Changes to Ontario PPSA Choice of Law Rules Affect Secured Parties

On December 31, 2015, Ontario proclaimed into force amendments to the choice of law provisions of its Personal Property Security Act. These amendments impact which laws secured parties will look to when creating and perfecting their security interests. In particular, secured parties perfecting through registration may, under Ontario’s new regime, be required to register financing statements in different jurisdictions than they would have previously.

The Old PPSA Rules

Under the PPSA enacted in each Canadian province (other than Quebec), the law of the jurisdiction where the debtor is located governs the validity and perfection of security interests in the following types of collateral:

  • intangibles (e.g., accounts receivable and deposit accounts);
  • goods of a type that are normally used in more than one jurisdiction; and
  • non-possessory security interests in an instrument, negotiable document of title, money and chattel paper.

Under the old Ontario rules, a debtor was “located” at its place of business or, if it had more than one place of business, at its “chief executive office.”  Since the PPSA did not define “chief executive office,” this rule created uncertainty around debtors with operations in multiple jurisdictions.  In practice, a secured party lending to a debtor with operations in multiple provinces would often register a financing statement in each province where the debtor had operations in order to minimize any perfection risk.

The PPSA Amendments

The Ontario PPSA amendments aim to do away with this uncertainty by deeming a debtor to be located in a specific jurisdiction – creating an objective standard using information that is easily ascertained. The new deeming rules operate as follows:

Type of Debtor Deemed Location of Debtor
Individual Jurisdiction of principal residence
Corporation, limited partnership or other organization organized under provincial or territorial law Province or territory of incorporation, amalgamation or organization
Federal corporation Registered or head office as set out in constating documents (e.g., articles) or, if not in constating documents, its bylaws
Partnership, other than a limited partnership Province or territory specified in the partnership agreement as the governing law
Trustees acting for a trust Province or territory specified in the trust deed as the governing law or, if not applicable, then the jurisdiction where the administration of the trust is principally carried out
U.S. organization registered under laws of a U.S. state The U.S. state of registration
U.S. organization registered under U.S. federal laws U.S. state designated by law or the U.S. state designated by the organization if permitted to make such designation under law or, if the foregoing are not applicable, the District of Columbia
None of the above Jurisdiction where the debtor’s chief executive office is located

A table illustrating the operation of the new rules in various scenarios follows this article which you can download for future reference.

Transitional Rules

Many debtors’ PPSA “locations” will change as a result of the Ontario amendments. To ease secured parties’ compliance requirements with respect to pre-existing security interests, the following transitional rules were adopted:

  • a security interest perfected prior to December 31, 2015 under the previous rules will remain perfected until the earlier of (i) the date the security interest ceases to be perfected under the previous rules and (ii) December 31, 2020;
  • a security interest perfected prior to December 31, 2015 under the previous rules will be deemed continuously perfected if subsequently perfected under the new rules;
  • if a security interest is perfected after December 31, 2015, the new rules will apply;
  • if a security agreement is amended after December 31, 2015 to add additional collateral, the new rules will apply to perfection in the additional collateral, even if the original collateral was perfected prior to December 31, 2015.

Other Provinces

To date, none of the other provinces have implemented similar changes to their PPSA choice of law rules, which remain similar to the previous Ontario rules. Until the laws are harmonized, secured creditors should be aware that debtors may have more than one applicable PPSA “location.” For instance, the location of an Ontario corporation with operations solely in British Columbia would be both in Ontario under the new Ontario deeming rules and also in British Columbia under British Columbia’s existing rules. Secured creditors will want to perfect under the laws of both provinces to ensure they are protected – thus, at least in the interim, secured creditors seeking maximum protection will likely continue to perfect in most or all jurisdictions where the debtor has operations in addition to now perfecting in the Debtor’s jurisdiction of incorporation.

The expectation and hope is that the other provinces will follow Ontario’s lead and adopt similar amendments to avoid unnecessary duplication and to provide a uniform system across the country. British Columbia and Saskatchewan have enacted similar amendments which are still waiting to be proclaimed into force.

Next Steps for Secured Creditors

Secured creditors should take the following steps to ensure compliance with the new rules:

  • discuss new rules, their applicability and best practices going forward with legal counsel;
  • ensure new security interests created after December 31, 2015 comply with the new Ontario rules, as well as the rules of any other province that continue to be applicable;
  • conduct PPSA registry searches with consideration to both the new Ontario rules and the rules of any other province that continue to be applicable – in particular, Ontario registry searches should be considered for any potential debtor organized in Ontario, even if the debtor or the transaction otherwise has limited connection to Ontario;
  • review existing security interests and update bring forward systems to ensure that any security interests extending beyond December 31, 2020 are brought into compliance with the new Ontario rules, if applicable, before that date;
  • watch out for future harmonizing amendments by the other provinces.

EKB’s Commercial Lending and Finance team is knowledgeable and experienced in these areas and can assist you further.

Ontario PPSA Choice of Law Rules – Operation of New Rules

 

Debtor Jurisdiction of Incorporation Debtor Location of Operations Collateral Type Perfected Prior to December 31, 2015? Applicable Law Under Previous Ontario Rules and Other Provinces Applicable Law Under New Ontario Rules Where to Perfect?
B.C. B.C. Intangibles or moveables* Yes B.C. B.C. B.C.
No B.C. B.C. B.C.
Immoveable goods† Yes B.C. B.C. B.C.
No B.C. B.C. B.C.
Ontario Intangibles or moveables* Yes Ontario Ontario‡ Ontario**
No Ontario B.C. Ontario and B.C.
Immoveable goods† Yes Ontario Ontario Ontario
No Ontario Ontario Ontario
Canada wide Intangibles or moveables* Yes Chief executive office Chief executive office‡ Chief executive office**
No Chief executive office B.C. Chief executive office and B.C.
Immoveable goods† Yes Location of goods Location of goods Location of goods
No Location of goods Location of goods Location of goods
Ontario B.C. Intangibles or moveables* Yes B.C. B.C.‡ B.C.**
No B.C. Ontario Ontario and B.C.
Immoveable goods† Yes B.C. B.C. B.C.
No B.C. B.C. B.C.
Ontario Intangibles or moveables* Yes Ontario Ontario Ontario
No Ontario Ontario Ontario
Immoveable goods† Yes Ontario Ontario Ontario
No Ontario Ontario Ontario
Canada wide Intangibles or moveables* Yes Chief executive office Chief executive office‡ Chief executive office**
No Chief executive office Ontario Chief executive office and Ontario
Immoveable goods† Yes Location of goods Location of goods Location of goods
No Location of goods Location of goods Location of goods
Delaware Ontario Intangibles or moveables* Yes Ontario Ontario‡ Ontario**
No Ontario Delaware Delaware
Immoveable goods† Yes Ontario Ontario Ontario
No Ontario Ontario Ontario
Canada wide Intangibles or moveables* Yes Chief executive office Chief executive office‡ Chief executive office**
No Chief executive office Delaware Chief executive office and Delaware
Immoveable goods† Yes Location of goods Location of goods Location of goods
No Location of goods Location of goods Location of goods

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* Includes intangibles, goods of a type that are normally used in more than one jurisdiction and non-possessory security interests in an instrument, negotiable document of title, money or chattel paper.
† The choice of law rules remain unchanged with respect to tangible collateral that is immoveable or not of the type used in more than one jurisdiction.
‡ Until the earlier of (i) failure to be perfected under the prior law and (ii) December 31, 2020.
** To be re-perfected under new rules prior to December 31, 2020.