An Overview of Bill 152: An Act to Modernize Various Acts Administered By Or Affecting the Ministry of Government Services, 2006

Ontario was the first province in Canada to adopt a UCC Article 9 type registration system called the 'Personal Property Security Act' or PPSA. During the early 1990s, Ontario refreshed its legislation, and other Canadian provinces soon followed with their own acts that were modeled on but not the same as the Ontario PPSA. As with any legislation, certain changes made by other provinces turned out to be superior to the act that it modeled.

Bill 152: An Act to modernize various Acts administered by or affecting the Ministry of Government Services, 2006, which received Royal Assent in the Ontario Legislature on Dec. 12, 2006, is Ontario's effort to keep itself as a leading-edge commercial environment. Bill 152 amends a variety of provincial Acts including the PPSA.

The most important amendments to the PPSA are set out below. To the leasing industry, clearly the most significant change will be the requirement to register all leases (finance and true) if they have a term of greater than one year. It is important to note that while Bill 152 has received Royal Assent, it has not yet been proclaimed and as such is not in force. It will be proclaimed at different stages, and certain aspects are unlikely to come into force for years. The list set out below is based as how they appear in Bill 152 and not in order of importance.

The proclamation date for Bill 152 has not been set, and the various parts may come into effect in stages. The most important amendments to the PPSA are summarized as follows:

1) Definition of 'Debtor'

The definition of 'debtor' is clarified so that it will now include both a person who owes payment and performance of the obligation secured, and a person who owns or has rights in the collateral and makes the collateral available as security without assuming any obligations under the security agreement. The most common example is a pledgor of shares who will no longer be required to execute a debt instrument such as an indemnity or guarantee to be considered a 'debtor' under the PPSA.

2) Application of the PPSA ' Leases

Bill 152 removes much of the 'true lease' and 'financing arrangement' analysis required by the PPSA (This analysis will still be relevant at the enforcement stage where a creditor claiming under a lease will be exempted from the enforcement sections of the PPSA). Once proclaimed, Bill 152 will amend the PPSA so that it will apply to leases of goods that run for terms of more than one year. This will be the case even if the lease is a true lease. This amended provision is similar to what is currently in existence in the other PPSA jurisdictions but differs substantially from Article 9. While sweeping in nature, this change should have little effect in practice as prudent leasing companies have registered leases in Ontario due to the uncertainty in the law under the old legislation.

This change will mean that all leases and other agreements running for terms of more than one year will need to be perfected under the PPSA in order for a creditor to avail itself of the priority provisions of the PPSA. The special timing rules in the PPSA pertaining to purchase-money security interests ('PMSI') will apply to leases containing terms of more than one year. Again, this should have little impact on current practice.

Short-term rental agreements (one year or less) will be exempt from the scope of the PPSA.

3) Conflict of Laws ' Location of the Debtor

Under the PPSA, the question of where to perfect is answered according to the class of collateral being granted as security, and method of perfection. For security interests in goods and possessory security interests in securities, instruments, negotiable documents of title, money, and chattel paper, perfection is governed by the law of the jurisdiction where the collateral is situated at the time the security interest attaches. Bill 152 does not change this.

Bill 152 clarifies the issue of where to perfect security interests in intangibles, goods normally used in more than one jurisdiction if the goods are equipment or inventory leased or held for lease by a debtor to others (often called mobile goods), and non-possessory security interests in securities, instruments, negotiable documents of title, money, and chattel paper (collectively, 'Debtor Location Collateral'). It must be emphasized that this change is not as sweeping as the Article 9 revision where the jurisdiction of incorporation was used in all cases.

Perfection of a security interest in Debtor Location Collateral is governed by the law of the jurisdiction where the debtor is located at the time the security interest attaches. Unlike determining the location of collateral, deciding where a debtor is located has proven to be difficult and confusing due to the complex and incomplete set of rules contained in the PPSA.

Bill 152 simplifies the test for locating the debtor by replacing the current rules with much simpler and straightforward deeming rules such as those in Table 1 below. As you will note, this follows much the same logic as Article 9.

