The concept of lenders insisting that borrowers provide collateral to secure the repayment of loans is perhaps almost as old as lending itself. For much of history, however, if borrowers wished to provide personal property as collateral, a lender’s only option was to take physical possession of the collateral until such time as the loan was repaid. While such an arrangement may work for a pawnbroker, it is unhelpful where borrowers need to use the assets they pledge as collateral in order to run their businesses.
Over time public registration systems were developed which allow lenders to publicly register their security interest (e.g. a lien, charge, chattel mortgage, etc.) in a borrower’s personal property, allowing borrowers to continue using such assets so long as they comply with the terms of the parties’ security agreement. Such registration systems prevent third parties from being able to later claim that they purchased a borrower’s secured assets or lent money to a borrower against such assets without knowing that the assets had already been pledged to the secured lender as collateral.
The Personal Property Security Registration System (“PPSRS”)
In Ontario, the system for publicly registering security interests in personal property is the Personal Property Security Registration System (“PPSRS”). It is governed by the Personal Property Security Act, RSO 1990, c P.10 (“PPSA”).
Under ss. 45-46 of the PPSA, lenders can publicly register their security interests in borrowers’ personal property by registering a “financing statement” in the PPSRS. The financing statement contains a description of the collateral in which a lender has a security interest, as well as identifying information for both the lender and the borrower(s).
Once a properly filled-out financing statement has been registered in the PPSRS, the onus is then on subsequent purchasers or lenders to search the PPSRS and verify that any personal property they wish to purchase or lend against is not already subject to a prior security interest, as any subsequent transaction involving the personal property will be subject to the prior registered security interest.
Subsequent Loans Involving the Same Collateral – Is a New Financing Statement Required?
A question that arises is whether lenders need to register a new financing statement (or amend an existing financing statement by filing a “financing change statement”) each time they enter into a new secured loan agreement with a borrower, or whether their original registration will be sufficient to cover the original and any subsequent loans. Below are a couple common scenarios where this can occur:
A lender, LoanCo, is approached by a borrower, ABC Inc., seeking a loan of $50,000. LoanCo agrees to loan the money, but on the condition that ABC Inc. signs a security agreement granting LoanCo a security interest in all of ABC Inc.’s personal property.
The parties sign the security agreement and LoanCo registers a financing statement in the Personal Property Security Registration System (“PPSRS”), registering its security interest in “all of the personal property of ABC Inc., present or future, wherever it may be.” LoanCo then disburses the $50,000 to ABC Inc.
ABC Inc. makes all loan payments on time, eventually repaying the loan in full, with interest.
Just as the loan is about to be repaid, ABC Inc. approaches LoanCo seeking a new $75,000 loan, again offering a security interest in all of ABC Inc.’s personal property as collateral. LoanCo accepts this offer, entering into a new security agreement with ABC Inc. with respect to the $75,000 loan after the $50,000 loan has been repaid in full.
LoanCo’s existing registration in the PPSRS of a security interest in “all of the personal property of ABC Inc., present or future, wherever it may be” has not expired. Does LoanCo need to register a new financing statement for the $75,000 loan or will the existing registration apply to the new loan?
LoanCo is approached by ABC Inc. seeking a loan of $50,000. LoanCo agrees to loan the money, but on the condition that ABC Inc. signs a security agreement granting LoanCo a security interest in all of the ABC Inc.’s personal property.
The parties sign the security agreement and LoanCo registers a financing statement in the PPSRS, registering its security interest in “all of the personal property of ABC Inc., present or future, wherever it may be.” LoanCo then disburses the $50,000 to ABC Inc.
ABC Inc. makes all loan payments on time, but before the loan is paid in full ABC Inc. realizes it needs more money. ABC Inc. approaches LoanCo seeking an additional $25,000 loan, again offering a security interest in all of its personal property as collateral. LoanCo accepts, entering into a new security agreement with ABC Inc. with respect to the $25,000 loan.
LoanCo’s existing registration in the PPSRS of a security interest in “all of the personal property of ABC Inc., present or future, wherever it may be” has not expired. Does LoanCo need to register a new financing statement for the $25,000 loan or will the existing registration apply to both loans?
The answer for both scenarios is the same – provided the lender’s original financing statement did not make reference to the loan amount covered by the security interest and the registration has not expired, there is no need for the lender to file a new financing statement. To understand why this is the case, it is important to understand two key concepts covered by the PPSA: (a) attachment and (b) perfection.
