instead, it is arguable that, in those cases, we may need to apply the conflict of laws relating to real rights and sales. It would be prudent for the lender to file the relevant TRD at the RPMRR (within the delays prescribed under the CCQ) if the debtor is domiciled in Quebec, the asset leased or sold is situated (or is destined to arrive) in Quebec or the TRD contract is governed by Quebec law.
The debtor's location governs the validity and perfection of a security interest/hypothec in intangible property and mobile goods. Under the PPSA, the debtor shall be deemed to be located at the debtor's place of business, or if there is more than one place of business, at the debtor's "chief executive office." This term is not defined under the PPSA and this can lead to uncertainty when trying to determine the debtor's location (e.g., if a company has its registered office in one province and executive offices in many provinces). For those who are familiar with secured transactions laws, this situation certainly brings back some "fond" memories from the former equivalent section 9-103(3)d of the UCC). Some PPSA provinces (e.g., Ontario and British Columbia) have begun proposals to amend the PPSA conflict of laws to define the debtor's location by referring to the debtor's jurisdiction of incorporation. These amendments will bring the PPSAs in line with the rules under UCC Article 9. Under the CCQ, a debtor's location is its "domicile." The domicile of a corporation is the "place and address of its head office" (registered office).
The PPSA/CCQ conflict of rules relating to security in investment property are essentially the same as those found under UCC Article 9. In fact, the PPSA and the CCQ rules were modeled on the UCC Article 9 rules. For the purposes of solving our case study (i.e., investment property of Wildnorth Co. 2), the validity and perfection of the security interest/hypothec in the securities account is governed by the law of the securities intermediary's jurisdiction (see rules in section 8-110(e) of the UCC). In our case study, this law would be Ontario since the securities account agreement is governed by Ontario laws.
The conflict of law rules have helped us understand "where" we must create and perfect our security. We are now ready to assist the U.S. lender in preparing a preliminary Canadian security "closing checklist":
- For Wildnorth Co. 1: An Ontario-law governed security agreement charging all of Wildnorth Co. 1's personal property, presently owned and after-acquired, filed with the Ontario PPSA registry (for validity and perfection of security interest in inventory and equipment located in Ontario); a deed of hypothec charging the universality of Wildnorth Co. 1's property (both movable and immovable, presently owned and after-acquired) (for validity and perfection of hypothec on inventory and equipment located in Quebec and all intangibles, e.g., on accounts receivable, including deposit accounts, trademarks) filed at the RPRMM and at the Quebec Land Register (for the hypothec on the real property owned by Wildnorth Co. 1); filing at the RPMRR of the transfer of reservation of ownership of vendor for equipment financed by U.S. lender (such transfer to U.S. lender may be evidenced in sale agreement between vendor and Wildnorth Co. 1); filing of the hypothec on the trademarks owned by Wildnorth Co. 1 at the CIPO; assignment of insurance policies and proceeds to U.S. lender and notification to insurer to name U.S. lender as loss payee on the policy.
- For Wildnorth Co. 2: An Ontario-law governed security agreement charging all of Wildnorth Co. 2's personal property, presently owned and after-acquired, filed in the Ontario PPSA registry (for validity and perfection of security interest in inventory and equipment located in Ontario and accounts receivable, including deposit accounts) and the BC PPSA registry (for validity and perfection of security interest in inventory and equipment located in BC); an Ontario-law governed securities account control agreement; filing of the security interest in the trademarks at the CIPO; assignment of insurance policy and proceeds to U.S. lender (and notification to insurer to name U.S. lender as loss payee on the policy).
In the end, despite the differences that exist between UCC Article 9 and the PPSA/CCQ, it is safe to say that the Canadian personal property secured transaction regime in Canada and in the United States are very similar. Of course, every transaction is unique and prudence dictates that you consult with Canadian counsel when Canadian property is an important part of your collateral.