Bill 152 contains provisions that transition and integrate the pre-amendment conflict of laws provisions of the PPSA with the post-amendment PPSA and help to clarify various conflicting scenarios (some of these include when a secured party may rely on the pre-amendment version of the PPSA when amending, renewing, or extending a registration, and time limits for perfection under prior law).

4) Lessees of Goods Not in Possession of the Goods Will Be Protected

The PPSA entitles a lessee who leases goods in the ordinary course of business to hold the goods, to the extent of the lessee's rights under the lease, free from any security interest therein given by the lessor even though it is perfected and the lessee knows of it, unless the lessee also knew that the lease constituted a breach of the security agreement. A version of this provision also applies to buyers of goods.

Bill 152 amends the PPSA to restrict this protection only to goods that are explicitly identified in the lease contract. (Note: Bill 152 sets out the information that is required for goods to be adequately described in a lease contract to access this provision.)

Bill 152 also amends the PPSA to extend this protection to lessees who either did not take possession of the goods, or where the lessor retained possession of the goods for any time. The amendments are targeted to solve a problem that has arisen since the repeal of the Bills of Sale Act regarding registrations needed for lessees of assets under construction or in storage and the lessor enters bankruptcy proceedings while in possession of such assets.

5) PMSI Notices

The inventory PMSI provisions of the PPSA will be amended to require a PMSI claimant to give notice in writing to every other secured party who has, before the date of registration by the PMSI claimant, registered a financing statement that: (i) describes the collateral as items or types of inventory, all or some of which are the same as the items or types of inventory that will be subject to the PMSI; or checks the collateral classification boxes of (ii) inventory; or (iii) accounts.

The current provisions only require the inventory PMSI claimant to give notice to secured parties who have classified their collateral as 'inventory' in their registration. Subparagraph (i) relates to the replacement of the 'check-box' system as discussed below. The requirement to notify registered secured parties perfecting a security interest in the 'accounts' of a debtor is a new requirement.

6) Registrations

Under the amended PPSA, financing statements and financing change statements must be submitted electronically. This eliminates paper forms of registration.

Additionally, the check-box system of classifying collateral according to categories will be replaced with a system that requires the secured party to submit a narrative description that describes collateral by item or type. (Note: The categories were previously 'consumer goods,' 'inventory,' 'equipment,' 'accounts,' 'other,' and 'motor vehicle included.') The narrative system is similar to what is in place in the other provinces and territories and will bring Ontario's PPSA into line with these other jurisdictions.

This amendment is likely to be the last one proclaimed, and it will likely be many years in the future, as the Ministry's computer system will need to be revamped.

7) Possession upon Default ' Exempt Collateral

The seizure provisions of the PPSA will be amended to import the Execution Act (Ontario) exemptions. These include personal clothes, farming implements, and motor vehicles, all up to a prescribed amount.

8) Assignment of Accounts Or Chattel Paper

Contractual terms that restrict, prohibit, or require an account debtor's consent, to the assignment or granting of a security interest in the whole of an account or chattel paper for money due or to become due, will bind the assignor only to the extent of making the assignor liable to the account debtor for breach of contract and will be unenforceable against third parties. Accordingly, any provision restricting assignment will be unenforceable.

9) Service of Notices

Notices required by the PPSA to be served on a secured party named in a registered financing statement or financing change statement or on a debtor by a secured party may, in addition to being served by personal service and registered mail, also be served by way of prepaid courier, fax, and electronic transmission.

Conclusion

Once fully proclaimed, the PPSA amendments contained in Bill 152 will have a substantial effect on the scope of the PPSA along with conflict of laws, perfection, and priority issues. The leasing industry should welcome these changes, as they will reduce some of the uncertainty that currently exists. As in all areas of
law, constant updating is required, and we applaud the government
for taking these steps; however, as will become apparent, new uncertainty will no doubt arise as to certain of these amendments and further changes will be required.

[IMGCAP(1)]

Jonathan Fleisher is a partner of the Toronto-based firm of Cassels Brock & Blackwell LLP. He may be reached at [email protected] or 416-860-6596. Harvey Garman is an associate at Cassels Brock & Blackwell LLP and practices law in the areas of financial services and commercial insolvency. He can be reached at [email protected] or 416-860-6455.