Under the PPSA,in order for a security interest to be enforceable against third parties, the security interest must be both “attached” to the collateral and “perfected.”
Under section 11(2) of the PPSA a security interest “attaches” to collateral only when:
(a) Value has been given (e.g. the lender has provided the borrower with funds);
(b) The borrower has rights in the collateral that it can transfer to the secured lender (i.e. the borrower owns the personal property it will be using as collateral); and
(c) The borrower has signed a valid security agreement that contains a description of the collateral sufficient to enable it to be identified.
Once all three of these requirements have been fulfilled, the lender’s security interest will have “attached” to the collateral. Once the security interest attaches, the borrower will only be able to sell or dispose of the collateral in accordance with the terms of the security agreement.
Attachment is the point at which a security interest becomes enforceable as between the lender and the borrower. However, in order for the security interest to be enforceable against third parties, it must also be “perfected”.
Section 19 of the PPSA says that a security interest is perfected when (a) it is attached and (b) all steps required for perfection under any provision of the PPSA have been completed, regardless of the order in which (a) and (b) take place.
The PPSA provides three potential ways to perfect a security interest: (1) by possession, (2) by control, or (3) by registration. The most common of these, and the method that is the focus of this blog post, is by registering the security interest in the PPSRS, thereby putting the world on notice that a security interest in the collateral potentially exists and that any third party interested in dealing with the identified collateral should make inquiries about the status of the registered security interest.
Section 45 of the PPSA spells out some key requirements for perfecting by registration and makes it clear that a security interest can be registered before the security agreement is actually signed by the borrower (emphasis added):
Registration of financing statement
45(1) In order to perfect a security interest by registration…a financing change statement shall be registered.
Collateral other than consumer goods
(3) Where the collateral is not consumer goods, the financing statement referred to in subsection (1) may be registered before or after the security agreement is signed by the debtor.
Subsequent security agreements
(4) Except where the collateral is consumer goods, one financing statement may perfect one or more security interests created or provided in one or more security agreements between the parties, whether or not,
(a) the security interests or security agreements are part of the same transaction or related transactions, or
(b) the security agreements are signed by the debtor before the financing statement is registered.
Thus the PPSA contemplates the very scenarios described above and authorizes the registration of a single financing statement to perfect multiple security interests.
Application to Scenario 1
In the first scenario described above there were two security interests: one created at the time of registration and the other created after the first loan was already repaid.
With respect to the first security interest, it attached to the collateral as soon as (a) LoanCo disbursed the loan to ABC Inc., (b) ABC Inc. had the right to grant LoanCo a security interest in all of its personal property, and (c) ABC Inc. did in fact grant LoanCo a security interest in all of its personal property by signing a valid security agreement. Because the security interest had attached, it was then “perfected” as soon as LoanCo registered a financing statement indicating that LoanCo had a security interest in all of the debtor’s personal property.
Although the original loan was repaid in full, LoanCo did not discharge the registration of the security interest upon repayment since ABC Inc. had already approached LoanCo about entering into a further loan agreement involving the same collateral.
Before the registration expired, LoanCo entered into a second security agreement in which ABC Inc. granted LoanCo a security interest in the exact same collateral: all of ABC Inc.’s personal property. Because s. 45 of the PPSA says a security interest can be registered before or after the security agreement is signed, as soon as ABC Inc. signed the new security agreement and LoanCo disbursed the new loan, the new security interest would be both attached and perfected because under ss. 19 and 45 of the PPSA it does not matter in what order the events happen; as soon as there is both attachment and registration, the security interest is perfected.
In fact, because registration can happen before attachment and priority is based on the order in which security interests are registered, in some circumstances it may even be a wise for a lender to register its security interest as soon as it knows it’s going to enter into a secured loan agreement. That way the lender’s security interest will be both attached and perfected as soon as the parties sign the security agreement and the lender disburses the loan to the borrower.
Application to Scenario 2
In the second scenario ABC Inc. entered into a security agreement with LoanCo and then before the first loan was repaid in full, entered into a second security agreement with LoanCo. Provided both loans were to be secured by the same collateral – i.e. all of the personal property of ABC Inc. – there would be no need for LoanCo to register a second financing statement.
The first security interest would be attached as soon as the security agreement was signed and the loan disbursed to the merchant. It would then be perfected as soon as the security interest was registered.
Because registration was already done in advance, the second security interest would be both attached and perfected as soon as the security agreement was signed and the loan was disbursed. The single registration of LoanCo’s security interest in all of ABC Inc.’s personal property would then cover both loans simultaneously.
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