PRIORITIES—2013
PAPER 5.1
The Odd Couple: Priorities Issues between the
Bank Act and the Personal Property Security Act
These materials were originally prepared by James I. Reynolds of Mandell Pinder LLP, Vancouver, BC, for the
Continuing Legal Education Society of British Columbia publication Priorities—2002 (April 2002) and were
updated by Annie Chen and Mark R. Davies, both of Richards Buell Sutton LLP, Vancouver, BC, for Priorities
(November 2009). They have been updated by Mark R. Davies and Jessica Wong, both of Richards Buell
Sutton LLP, Vancouver, BC, for November 2013.
© Mark R. Davies and Jessica Wong
5.1.1
THE ODD COUPLE: PRIORITIES BETWEEN SECURITY SUBJECT
TO THE BANK ACT AND SECURITY SUBJECT TO THE PERSONAL
PROPERTY SECURITY ACT
I.
Introduction .................................................................................................................................1
II.
Background................................................................................................................................. 2
III.
The Basic Rules Governing Priorities ........................................................................................ 4
A. Legislative Rescue of the Bank Act ........................................................................................................... 6
B. Rule 1—Set Aside the PPSA ...................................................................................................................... 6
C. Rule 2—Determine Priority Pursuant to the Bank Act ......................................................................... 7
1. Basic Rule Under Section 428(1) ...................................................................................................... 7
2. Exception for Conditional Sales Vendors ....................................................................................... 9
3. Does the Exception Extend to all PMSI Holders?...................................................................... 11
D. Rule 3—Where Appropriate, Apply the First-In-Time Priority Rule ................................................ 12
E. The Three Rules Reconsidered ................................................................................................................ 12
IV.
Related Issues ............................................................................................................................ 13
A. Double Documentation ............................................................................................................................ 13
B. Proceeds ....................................................................................................................................................... 15
V.
Reform ....................................................................................................................................... 16
VI.
Schedule A—Registration of Bank Act Security ........................................................................ 18
A. Registration of Bank Act Security ............................................................................................................ 18
B. Bank Act Security Searches ....................................................................................................................... 18
C. Other Agency Services .............................................................................................................................. 18
VII.
Schedule B—Recent Amendments to the Bank Act Pursuant to the Financial Systems
Review Act ................................................................................................................................. 19
I.
Introduction
In British Columbia, the two major legislative schemes for regulating consensual security over personal
property are the Bank Act, S.C. 1991, c. 359, under which security may be taken only by eligible Canadian
banks (the 49 banks listed in Schedules I and II of the Bank Act), and the Personal Property Security Act, R.S.B.C.
1996, c. 359 (“PPSA’), which may be used by any person or thing, domestic or foreign. As discussed below,
the Bank Act pre-dates the PPSA and does not refer to it. The PPSA merely provides in s. 4(b) that it does
not apply to any security agreement governed by a federal Act including “any agreement governed by Part V,
Division B of the Bank Act (Canada).”
These two systems, each with their own registries, are both competent to enable security to be taken over, for
example, farm products and equipment, warehoused or manufactured goods and mining, forestry and
aquaculture products. This overlap has led to numerous priority issues that involve challenging
reconciliations of these two conceptually different legislative programs.
5.1.2
II.
Background
First, it may be useful to give a brief history and overview of each system. The security that may be taken
under s. 427 of the Bank Act can be traced back to pre-confederation Upper Canada legislation and appeared
in the first Bank Act of 1890. For clarity, references to former section numbers have been changed to those
currently in force. Section 427 permits banks to take security over certain types of property from certain
types of borrowers for certain types of purposes. The Bank Act definition of “banks” refers to those banks
listed in Schedules I and II of the Bank Act. The Bank Act is among the most poorly drafted, technical and
confusing pieces of legislation in Canada. The combined effect of ss. 427(2) and 435(2)(c) is that a bank
receives the same rights and title in collateral as the borrower enjoys: Flintoft v. R.B.C., [1964] S.C.R. 631
[Flintoft]; Royal Bank of Canada v. Sparrow Electric Corp., [1997] S.C.J. No. 25 [Sparrow] followed in BMO v.
Innovation Credit Union, [2010] S.C.J. No. 47 [Innovation SCC] and in Royal Bank v. Radius Credit Union Ltd.,
[2010] S.C.J. No. 48 [Radius SCC]. The system is title based, subject to the specific provisions of the statute; it
is accordingly governed by traditional common law and equitable principles. A good account of Bank Act
security is given by William D. Moull in his article on “Security Under ss. 177 and 178 of the Bank Act,”
(1986) 65 Can. Bar Review 242.
Section 427(4)-(6) sets out a registration system for filing notices of intention to take security. Failure to
follow these requirements renders the rights and powers of the bank void against creditors of the borrower.
Notice of Intention
(4) The following provisions apply where security on property is given to a bank under this
section:
(a) the rights and powers of the bank in respect of property covered by the
security are void as against creditors of the person giving the security and as
against subsequent purchasers or mortgagees in good faith of the property
covered by the security unless a notice of intention signed by or on behalf of
the person giving the security was registered in the appropriate agency not
more than three years immediately before the security was given;
(b) registration of a notice of intention may be cancelled by registration in the
appropriate agency in which the notice of intention was registered of a
certificate of release signed on behalf of the bank named in the notice of
intention stating that every security to which the notice of intention relates has
been released or that no security was given to the bank, as the case may be;
(c) every person, on payment of the fee prescribed pursuant to subsection (6), is
entitled to have access through the agent to any system of registration, notice
of intention or certificate of release kept by or in the custody of the agent;
(d) any person desiring to ascertain whether a notice of intention given by a
person is registered in an agency may inquire by sending a prepaid telegram or
written communication addressed to the agent, and it is the duty of the agent,
in the ease of a written inquiry, only if it is accompanied by the payment of the
fee prescribed pursuant to subsection (6), to make the necessary examination
of the information contained in the system of registration and of the relevant
documents, if any, and to reply to the inquirer stating the name of the bank
mentioned in any such notice of intention, which reply shall be sent by mail
unless a telegraphic reply is requested, in which case it shall be sent at the
expense of the inquirer; and
(e) evidence of registration in an agency of a notice of intention or a certificate of
release and of the place, date, time and serial number, if any, of its registration
may be given by the production of a copy of the notice of intention or
certificate of release duly certified by the agent to be a true copy thereof
without proof of the signature or of the official character of the agent.