Ontario was the first province in Canada to adopt a UCC Article 9 type registration system called the 'Personal Property Security Act' or PPSA. During the early 1990s, Ontario refreshed its legislation, and other Canadian provinces soon followed with their own acts that were modeled on but not the same as the Ontario PPSA. As with any legislation, certain changes made by other provinces turned out to be superior to the act that it modeled.

Bill 152: An Act to modernize various Acts administered by or affecting the Ministry of Government Services, 2006, which received Royal Assent in the Ontario Legislature on Dec. 12, 2006, is Ontario's effort to keep itself as a leading-edge commercial environment. Bill 152 amends a variety of provincial Acts including the PPSA.

The most important amendments to the PPSA are set out below. To the leasing industry, clearly the most significant change will be the requirement to register all leases (finance and true) if they have a term of greater than one year. It is important to note that while Bill 152 has received Royal Assent, it has not yet been proclaimed and as such is not in force. It will be proclaimed at different stages, and certain aspects are unlikely to come into force for years. The list set out below is based as how they appear in Bill 152 and not in order of importance.

The proclamation date for Bill 152 has not been set, and the various parts may come into effect in stages. The most important amendments to the PPSA are summarized as follows:

1) Definition of 'Debtor'

The definition of 'debtor' is clarified so that it will now include both a person who owes payment and performance of the obligation secured, and a person who owns or has rights in the collateral and makes the collateral available as security without assuming any obligations under the security agreement. The most common example is a pledgor of shares who will no longer be required to execute a debt instrument such as an indemnity or guarantee to be considered a 'debtor' under the PPSA.

2) Application of the PPSA ' Leases

Bill 152 removes much of the 'true lease' and 'financing arrangement' analysis required by the PPSA (This analysis will still be relevant at the enforcement stage where a creditor claiming under a lease will be exempted from the enforcement sections of the PPSA). Once proclaimed, Bill 152 will amend the PPSA so that it will apply to leases of goods that run for terms of more than one year. This will be the case even if the lease is a true lease. This amended provision is similar to what is currently in existence in the other PPSA jurisdictions but differs substantially from Article 9. While sweeping in nature, this change should have little effect in practice as prudent leasing companies have registered leases in Ontario due to the uncertainty in the law under the old legislation.

This change will mean that all leases and other agreements running for terms of more than one year will need to be perfected under the PPSA in order for a creditor to avail itself of the priority provisions of the PPSA. The special timing rules in the PPSA pertaining to purchase-money security interests ('PMSI') will apply to leases containing terms of more than one year. Again, this should have little impact on current practice.

Short-term rental agreements (one year or less) will be exempt from the scope of the PPSA.

3) Conflict of Laws ' Location of the Debtor

Under the PPSA, the question of where to perfect is answered according to the class of collateral being granted as security, and method of perfection. For security interests in goods and possessory security interests in securities, instruments, negotiable documents of title, money, and chattel paper, perfection is governed by the law of the jurisdiction where the collateral is situated at the time the security interest attaches. Bill 152 does not change this.

Bill 152 clarifies the issue of where to perfect security interests in intangibles, goods normally used in more than one jurisdiction if the goods are equipment or inventory leased or held for lease by a debtor to others (often called mobile goods), and non-possessory security interests in securities, instruments, negotiable documents of title, money, and chattel paper (collectively, 'Debtor Location Collateral'). It must be emphasized that this change is not as sweeping as the Article 9 revision where the jurisdiction of incorporation was used in all cases.

Perfection of a security interest in Debtor Location Collateral is governed by the law of the jurisdiction where the debtor is located at the time the security interest attaches. Unlike determining the location of collateral, deciding where a debtor is located has proven to be difficult and confusing due to the complex and incomplete set of rules contained in the PPSA.

Bill 152 simplifies the test for locating the debtor by replacing the current rules with much simpler and straightforward deeming rules such as those in Table 1 below. As you will note, this follows much the same logic as Article 9.

