Amendments to Ontario PPSA debtor location rules take effect December 31, 2015

October 29, 2015

The announcement was recently made that amendments to the Personal Property Security Act (Ontario) (the "Ontario PPSA") legislated back in 2006 will become effective on December 31, 2015. These amendments change the debtor's location which will, in turn, require creditors to consider new criteria when determining where to perfect their security in certain types of collateral, including accounts.

Introduction

Under the Ontario PPSA, the law of the jurisdiction where the debtor is located governs the validity, perfection and effect of perfection or non-perfection of a security interest granted by that debtor in intangibles (including accounts, for instance) and mobile goods (i.e. goods of a type normally used in more than one jurisdiction that are equipment or inventory leased or held for lease) as well as of a non-possessory security interest granted by the debtor in instruments, negotiable documents of title, money and chattel paper. The law of the jurisdiction where the debtor is located also governs perfection of a security interest in investment property by registration. These conflict of laws rules are largely consistent across the provinces and territories of Canada other than Quebec (collectively, the "PPSA jurisdictions"). The PPSA jurisdictions have also generally deemed a debtor (other than an individual) to be located at its place of business, if there is one, or at its chief executive office, if it has more than one place of business (the "deeming rule"). "Chief executive office" is not defined in the PPSA.

2006 amendments

In 2006, the Ontario PPSA was amended, including amendments to the deeming rule in response to criticism that determining the location of a debtor's chief executive office can be problematic, given the vagueness of the criteria and the uncertainty of their application, particularly in the context of non-corporate entities such as partnerships and trusts. The amendments to the deeming rule were intended to provide more certainty with respect to determining where a debtor is located: the location may generally be determined by virtue of reviewing the debtor's constating documents or by a search of a public registry.

In order to avoid a situation where a debtor may be located in more than one jurisdiction, depending on which PPSA jurisdiction's rules applied (in a case where not all jurisdictions amended their deeming rules simultaneously), the amendment to the deeming rule was not proclaimed in force, pending the other PPSA jurisdictions enacting a similar rule. However, following the recommendation of the Business Law Agenda Stakeholder Panel (mandated with the review of certain corporate and commercial statutes in Ontario) that the amendments to the deeming rule be given effect, December 31, 2015 has been proclaimed as the date the amended rules will come into effect in Ontario, notwithstanding that the other PPSA jurisdictions have not yet adopted comparable rules.

New deeming rule

The "new deeming rule" locates a debtor according to its entity type as follows:

Type of Debtor Entity

Location of Debtor

Corporation, limited partnership or organization organized under the laws of a Canadian province or territory, as disclosed in a public record

Its province or territory of organization

Corporation existing under Canadian federal law, as disclosed in a public record

Its registered office or head office as set out in its constating documents (such as its special Act, letters patent or articles) or, if not found in such constating documents, in its by-laws

Partnership (other than a limited partnership), with a partnership agreement explicitly governed by Canadian provincial or territorial law

The province or territory the laws of which are specified in the partnership agreement as the governing law

Trustees acting for a trust

If the trust instrument states it is governed by the laws of a Canadian province or territory, that province or territory.

Otherwise, the jurisdiction in which the administration of the trust is principally carried out

Individual

The jurisdiction where its principal residence is located

Organization organized under the laws of a U.S. state or territory, as disclosed in a public record

That U.S. state or territory

Organization organized under the federal laws of the United States of America, as disclosed in a public record

The U.S. State designated by U.S. law; or the U.S. State designated by the organization, if it is so authorized by U.S. law; or the District of Columbia, if neither of the foregoing is applicable

None of the above

The jurisdiction where the chief executive office of the debtor is located

Transition

As many debtors' location for purposes of the Ontario PPSA will change as a result of the new deeming rule, transitions rules have been enacted to give creditors an opportunity to reperfect, as necessary. The rules generally provide that a security interest in collateral arising and perfected prior to the new deeming rule coming into effect will remain perfected under the Ontario PPSA for five years after the new deeming rule comes into effect (notwithstanding that the security interest has not been perfected in accordance with the new deeming rule but subject to perfection ceasing under the prior law). If a security interest that arose prior to the new deeming rule becoming effective was perfected under the then-applicable law and is, subsequent to the new deeming rule becoming effective and prior to the five-year deadline, perfected in accordance with the new deeming rule, the security interest will be continuously perfected.

Going forward

Although the effectiveness of the new deeming rule was delayed in order to permit the other PPSA jurisdictions to follow suit, as the change in law will be implemented notwithstanding the lack of conformity with the other PPSA Jurisdictions, the debtor may have a different "location" depending on which jurisdiction's Personal Property Security Act applies. As the other PPSA jurisdictions have not adopted (at this time) the new deeming rule (and consequently have not have adopted the relevant transition rules providing for the continued perfection of security), creditors will need to consider the conflict of laws rules in both the jurisdiction in which the chief executive office of the debtor is located as well as the jurisdiction in which the debtor is located as determined under the new deeming rule when deciding where to perfect their security and where to conduct searches, in order to obtain the priority they are expecting.

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