Definitions
(5) In subsections (4) and (6),
5.1.3
“agency”
“agency” means, in a province, the office of the Bank of Canada or its authorized
representative but does not include its Ottawa office, and in Yukon, the Northwest
Territories and Nunavut means the office of the clerk of the court of each of those
territories respectively;
“agent”
“agent” means the officer in charge of an agency, and includes any person acting for that
officer;
“appropriate agency”
“appropriate agency” means
(a) the agency for the province in which is located the place of business of the
person by whom or on whose behalf a notice of intention is signed,
(b) if that person has more than one place of business in Canada and the places of
business are not in the same province, the agency for the province in which is
located the principal place of business of that person, or
(c) if that person has no place of business, the agency for the province in which
the person resides,
and in respect of any notice of intention registered before the day this Part comes into force,
means the office in which registration was required to be made by the law in force at the
time of such registration;
“notice of intention”
“notice of intention” means a notice of intention in the prescribed form or in a form to the
like effect, and includes a notice of intention registered before the day this Part comes into
force, in the form and registered in the manner required by the law in force at the time of
the registration of the notice of intention;
“principal place of business”
“principal place of business” means
(a) in the case of a body corporate incorporated by or under an Act of Parliament
or the legislature of a province, the place where, according to the body
corporate’s charter, memorandum of association or by-laws, the head office of
the body corporate in Canada is situated, and
(b) in the case of any other body corporate, the place at which a civil process in
the province in which the loans or advances will be made can be served on the
body corporate;
“system of registration”
“system of registration” means all registers and other records required by subsection (4) to
be prepared and maintained and any such system may be in a bound or loose-leaf form or in
a photographic film form, or may be entered or recorded by any system of mechanical or
electronic data processing or any other information storage device that is capable of
reproducing any required information in intelligible written form within a reasonable time.
Regulations
(6) The Governor in Council may, for the purposes of this section, make regulations
(a) respecting the practice and procedure for the operation of a system of
registration, including registration of notices of intention, the cancellation of
such registrations and access to the system of registration;
(b) requiring the payment of fees relating to the system of registration and
prescribing the amounts thereof; and
(c) respecting any other matter necessary for the maintenance and operation of a
system of registration.
Section 428(1) deals with priorities generally and is discussed below. Section 427(7) sets out special priority
rules in favour of unpaid wage earners and claims of growers or producers of agricultural products.
5.1.4
Until the 1967 Bank Act, banks were prohibited from lending money or making advances upon the security of
goods, ware and merchandise except by way of Bank Act security.
The PPSA was enacted in BC in 1990. It is based on concepts of “security interest,” “attachment” and
“perfection” originating from Article 9 of the US Uniform Commercial Code, U.C.C. §9. Article 9 was the
product primarily of US academics and was mainly intended to overcome deficiencies in US law such as the
difficulty of taking security in after acquired assets. Anglo-Canadian law had tried to overcome these
problems with the awkward device of the floating charge. As noted by Gonthier J. in Sparrow, the PPSA
regimes, “have been implemented to increase certainty and predictability in secured transactions through the
creation of a coherent system of priorities.” Whether this could have been achieved by reform rather than
revolution may be debated. The PPSA regulates all types of security interests taken by all types of secured
parties, including banks, in all types of personal property except as excluded in s. 4. A security interest is
perfected by possession or registration of a financing statement in the Personal Property Registry in Victoria.
Priorities are governed by Part 3 of the Act. The basic rule set out in s. 35(1) is that the first to perfect has
priority (note that s. 35.1 sets out the basic rule for priorities in relation to “investment property” as defined
in the PPSA), but there are numerous specific rules and a major exception to allow super-priority for
purchase money security interests (“PMSIs”) in s. 34. PMSI holders include conditional sales vendors and
those who otherwise finance the acquisition of personal property. The definition of a PMSI is as follows:
“Purchase money security interest” means
(a) a security interest taken in collateral, other than investment property, to the
extent that it secures payment of all or part of its purchase price,
(b) a security interest taken in collateral, other than investment property, by a
person who gives value for the purpose of enabling the debtor to acquire
rights in the collateral, to the extent that the value is applied to acquire the
rights,
(c) the interest of a lessor of goods under a lease for a term of more than one
year, and
(d) the interest of a person who delivers goods to another person under a
commercial consignment,
but does not include a transaction of sale by and lease back to the seller and, for the
purposes of this definition, “purchase price” and “value” include credit charges or interest
payable for the purchase or loan credit;
The purpose of the PPSA was to replace traditional common law and equitable rules, and prior statutory
provisions based on them, with a system capable of reconciling the more complex array of interests and
systems that make up our present commercial world. It is designed to accommodate the commercial
intricacies of today that have evolved far past simply a consideration of the location of legal and beneficial
titles. Our economy now recognizes commercial value in many more types of interests, such as future,
conditional, fractional, contingent and optional interests, and requires a system for secured transactions that
takes account of these diverse elements. The introductions of the PPSA, however, has created a theoretical
irreconcilability between it and the Bank Act with the result that priority disputes between the PPSA and the
Bank Act are often hard to rationalize and, as seen in the game-changing cases of Innovation SCC and Radius
SCC, difficult to predict.
III. The Basic Rules Governing Priorities
In 1994, the general approach to determining priorities between s. 427 (formerly s. 178) security and PPSA
security was set out by Bayda C.J.S. of the Saskatchewan Court of Appeal in Agricultural Credit Corp. of
Saskatchewan v. Royal Bank of Canada, [1994] S.J. No. 313 (Sask. C.A.) [Agricultural Credit], at para. 52:
In a priority dispute between a s. 178 Bank Act security and a security interest that is
perfected or is perfectible under the PPSA, there are, generally speaking, three basic rules
to follow for determining the priority: (1) Set aside the PPSA from the analysis and
determine the priority as if the PPSA did not exist; (2) Determine the priority pursuant to
5.1.5
ss. 178, 179 and 180 of the Bank Act (and such other provisions as may be applicable to
the circumstances) to the extent it is possible to do so; (3) Where appropriate, apply the
first-in-time priority rule.
More recently, in Innovation Credit Union v. Bank of Montreal, [2009] S.J. No. 147 (Sask. C.A.) [Innovation CA]
aff’d in Innovation Credit SCC, the Saskatchewan Court of Appeal reviewed the caselaw and affirmed the
general approach set out above. G.R. Jackson J.A. stated at para. 29:
While there are differences in the factual circumstances, each of these decisions follows the
general framework articulated in Agricultural Credit: (i) set aside the priority rules of the
PPSA; and (ii) construe the Bank Act to determine if there is any priority rule that may
apply. This may involve an examination of the ordinary law of the province to determine
what proprietary rights the debtor retains after a prior security interest has been granted. It
may also be necessary to apply the first-in-time principle to resolve a given dispute.
However, Innovation CA was then appealed to the Supreme Court of Canada, which partly confirmed but also
made material changes to the approach established by the three basic rules formulated in Agricultural Credit.
In Innovation SCC (confirmed by the SCC on the same day as Radius SCC), the appeal of the Bank was
dismissed but the reasoning of the Court of Appeal was replaced with the following:
(a) the provisions and concepts of the Bank Act must determine any priority dispute
between a Bank Act security interest and a secured claim from outside the Bank Act, if the
security from outside the Bank Act arises from provincial law, because the Bank Act, as
federal legislation, prevails over provincial law;
(b) where there is a specific provision in the Bank Act that deals with a particular dispute,
that specific provision will be applied to determine the dispute. However, there is no
specific priority provision in the Bank Act dealing with a conflict between a Bank Act
security interest and a prior, non-Bank Act security interest;
(c) we, therefore, must look at the principles underlying the Bank Act for guidance.
