By Victoria Yang
Oftentimes when companies or individuals loan money, they want that loan to be secured. That means the lender has an interest in some specified personal property of the borrower (or debtor) which secures payment or performance of the loan being repaid.
For instance, if a loan is secured by the borrower’s motor vehicle, then if the borrower defaults on his payments, the lender or secured party can give notice and then repossess the motor vehicle pursuant s.62 of the Personal Property Security Act (PPSA). After repossession, subject to notice as required under s.63(4), the secured party can dispose the collateral in a commercially reasonable manner by public sale, private sale. Any surplus proceeds are then aid to other creditors or are returned to the debtor. In Ontario the debtor is liable for any deficiency.
Many things can be considered personal property, and thus can be secured by another party. These include chattel paper, documents of title, goods, instruments, intangibles, money and investment property, and fixtures as defined under s.1(1) – more or less anything that is not land. One of the most common is goods, which are sub-categorized into consumer goods, inventory, and equipment.
- Consumer goods: goods that are used or acquired for use primarily for personal, family or household purposes.
- Inventory: includes goods that are held by a person for sale or lease, or that are to be furnished, or are raw materials, or materials used or consumed in a business or profession. Examples include cars of a car leasing company, or building materials of a builder.
- Equipment: this is a residual category for goods that are not inventory or consumer goods, such as a car used by a salesman or a photocopier at an office.
There are three steps in securing an obligation: attachment and perfection.
- Creation: There is an agreement to have a security agreement, either by writing or by mutual understanding
- Attachment: Attachment marks the point when the security interest attaches to the collateral. Pursuant to s. 11(2) a security interest attaches to a collateral only when value is given, the debtor has rights in the collateral or the power to transfer rights in the collateral to a secured party, and satisfies either the writing requirement or possession rule.
- The writing requirement entails the debtor signing a security agreement that contains either a description of the collateral sufficient to enable identification OR a description of the collateral
- The possession rule merely requires that collateral is in the possession of the secured party or person on behalf of the secured party
- Perfection: Perfection generally relates to the publication of the security interest. Registration and possession are two ways to perfect security interest but by far the most common today has been registration in compliance with s.23 of the PPSA.
The Ontario PPSA registration system today is completely computerized, and involves lodging a simple financing statement that summarizes the barebones of the transaction. To search the register, there is an online application that must be completed, and a fee. There are three separate indexes: (1) an individual debtor name; (2) a business debtor name, and (3) a motor vehicle ID index. Ontario has an exact match system where details keyed into the search must exactly match the debtor’s name and other details set out in the financing statements. It is advised that prior to taking a security interest, one searches the individual, business, or motor vehicle to assess the risk of providing a loan, especially if there are already prior security encumbrances registered.
For more information or any other questions regarding this and other matters related to secured transactions or commercial lending, please contact our commercial lending team.