Bill 152 contains provisions that transition and integrate the pre-amendment conflict of laws provisions of the PPSA with the post-amendment PPSA and help to clarify various conflicting scenarios (some of these include when a secured party may rely on the pre-amendment version of the PPSA when amending, renewing, or extending a registration, and time limits for perfection under prior law).

4) Lessees of Goods Not in Possession of the Goods Will Be Protected

The PPSA entitles a lessee who leases goods in the ordinary course of business to hold the goods, to the extent of the lessee's rights under the lease, free from any security interest therein given by the lessor even though it is perfected and the lessee knows of it, unless the lessee also knew that the lease constituted a breach of the security agreement. A version of this provision also applies to buyers of goods.

Bill 152 amends the PPSA to restrict this protection only to goods that are explicitly identified in the lease contract. (Note: Bill 152 sets out the information that is required for goods to be adequately described in a lease contract to access this provision.)

Bill 152 also amends the PPSA to extend this protection to lessees who either did not take possession of the goods, or where the lessor retained possession of the goods for any time. The amendments are targeted to solve a problem that has arisen since the repeal of the Bills of Sale Act regarding registrations needed for lessees of assets under construction or in storage and the lessor enters bankruptcy proceedings while in possession of such assets.

5) PMSI Notices

The inventory PMSI provisions of the PPSA will be amended to require a PMSI claimant to give notice in writing to every other secured party who has, before the date of registration by the PMSI claimant, registered a financing statement that: (i) describes the collateral as items or types of inventory, all or some of which are the same as the items or types of inventory that will be subject to the PMSI; or checks the collateral classification boxes of (ii) inventory; or (iii) accounts.

The current provisions only require the inventory PMSI claimant to give notice to secured parties who have classified their collateral as 'inventory' in their registration. Subparagraph (i) relates to the replacement of the 'check-box' system as discussed below. The requirement to notify registered secured parties perfecting a security interest in the 'accounts' of a debtor is a new requirement.

6) Registrations

Under the amended PPSA, financing statements and financing change statements must be submitted electronically. This eliminates paper forms of registration.

Additionally, the check-box system of classifying collateral according to categories will be replaced with a system that requires the secured party to submit a narrative description that describes collateral by item or type. (Note: The categories were previously 'consumer goods,' 'inventory,' 'equipment,' 'accounts,' 'other,' and 'motor vehicle included.') The narrative system is similar to what is in place in the other provinces and territories and will bring Ontario's PPSA into line with these other jurisdictions.

This amendment is likely to be the last one proclaimed, and it will likely be many years in the future, as the Ministry's computer system will need to be revamped.

7) Possession upon Default ' Exempt Collateral

The seizure provisions of the PPSA will be amended to import the Execution Act (Ontario) exemptions. These include personal clothes, farming implements, and motor vehicles, all up to a prescribed amount.

8) Assignment of Accounts Or Chattel Paper

Contractual terms that restrict, prohibit, or require an account debtor's consent, to the assignment or granting of a security interest in the whole of an account or chattel paper for money due or to become due, will bind the assignor only to the extent of making the assignor liable to the account debtor for breach of contract and will be unenforceable against third parties. Accordingly, any provision restricting assignment will be unenforceable.

9) Service of Notices

Notices required by the PPSA to be served on a secured party named in a registered financing statement or financing change statement or on a debtor by a secured party may, in addition to being served by personal service and registered mail, also be served by way of prepaid courier, fax, and electronic transmission.

Conclusion

Once fully proclaimed, the PPSA amendments contained in Bill 152 will have a substantial effect on the scope of the PPSA along with conflict of laws, perfection, and priority issues. The leasing industry should welcome these changes, as they will reduce some of the uncertainty that currently exists. As in all areas of
law, constant updating is required, and we applaud the government
for taking these steps; however, as will become apparent, new uncertainty will no doubt arise as to certain of these amendments and further changes will be required.

[IMGCAP(1)]

Jonathan Fleisher is a partner of the Toronto-based firm of Cassels Brock & Blackwell LLP. He may be reached at [email protected] or 416-860-6596. Harvey Garman is an associate at Cassels Brock & Blackwell LLP and practices law in the areas of financial services and commercial insolvency. He can be reached at [email protected] or 416-860-6455.