Here, sections 427(2) and 435(2) setting out what proprietary rights are granted to a
bank are relevant. The combined effect of those subsections is that a bank cannot
acquire any greater interest in collateral than the debtor had at the time the Bank Act
security was taken;
(d) it, therefore, has to be determined what interest was conveyed to the Credit Union
under its PPSA security interest. Since the security regime in the Bank Act is propertybased, the property right claimed by the Credit Union must be determined. Provinces are
competent to legislate laws relating to property and civil rights, as has been done in the
PPSA. The PPSA, however, does not specify what property rights are created by a
security interest. What property rights for a security interest it seems to create, however, is
a statutory fixed charge [Sparrow] [Radius]. The subsequent interest taken under the Bank
Act could only be taken in the debtor's equity of redemption in the collateral remaining
after the Credit Union’s fixed charge;
(e) the property-based framework used by the Bank Act doesn't permit a “first to register”
or “first to perfect” priority rule. The Bank Act would have to be amended to create such
a rule;
(f) under common law, priority disputes are determined by application of the nemo dat quod
non habet rule. Sections 427(1) and (2) and 435(2) operate in the same manner.
The result is that the Credit Union, with its earlier taken unperfected security interest under PPSA, has
priority over the later taken, property perfected security interest of the bank taken under the Bank Act. The
bank is entitled only to what collateral remains after Credit Union security interest is satisfied. A companion
discussion to the above is set out in Radius SCC.
We will now look at what remains of the three basic rules and the jurisprudence before Innovation SCC and
Radius SCC.
5.1.6
A.
Legislative Rescue of the Bank Act
The Bank Act, with other federal statutes relating to financial institutions, is required to be reviewed by the
federal government every five years. The most recent review process resulted in the Financial Systems Review
Act, which came into force on May 24, 2012, and contains amendments to ss. 425 to 428 of the Bank Act that
appear to be intended to reverse the effect of Innovation SCC and Radius SCC.
All of the revised subsections are printed out in Schedule B hereto. The two notable features of the
amendments are as follows:
(a)
Bank Act security is now explicitly given priority over security interests that are unperfected.
A definition of “unperfected” is included in the amendments. In the case of PPSA security,
unperfected refers to the methods of perfection or lack thereof recognized by the PPSA.
(b)
The priority Bank Act security enjoys over unperfected security will not occur, however, if
the bank acquired its Bank Act security with knowledge of the unperfected security interest
or the vendor's lien. No definition of knowledge was included in the amendments.
There was no suggestion in Innovation SCC or Radius SCC that the banks had knowledge of the unperfected
PPSA security in those cases so these amendments, if they were in force when those cases were heard, would
reverse the results of those cases. However, we are now left with wondering what “knowledge” means.
“Knowledge” has been a difficult concept under secured transactions law which needs to balance the
certainty of requiring registration to provide notice of security interests with alleviating the unfairness created
by parties knowingly taking advantage of a flaw in the secured status of another secured party. In trying to
create a balance, the BC PPSA creates a lengthy formula for determining when a party may have “knowledge”
that will alter the effect of otherwise generally applicable rules. For example, s. 1(2) sets out the formula
when a corporation has “knowledge” as follows:
1(2)(c) A corporation knows or has knowledge when information has come to the attention
of
(i) a managing director or officer of the corporation, or
(ii) a senior employee of the corporation with responsibility for matters to
which the information relates, under circumstances in which a reasonable
person would take cognizance of it or when the information in writing
has been delivered to the corporation's registered office or attorney for
service.
Implicit in the above formula for acquiring “knowledge” is that a corporation may be deemed to acquire
“knowledge” while its relevant employees may, in fact, be unaware of the information relating to the
“knowledge.” Under the PPSA, therefore, knowledge can either be actual or constructive. We will have to
see how the courts interpret this in the case of the Bank Act which, as set out in the case law, cannot look to
the PPSA for any guidance on matters other than what PPSA affects within its own ambit.
B.
Rule 1—Set Aside the PPSA
This rule flows from the doctrine of federal paramountcy which has been applied by the Supreme Court to
Bank Act security in Landry Pulpwood v. La Banque Canadienne Nationale, [1927] S.C.R. 605 at 615; and Bank of
Montreal v. Hall, [1990] S.C.J. No. 9 [Hall].
As Vancise J.A. of the Saskatchewan Court of Appeal said in Bank of Montreal v. Pulsar Ventures Inc., [1987] S.J.
No. 553 (Sask. C.A.) [Pulsar]:
If the Bank Act provides directly or by implication a priority rule then that provision will
govern notwithstanding that it is in conflict with a provincial scheme of priorities. This rule
is based on the primacy of federal law. … A s. 178 [now s. 427] security interest does not
have to be registered in a Personal Property Security Registry and its priority is not
governed by the internal rules of the Personal Property Security Act.
5.1.7
… A s. 178 security interest cannot be subject to a Personal Property Security Act priority
rule which takes away rights given by the Bank Act.
However, in Innovation SCC, the Supreme Court of Canada stated that:
… this formulation does not accurately reflect the applicable constitutional principles at
play. (par. 27)
Instead, Rule 1 “… means simply that the internal priority rules of the PPSA have no bearing on determining
a priority dispute between Bank Act and PPSA security interests. However, the PPSA retains importance in
resolving the priority dispute at issue here” (para. 27).
C.
Rule 2—Determine Priority Pursuant to the Bank Act
1.
Basic Rule Under Section 428(1)
Section 428 (1) of the Bank Act (as recently revised in 2012) sets out the basic priority scheme for s. 427
security.
Priority of bank’s claim
428(1) All the rights and powers of a bank in respect of the property mentioned in or
covered by a warehouse receipt or bill of lading acquired and held by the bank, and the rights
and powers of the bank in respect of the property covered by a security given to the bank
under section 427 that are the same as if the bank had acquired a warehouse receipt or bill of
lading in which that property was described, have, subject to subsection 427(4) and
subsections (3) to (6) of this section, priority over all rights subsequently acquired in, on or
in respect of that property, and also over the claim of any unpaid vendor or of any person
who has a security interest in that property that was unperfected at the time the bank
acquired its security in the property.
Under s. 428 (1), a bank with Bank Act security has “priority over all rights subsequently acquired in, on or in
respect of that property, and also over the claim of any unpaid vendor” subject to s. 428(2), which provides
an exception for “the claim of any unpaid vendor who had a lien on the property at the time of the
acquisition by the bank of the warehouse receipt, bill of lading or security, unless the same was acquired
without knowledge on the part of the bank of that lien.”
A bank’s priority is also subject to compliance with ss. 428(3) to (6) dealing with registration of the security in
the provincial land title system where fixtures are concerned and in the Ships Registry where vessels are
concerned.
Section 428 (1), therefore, gives the bank priority over all rights subsequently acquired in the property
including those of any unpaid vendor without a lien at the time the Bank Act security was taken. This
provision has been applied in the following cases:
(a)
Pulsar, per Vancise J.A.:
Section 428(1) clearly establishes that a bank’s s. 427 security takes priority over competing claims that are
created or arise at a later time than the assignment to the bank.
This case involved a priority competition between Bank Act security and a subsequently taken and perfected
PPSA security interest. The security granted to the bank was first in time both as to the date of giving of the
security and the date of registration under the equivalent of s. 428(4).
(b)
Bank of Nova Scotia v. International Harvester Credit Corp. of Canada Ltd., [1990] O.J. No. 1702 (Ont. C.A.)
[International Harvester]
International Harvester ruled in favour of an imperfectly registered conditional sales contract over a subsequent
Bank Act security that was registered both under the Bank Act and the PPSA.
5.1.8
Houlden J.A. states at para. 45:
Section 428(2), in my opinion confirms the priority of I.H.C.C.. It provides that the bank’s
rights and powers under its section 427 have ‘priority over all rights subsequently acquired
in or in respect of such property.’ The rights of I.H.C.C. under its conditional sales
contracts were acquired prior to, not subsequent to the bank acquiring its rights.
If a conditional sale registration under PPSA is, however, so “imperfectly” registered as to be unperfected
according to the PPSA, it seems that the recent amendment to s. 428 would reverse the priorities decided in
this case unless the conditional sales vendor could claim a valid lien outside of the PPSA.
(c)
Agricultural Credit
The priority competition in Agricultural Credit was between a perfected PPSA security and a subsequent Bank
Act security for the same collateral.
Bayda C.J.S. said, at paras. 52 and 54-55:
[52] An application of these rules [i.e., the basic rules described above] to the present case
produces this result: Because the security interests of ACS created by the ACS 1985
Security Agreement came into existence on 24 September 1985 and thus predated the
Bank’s s. 178 security interests created by the 3 October 1985 and 3 October 1986 General
Assignments, the former supersedes and takes priority over the latter. (In following this
approach I make no comment on the use by the Bank of the provincial filing system to
register Bank Act security.)
…
[54] The facts in Pulsar are entirely distinguishable from those in the present case. The
critical fact, of course, is that in Pulsar all of the advances by the bank to the debtor and the
governing assignment creating the security in respect of those advances were made before
the security interest created by the security agreement entered into by the opposing
claimant (Pulsar Ventures). In the present case all of the advances by the bank to the
debtor and the governing assignments creating the securities in respect of those advances
were made after the security interest created by the security agreement entered into by the
opposing claimant (ACS).
[55] It follows that the Bank’s s. 178 claim does not have priority over ACS loans B & C
which were secured by the ACS 1985 Security Agreement.
(d)
YMCF Inc. v. 406248 B C Ltd., [1998] B.C.J. No. 316 (S.C.) [YMCF]
Drossos J. said, at para. 33:
… since the Bank’s security under the Bank Act was not taken by CIBC until May 16, 1995,
almost four years after the Yamaha Ltd. security and PMSI, it is subordinate in priority to it.
This result is consistent with the two Supreme Court cases and the 2012 amendments to the Bank Act.
(e)
Innovation Credit CA
Here the Credit Union had an unperfected PPSA security interest in agricultural equipment at the time the
Bank took Bank Act security in the same equipment. The lower court, [2007] S.J. No. 679 (Sask. Q.B.), had
held that s. 428(1) gave the Bank priority over the prior PPSA security interest as it was unregistered.
Essentially, it ruled that in order for a prior PPSA security interest to defeat a subsequent Bank Act security,
the PPSA security interest had to be perfected.
This Saskatchewan Court of Appeal reversed the result saying that the lower court had incorrectly interpreted
s. 428(1) and that “a bank holding security taken pursuant to the Bank Act cannot gain access to the PPSA
priority regime, which provides that a perfected security interest takes priority over an unperfected one (see
s. 35(1))” (at para. 32). Further to this, G.R. Jackson J.A. stated at para. 38 that:
5.1.9
With much respect, the Chambers judge has interpreted s. 428(1) so as to grant priority to
Bank Act security over a prior, unperfected PPSA security interest and thereby created a
new priority rule. This is a reading of s. 428(1) that cannot be given to it and is contrary to
all past authority. Further, such a priority rule would permit the Bank to rely on the Credit
Union’s failure to register, which is contrary to the intent of s. 4(k) of the PPSA. As will
be seen, s. 428(1) may be used to support an interpretation that the Bank Act relies on
provincial law to determine what a bank acquires when it takes s. 427 security, but it does
no more than that vis a vis a security interest taken prior to the Bank Act interest. In
summary, s. 428(1) of the Bank Act does not apply to resolve the instant dispute.
The Court of Appeal then considered ss. 427(2) and 435(2) of the Bank Act in relation to the priority dispute.
The Court found that even though the Credit Union’s interest was unregistered, the Credit Union had an
“attached” interest that gave it an enforceable proprietary right. Following this finding, the Court concluded
at para. 61 that:
Applying s. 427(2), read in conjunction with s. 435(2), means that the Bank acquired its
interest in the collateral subject to the proprietary rights of the Credit Union. By the time
the Bank acquired its interest in the property, the Credit Union already had real rights in
the collateral through attachment of its security interest. Thus, on an application of the
Agricultural Credit framework, priority must be accorded to the Credit Union.
Near the end of its judgment, the Court did recognize that “this result can lead to lending uncertainty in
individual cases (as opposed to uncertainty as to the result)” (at para. 65). However, the Court went on to
state, at paras. 66-67, that:
[66] There are clear incentives for lending institutions to register under the PPSA, not the
least of which are the consequences of holding an unperfected security interest. By failing
to register a security interest, a provincial lending institution stands to be defeated by many
more provincial interests than federally created ones. The problem is the age old one of a
debtor failing to disclose—either negligently or fraudulently—that it has borrowed money
elsewhere. The PPSA provides a solution for banks as well, but only if they take a security
interest under that Act and not under the Bank Act in this jurisdiction, which is a solution
that has been adopted elsewhere.
[67] In short, in the within appeal, the Bank cannot insist on registration under a system of
which it is not a part and that it has not adopted. The Credit Union is entitled to priority
over the Bank of Montreal by virtue of the Credit Union's prior security interest. The
priority rule, resting as it does on ss. 427(2) and 435 of the Bank Act and provincial law,
does not depend on whether the prior security interest is perfected.
In essence, this decision relies on the adage, nemo dat quod non habet, “in summary, a bank, by virtue of the
document of title fiction, acquires whatever interest the debtor has in the property at the time the bank
acquired its interest” (at para. 54). However, the decision is reversed, in effect, by the 2012 amendments,
subject only to the qualification that the unregistered PPSA security interest may still have priority if the bank,
when taking its security, had “knowledge” of the unperfected PPSA security.
(f)
Radius Credit Union Ltd. v. Royal Bank of Canada, [2009] S.J. No. 148 (Sask. C.A.) [Radius CA] aff’d in
Royal Bank of Canada v. Radius Credit Union Ltd., [2010] S.C.J. No. 48
This is a companion case to Innovation Credit CA, in which the priority issue is essentially the same. The lower
court, [2007] S.J. No. 680 (Sask. Q.B.) and the Court of Appeal decisions were decided by the same judges as
Innovation Credit and, therefore, both cases have the same result and reasoning. It is also in effect, overturned
to the same extent by the 2012 amendments.
2.
Exception for Conditional Sales Vendors
An important point to note in considering the application of s. 428(1) to resolve priorities is that it has been
interpreted to exclude conditional sales vendors from the words “and also over the claim of any unpaid vendor.”
5.1.10
In the following cases, courts have held:
(a)
a non-bank claimant was a conditional sales vendor who had retained title to property until
payment had been received from the bank customer,
(b)
a bank can only take s. 427 security over the interest in the property then held by the
customer and the customer would not have title to the property until it paid the purchase
price, and
(c)
accordingly, s. 428(1) should be interpreted to exclude a conditional sales vendor from the
reference to an “unpaid vendor.”
See Rogerson Lumber Co. Ltd. v. Four Seasons Chalet Ltd. and Bank of Montreal et al., [1980] O.J. No. 3651 (Ont.
C.A.); International Harvester, supra; Kawai Canada Music Ltd v. Encore Music Ltd. (c.o.b. Electronic Keyboard Centre),
[1993] A.J. No. 310 (Alta. C.A.) [Kawai], application for reconsideration refused, [1993] A.J. No. 462 (Alta.
C.A.), leave to appeal to S.C.C. refused, [1993] S.C.C. No. 302.
Kawai referred to the statement by La Forest J. in Bank of Montreal v. Hall, that, under s. 427 security, “the
borrower retains an equitable right of redemption, of course, but the bank effectively acquires legal title to
whatever rights the borrower holds in the assigned property from time to time.” The Court then continued:
We think that the concluding sentence in the passage quoted confirms that, while the
enhanced status of the Bank’s securities must be conceded, they do not capture more than
the conditional purchaser owns or possesses when he assigns or subsequently acquires.
As in Bank of Nova Scotia v. International Harvester Credit Corp. Of Canada [supra], what is of
determining importance is that the only interest the borrower had in the pianos, etc. at the
time it granted the s. 178 security to the Bank was the equity that it possessed in the pianos
at that time or that which it might subsequently acquire—nothing higher than a right of
possession until it paid the purchase price, none of which had been paid when Kawai and
the Royal Bank effected seizure.
The rights and powers of the Bank under s. 178 security (read with the deeming provisions
of s. 179) result in the Bank’s priority “over the claims of any unpaid vendor.” If Kawai
were a mere unpaid vendor, the Bank would prevail. The phrase “any unpaid vendor” as
employed in s. 179(1) of the Bank Act has been interpreted to exclude a person who sells
goods to a purchaser under a conditional sales contract, validly registered. Rogerson Lumber
et al v. Four Seasons Chalet Limited, ante. We agree with the conclusion of the Ontario Court
of Appeal in that case. By itself this interpretation of “any unpaid vendor” in the context
in which the clause is found in the Bank Act will promote consistency within the relevant
provincial and federal legislative regimes. It also draws support from s. 179(2) which
advances the priority of an unpaid vendor who had a lien upon the property at the time the
Bank’s security was taken.
…
Legislation is presumed not to confiscate other people’s property unless the language in
which it is couched requires it. Allowing Encore to mortgage Kawai’s ownership of the
pianos etc. would achieve just that and by unnecessary implication. The implications that
we must weigh, however, are those which fall on the business community. Wholesalers
and manufacturers must secure the cost of inventory they supply to their dealers and
jobbers. It is frequently achieved by conditional sales contracts or some analogous device.
These contracts allow dealers and distributors to obtain necessary inventory without first
laying out funds. These contracts also protect the manufacturers and suppliers by the
retention of title to their goods until they are paid for. To allow bank securities as here to
gain priority to those goods would work great hardship on both manufacturers and dealers.
Manufacturers and suppliers would be loath to supply stock to dealers which might be later
lost to lateral claims, against which the supplier/owner had neither protection nor control.
In conclusion we hold that a secured creditor like Kawai, who has expressly reserved title
to merchandise supplied to a conditional purchaser, maintains priority over a bank which
5.1.11
has taken s. 178 security from that purchaser. That priority will be upheld where the
conditional vendor (like Kawai) has validity registered his security pursuant to the
Conditional Sales registration regime in place in his jurisdiction. [pages 5-6]
In YMCF, Drossos J. stated, at para. 33:
Lastly, all the disputed inventory was sold by Conditional Sales Contract, the invoices, and
the rights of unpaid vendors (and their assignees) prevail over the Bank Act security, even
if that security predates the security against which it is competing. See Re Kawai v. Canada
Music Ltd. (1993), 101 D.L.R. (4th) 1 (Alta. C.A.), and McLaughlan v. CIBC (1986), 58
C.B.R. 113 (B.C.S.C.) where it was held that such security under the Bank Act did not
extend to give priority over conditional vendor’s title and interest under a conditional sales
contract, but only contemplated charging its customer’s interest, i.e. the right to purchase,
since its customer did not have title to what it had purchased under a conditional sales
contract.
In other cases, courts have found that the non-bank claimant had failed to show their security constituted a
conditional sales contract and so could not come within the exception: see Pulsar and Hallett v. Canadian
Imperial Bank of Commerce, [1988] S.J. No. 764 (Sask. Q.B.).
3.
Does the Exception Extend to all PMSI Holders?
In Royal Bank of Canada v. United Grain Growers Ltd., 2000 SKQB 393 [United Grain], Zarzeczny J. distinguished
a PMSI holder from a conditional sales vendor:
… a careful examination of the UGG security agreement does not purport to be nor can it
be construed as constituting a conditional sales agreement or contract. … s. 34(11) of the
PPSA does not purport to statutorily constitute a party in the position of UGG as a
conditional seller—it simply gives such a party a priority security position over any and all
others claiming a security interest in the same collateral (under the PPSA). [at para. 31]
The Court of Appeal for Saskatchewan upheld this decision on appeal: 2001 SKCA 42. Therefore, a PMSI
holder does not necessarily come within the exception made for conditional sales vendors.
The Saskatchewan Court of Appeal in Royal Bank of Canada v. Moosomin Credit Union, 2003 SKCA 115
[Moosomin], held that the PMSI held by the Moosomin Credit Union was not equivalent to a conditional sales
agreement since it did not reserve title to the collateral. At para. 78, Lane J.A. concluded that:
As the Credit Union has not reserved title, the rule to determine priority as set out in Royal
Bank v. Agricultural Credit Corp. is to now apply the first-in-time rule. As stated above,
clearly the Bank was first-in-time. At the time the debtors acquired the truck the Bank’s
security interest attached and the Bank effectively had title by virtue of the after-acquired
property provisions and special security sections of the Bank Act. The common law
principle of nemo dat non quod habet also works in the Bank’s favour as the debtors had
no title to give to the Credit Union once it was automatically transferred to the Bank.
This decision reversed the decision on appeal, 2001 SKQB 435. In the chambers decision, Kyle J. extended
the exception for conditional sales vendors to PMSI holders and said that in Saskatchewan the equivalent of a
conditional sales agreement is a PMSI. In overruling the trial decision, the Court of Appeal stated, at paras.
75 and 77, that:
[75] In my view the agreement cannot be construed as a conditional sales agreement. The
chambers judge correctly found the security agreement between the Credit Union and the
debtors did not reserve title to the Credit Union but erred in finding the agreement was
akin to a conditional sales agreement. In my view the chambers judge erred in applying
personal property principles to determine priority instead of the applicable Bank Act
principles as he is required to do.
…
5.1.12
[77] If the Credit Union’s position is upheld, all PMSIs would be equivalent to conditional
sales agreements. In a priority dispute between a personal property security interest and a
Bank Act security in my view there must be more. The security agreement must be able to
be construed as reserving title. It must be remembered in a dispute between a Bank Act
security and a personal property security interest such as this we are applying property
concepts. It is not axiomatic that all PMSIs are akin to conditional sales. Indeed, the
parties to a PMSI themselves may intend that title not be reserved. The chambers judge
erred in determining that a PMSI prima face reserved title in the collateral, even though he
found the particular security agreement did not reserve title.
In his judgment, the Chambers judge cited policy considerations in support of his decision, particularly,
commercial efficacy and the ability of farmers to borrow money to finance operations and purchases. The
Court of Appeal did not agree with the Chambers judge and responded that the Credit Union had sufficient
time to check the Bank Act registry. The Court further stated that “[t]o strengthen a PPSA lender’s hand it
has been suggested, and I make no comment thereon, it may be possible to include a title retention clause for
the purpose of protecting itself in a priority dispute with other than a PPSA security” (at para. 79).
As we have seen, the conditional sales agreement exception is based on title concepts and the inability of the
bank customer to give the bank any better title than he has under the conditional sales contract.
The PPSA’s modernized view, however, rejects title retention as necessary to the creation of a PMSI. Vendor
title retention was the only method of obtaining security for financed sales in a commercially simpler,
exclusively common-law regulated environment. PPSA rejects form in favour of substance and recognizes as
secured party financing a purchase by a debtor from a third party vendor as equivalent to a vendor obtaining
security for its unpaid purchase price. In both cases, a PMSI may be created in priority to prior security
interests and the same policy is furthered—that of preventing debtors from being stifled from acquiring
further property because of a blanket charge granted to a prior lender. This is as much an issue under the
Bank Act as it is in the PPSA and it is unfortunate that the archaic perspective of the Bank Act is allowed to
prevail over the more commercially realistic scheme of the PPSA. Not everything may be purchased by
conditional sale; sometimes it is necessary for a third party to fund a purchase.
D.
Rule 3—Where Appropriate, Apply the First-In-Time Priority Rule
In setting out the general rules to govern priority disputes between s. 427 security and a security interest
under the PPSA in Agricultural Credit, Bayda C.J.S. stated the third rule as, “where appropriate, apply the firstin-time priority rule.” Unfortunately, he did not explain where it would be appropriate to do so.
It seems that this rule complements rule two. As we have seen, s. 428(1) provides a basic rule that the bank’s
security prevails over “all rights subsequently acquired in, or in respect of,” the property subject to the
security. In reaching his decision in Agricultural Credit, Bayda C.J.S. appears to have applied all three of the
rules to reach the result of giving priority to the non-bank claimant. On the facts, that claimant’s security
agreement predated the bank’s s. 427 security. Therefore, the non-bank claimant’s rights in the property were
not “subsequently” acquired and s. 428(1) did not give the bank priority. Having found that rule two did not
apply, it seems the Court moved on to rule 3 to hold that the first in time rule gave priority to the non-bank
claimant.
As discussed above, after finding the Credit Union (the PSMI holder) did not reserve title to the collateral, the
Court of Appeal in Moosomin then applied the “first-in-time” rule and ruled in favour of the Bank security
which clearly preceded that of the Credit Union.
E.
The Three Rules Reconsidered
Innovation SCC and Radius SCC radically reduced the efficacy of Bank Act security by affirming the priority of
prior unperfected PPSA security. The three rules set out by Agricultural Credit then seemed to devolve into
the following two inquiries:
5.1.13
1.
Which security interest, the Bank Act or the PPSA, is first in time?
2.
Is there any provision in the Bank Act that reverses the priority bestowed by being first in
time?
In order to be eligible to be included in inquiry #1, the PPSA security may be perfected (in nearly all cases
this will mean registered) or unperfected while the Bank Act security must be perfected by the filing of a
Notice of Intention under s. 427(4) within the three-year period prior to the security being taken or the
“rights and powers of the bank … are void against creditors of the person giving the security …”
(s. 427(4)(a)). As we have seen, one point relevant to inquiry #2 that reverses the prima facie priority granted
under inquiry #1 is the priority given to conditional sales vendors (prior or subsequent) by virtue of the
judicial gloss on the words “… and also over the claim of any unpaid vendor” in s. 428(1).
The recent amendments to the Bank Act now seem to create the following test for determining priorities
between the PPSA and Bank Act security:
1.
Which security interest, the Bank Act or the PPSA, was perfected first according to their
respective statutes?
2.
If the Bank Act security has priority under question 1, is there any provision in the Bank Act
that reverses that priority, including the requirement that the bank not have knowledge of
prior unperfected security when taken the Bank Act security?
IV. Related Issues
There are a couple of related issues that should be mentioned: double documentation and proceeds.
A.
Double Documentation
This refers to the practice of banks of acquiring security both by way of a security agreement under the PPSA
and an assignment under s. 427. Some commentators, such as Professors Cumming, Wood and Ziegel object
to a bank being able “to give itself the power to choose the source of law most advantageous to it in the
particular circumstances” (British Columbia Personal Property Security Act Handbook, 4th ed., 1998 at 70). See also
R.C.C. Cumming and R. Wood, “Compatibility of Federal and Provincial Personal Property Security Law”
(1986), 65 Can. Bar Rev. 265; R.C.C. Cumming “The Relationship Between Personal Property Security Acts
and Section 178 of the Bank Act,” (1988), 14 C.B.L.J. 315; and R.C.C. Cumming “PPSA — Section 178 Bank
Act, Overlap: No Closer to Solutions” (1991), 18 C.B.L.J. 135). Professor Ziegel comments:
Another technique adopted by banks for maximum protection is to obtain from its
customers, in respect of the same collateral, a security interest under the relevant provincial
Act as well as a s. 427 assignment. The effect of such double documentation has not yet
been considered in Ontario but seemingly has been accepted in Saskatchewan. However,
commentators are divided about the legal effect of such double documentation. In
particular, there is much uncertainty about whether it is possible for a secured party to
hold successive security interests in the same collateral governed by two incompatible
chattel security regimes and, if it is possible, whether the bank is put to its election to retain
one or the other security interest and, if so, at what point.
(“Harmonization of Section 427 of the Bank Act and the Provincial Personal Property Security Act: Is There
a Better Solution?” (1997), 12 B.F.L.R. 425 at 429; see also J.S. Ziegel, “The Interaction of Section 178
Security Interests and Provincial PPSA Security Interest: Once More Into The Black Hole,” (1991), 6
B.F.L.R. 343.)
Courts appear to have no difficulty with the practice of double documentation and have rejected arguments
that banks must elect which type of security they wish to rely on. See Pulsar, per Vancise J.A.:
5.1.14
… there is no basis for deciding that by registration of a s. [427] security interest under the
[PPSA] the bank should be deemed to have elected to proceed under that regime and
given up its rights under the [Bank Act]. I, therefore, reject the submission that the Personal
Property Security Act is the regime which must determine the priorities between the parties.
In Birch Hills Credit Union Ltd v. Canadian Imperial Bank of Commerce, [1988] S.J. No. 782 (Sask. C.A.), Tallis J.A.
said at 120:
Accordingly the Bank’s priority under its PPSA security interest is not excluded or
impaired by its security under s. 178 of the Bank Act. In the circumstances of this case the
existence of rights under both the Bank Act and the Personal Property Security Act do not
involve any inconsistency or clash so there is no need to canvass the paramountcy
doctrine. Since there is no conflict under the two systems the bank is entitled to rely on
any security it may have under the PPSA. It is not put to an election. In this particular case
its security interest under that Act entitles it to priority over the Credit Union once effect is
given to the discharge of security registered by the Credit Union on March 29, 1984.
Almost all of the PPSA legislation in Canada, including BC (but excluding Ontario), provides that the PPSA
does not apply to a security agreement governed by federal legislation, including security taken under the
Bank Act. Section 4(b)(ii) of the BC PPSA states:
4 Except as otherwise provided in this Act, this Act does not apply to the following:
…
(b) a security agreement governed by an Act of the Parliament of Canada that
deals with rights of parties to the agreement or the rights of third parties
affected by a security interest created by the agreement, including but without
limitation:
…
(ii) any agreement governed by Part V, Division B of the Bank Act (Canada).
Subsection 4(b)(ii) does not prohibit “double documentation,” it merely provides that the PPSA will not
apply to Bank Act security. The Saskatchewan PPSA, however, goes one step further and specifically
prohibits “double documentation” in s. 9(2), which was added to the Saskatchewan PPSA in 2000. No other
jurisdiction has an equivalent to Saskatchewan’s s. 9(2). Section 9(2) of the Saskatchewan PPSA states:
9(2) A security interest in collateral ceases to be valid with respect to that collateral to the
extent that and for so long as the security interest secures payment or performance of an
obligation that is also secured by a security in favour of that secured party on that collateral
created pursuant to sections 425 to 436 of the Bank Act (Canada).
In Innovation CA, the Saskatchewan Court of Appeal quoted the 1992 Report of the Law Reform Commission
of Saskatchewan (the “Commission”) in which the Commission recommended the addition of s. 9(2) to the
Saskatchewan PPSA (at para. 36):
Section 9(2) is a companion provision to section 4(k) [equivalent to s. 4(b)(ii) in the B.C.
PPSA]. While section 4(k) is designed to preclude the argument that a Bank Act security is
a security interest under this Act, this provision is designed to nullify security interests
arising under security agreements in situations where a bank takes both a provincial
security interest and a Bank Act security in the same collateral to secure the same
obligation. The approach taken in section 9(2) is quite different from that taken in section
4(k). In order to preclude banks from claiming that their Bank Act interests are security
interests under the Act, it is sufficient to exclude federal security agreements from the
scope of the Act. However, in order to force banks to choose between rights under
federal or provincial personal property security law, it is necessary to nullify any attempt to
invoke provincial law through a security agreement paralleling an agreement providing for
a Bank Act security.
5.1.15
Unfortunately, the Court did not discuss the ramifications of this s. 9(2) other than to say at para. 37:
Counsel for the Credit Union submitted that the reason why the legislature adopted the
Law Reform Commission’s recommendation on this point was to place pressure on federal
lending institutions to use the PPSA only, and thereby make the provincial exemption and
enforcement mechanisms apply for all debtors. From a juridical standpoint, however, the
only salient point with which this Court is entitled to concern itself is that, in this
jurisdiction, the legislature has denied banks the benefit of the priority rules contained in
the PPSA unless a security interest is taken under that Act. The legislature has made its
intention clear.
Innovation SCC referred to s. 9(2) only to strengthen its holding that the bank was unable to elevate the priority
of its Bank Act security by making arguments based on the PPSA. Neither it nor Radius SCC referred to
double documentation.
B.
Proceeds
Another issue that seems to have concerned academic commentators more than judges is the issue of
proceeds. The Bank Act does not give a bank any express right with respect to the proceeds of goods
secured under s. 427. However, it was held in Flintoft that the bank’s security under the section automatically
follows into the proceeds that the bank customer realizes upon the sale of the goods. (cf. De Vries v. Royal
Bank of Canada, [1975] O.J. No. 1654 (C.A.)) Cumming and Woods have argued that since the bank’s
interest in proceeds does not arise under the Bank Act, a bank does not have priority with respect to
proceeds over other claimants pursuant to that Act. In United Grain, Zarzeczny J. rejected their argument
as follows (at paras. 32-33):
Alternatively, counsel for UGG argued that even if it is determined that the Bank has a
priority security interest in the potato crops then nevertheless such an interest does not
extend to the proceeds derived from a sale of those crops or as the result of the collection
of the accounts receivable (both before the bankruptcy or after it) existing or created when
the 1998 crop of potatoes was sold. Counsel seeks to distinguish these proceeds from
proceeds that the above referenced cases have recognized as being included in the Bank
Act security because the cases recognizing Bank Act security as covering proceeds (based,
as they are, upon common law trust models or statutorily created proprietary rights) are
incompatible with the borrowers equity of redemption in the collateral, whether potato
crop or proceeds.
In advancing this argument, UGG relies upon the somewhat theoretical analysis of the
authors Cumming and Wood as it is contained in their article “Compatibility of Federal
and Provincial Personal Property Security Law” (1986), Can. Bar Rev., vol. 65, 267. At 297
and 298 the authors examine the cases that apply common law theories of trust or the
Bank Act’s statutory grant of a proprietary interest (now s. 428) in favour of the Bank
which have resulted in establishing the Bank’s priority right to the proceeds of the sale of
secured collateral. The authors argue that since the former is a common law right it is not
provided priority protection pursuant to the provisions of the Bank Act. Rather, being a
common law right of property, it becomes subject to the provisions of the PPSA (insofar
as the proceeds claim is concerned). This analysis breaks down, however, if one accepts as
decisive the cases that conclude that if the collateral itself is subject to Bank Act security
(and, therefore, priority) the proceeds are subject to the same statutory interest and priority
under the Bank Act as is the original collateral itself. In essence, these cases recognize that
the collateral has simply changed in character but the substance of the Bank’s interest and,
therefore, priority continues to apply. There is not some new collateral created that is free
from the Bank Act security and priority result.
This decision was upheld by the Saskatchewan Court of Appeal: 2001 SKCA 42.
5.1.16
V.
Reform
Several commentators have urged the need to harmonize the rules relating to federal and provincial security
in personal property. In their 1986 article in the Canadian Bar Review cited above, Cummings and Wood
concluded “it is clear to the authors that ultimately legislative solutions will be required, and that anything
short of a restructuring of the s. 427 Bank Act system along the lines of provincial Personal Property Security
Acts will very likely be inadequate.” In 1991, the federal government commissioned a report by D.C. Tay and
others: “Position Paper on Revising Bank Act Security” (Ottawa: Department of Finance, 1990). This
recommended a federal PPSA to apply to all security interests taken by a bank which, so far as banks were
concerned, would take the place of s. 427 security and security agreements under provincial law. In the mid1990s, there were discussions between the Canadian Bankers’ Association and the Legal Committee of the
Canadian Conference on Personal Property Security Law to find a solution. This proposed solution was
primarily to amend the s. 427 scheme to make it more consistent with PPSA schemes, including giving
priority to PMSI holders.
In 1997, Professor Ziegel proposed that s. 427 simply be suspended or repealed with respect to those
provinces that adopt personal property security legislation and that do not discriminate against banks. Also,
in 1997, the federal government’s “Review of Financial Sector Legislation — Proposals For Change,” said
that a Working Group would be appointed to examine whether legislative changes should be made to address
the inconsistencies between the two systems.
The Law Commission of Canada has considered federal security interests generally, which led to a report in
June 2000 by Fraser Milner Casgrain. It has a useful summary of the issues but no new or detailed
recommendations. In a more recent 2004 report, “Modernizing Canada’s Secured Transactions Law: The
Bank Act Security Provisions,” the Law Commission of Canada reviewed the relationship between the Bank
Act and the provincial PPSA regimes and three possible reform options: (1) amending the Bank Act
provisions; (2) creating a federal PPSA regime; and (3) repealing the Bank Act provisions. After analyzing the
advantages and disadvantages of each option, the Law Commission of Canada recommended that Parliament
eliminate Bank Act security by repealing ss. 427 to 429. In reaching this conclusion, the Law Commission of
Canada stated at 30 that:
We believe that repealing the Bank Act security provision is most likely to create greater
certainty in legal outcomes and a more efficient and effective secured transactions regime.
This option is best able to take account of the bijural nature of Canadian commercial law.
It is also the option that does not frustrate legitimate legislative measure of general
application within the provinces and territories.
The Law Commission of Canada cited various other commentators and groups that have also proposed
similar recommendations (at 29):
Legal experts who have studied the matter have similarly concluded that repealing the Bank
Act security provisions is the best option. Surveys of commercial lawyers indicate that this
is their preferred option. On April 7, 1997, the Personal Property Security Law SubCommittee of the Canadian Bar Association-Ontario made a submission proposing the
suspension or repeal of the Bank Act security regime. In August 2003, the Secured
Transactions Working Group of the Uniform Law Conference of Canada recommended
the abolition of the Bank Act security provisions, and at the Annual Meeting of the
Conference it was resolved that the President of the Uniform Conference of Canada
should write the federal ministers of Justice, Finance and Industry recommending repeal of
these provisions. In June 2003, a study paper was prepared for the Department of Justice
which also proposed repealing the Bank Act security provisions as the preferred option.
Despite the obvious problems that have resulted from the clash between the federal Bank Act and provincial
PPSA regimes, the extensive amendments to the Bank Act by Bill C-8 (Royal Asset given on June 14, 2001)
and the amendments in Bill C-27 (Royal Assent given on March 29, 2007) both left s. 427 security untouched.
5.1.17
The source of the often tortured disputes involving PPSA and Bank Act security is their conceptual
incompatibility. Like an ancient groom wedded to an adolescent bride, there is very little common ground
and the couple exist together only uneasily. The PPSA was deliberately conceived as a departure from and
modernization of the title-based system underlying Bank Act security. Due to federal paramountcy, the
Bank Act perspective has dominated the PPSA perspective and prevailed on virtually every point of
theoretical conflict. “Proceeds” are read into the Bank Act. The concept of a PMSI is read down to
include only conditional sale agreements. The inner mechanics of Bank Act security often has to be read
into the Act through importation of points from common law while the PPSA sets out its “complete
system” in specific detail. PPSA modernist reform has somehow become the late model roadster shackled
to the Bank Act tow truck.
The recent amendments to ss. 425, 426 and 428 have, for the most part, restored the law of priorities as
between Bank Act and PPSA security to its pre Innovation SCC and Radius SCC state, subject only to the
exception posed by the additional criteria of “knowledge” or lack thereof. Those who have advocated for
more major reform or even repealment of the Bank Act security program will likely see this, however, as
merely a band-aid solution that does not deal with the traditional tensions between PPSA and Bank Act
security and may in fact have further muddied the water.
5.1.18
VI. Schedule A—Registration of Bank Act Security
Bank of Canada contracted out its security registry service to Canadian Securities Registration Systems (now
known as Davis & Henderson) in 1997.
The BC office for Davis & Henderson is:
Davis & Henderson (formerly Canadian Securities Registration Systems)
Suite 200 - 4126 Norland Avenue
Burnaby, BC V5G 3S8
Tel: 604.637.4000
Toll-free: 1.800.561.1404
Direct Tel. For Bank Act Security Dept.: 604.637.4014
Fax: 604.637.4001
A.
Registration of Bank Act Security
An original Notice of Intention is required for registration, therefore, all registrations must be mailed or
couriered to the address above. Registrations can also be done in person at the Davis & Henderson office
during their office hours (8:30 a.m. to 4:00 p.m., Monday to Friday). Due to the requirement of an original
Notice of Intention, electronic registration is not available.
Unless the registering party has an account with Davis & Henderson, the appropriate fee must be provided
with the registration request.
B.
Bank Act Security Searches
Searches can be conducted in person or by forwarding the search request to Davis & Henderson by mail, fax
or courier.
Provided the user sets up a specific type of account with Davis & Henderson, the user may also conduct
searches online through the David & Henderson's website (additional fees will apply).
C.
Other Agency Services
Other agency services, such as Dye & Durham, will perform registrations and searches for its customers
(additional fees will apply).
5.1.19
VII. Schedule B—Recent Amendments to the Bank Act Pursuant to the
Financial Systems Review Act
“unperfected”
425(1) “unperfected”, in relation to a security interest, means that the security interest has
not been registered in a public register maintained under the law under which the security
interest is created, or has not been perfected or published by any other means recognized by
that law, where the registration or other means of perfection or publication would have
made the security interest effective against third parties or would have determined priorities
in rank in respect of rights in, on or in respect of the property that is subject to the security
interest;
Priority of bank’s rights
426(7) Subject to subsections (8), (9) and (10), all the rights and powers of a bank in respect
of the property covered by security given under this section have priority over all rights
subsequently acquired in, on or in respect of the property and also over the claim of any
mechanics’ lien holder, of any unpaid vendor of equipment or casing or of any person who
had a security interest in that property that was unperfected at the time the bank acquired its
security in the property.
Exception
426(7.1) The priority referred to in subsection (7) does not extend over the claim of any
unpaid vendor who had a lien on the equipment or casing, or of any person who has a
security interest in the property that was unperfected at the time the bank acquired its
security in the property, if the bank acquired its security with knowledge of that unpaid
vendor’s lien or that other person’s security interest.
Priority of bank’s rights
428(1) All the rights and powers of a bank in respect of the property mentioned in or
covered by a warehouse receipt or bill of lading acquired and held by the bank, and the rights
and powers of the bank in respect of the property covered by security given to the bank
under section 427 that are the same as if the bank had acquired a warehouse receipt or bill of
lading in which that property was described, have, subject to subsection 427(4) and
subsections (3) to (6) of this section, priority over all rights subsequently acquired in, on or
in respect of that property, and also over the claim of any unpaid vendor or of any person
who has a security interest in that property that was unperfected at the time the bank
acquired its security in the property.
Exception
428(2) The priority referred to in subsection (1) does not extend over the claim of any
unpaid vendor who had a lien on the property, or of any person who has a security interest
in the property that was unperfected at the time the bank acquired its warehouse receipt, bill
of lading or security, if the bank acquired it with knowledge of that unpaid vendor’s lien or
that other person’s security interest.