In Canada, some long waited amendments to the conflict of law provisions in the Personal Property Security Act (Ontario) (the “ Ontario PPSA”) will finally be coming into force on December 31, 2015. These changes will set out clear criteria in Ontario for determining where a debtor is “located” for the purposes of demining which law governs the validity, perfection and priority of security interests in certain types of collateral, including intangibles, mobile goods and non-possessory security interests in chattel paper and instruments. The location of a debtor is relevant for these types of collateral as it determines where to register an Ontario PPSA financing and where to do an Ontario PPSA search.
Current Regime in Ontario Prior to December 31, 2015
The current rules for determining where a debtor is located are very confusing. If a debtor has only one place of business, then the debtor is deemed to be located at its “place of business”. However, if a debtor has more than one place of business (which is common), then it is deemed to be located at its “chief executive office”. Both “place of business” and “chief executive office” can be difficult to determine, since neither term is defined in the Ontario PPSA or in the accompanying regulations. In addition, the case law on such determinations is sparse and unhelpfully characterizes such determinations as “questions of fact”. To deal with such uncertainty, secured creditors and law firms require debtors to deliver officer’s certificates that certify factual indicia such as the location of the registered office, the residency of the directors and officers, the location of the negotiation of material contracts and where significant executive functions were carried out. However, while this helps to provide comfort to a law firm providing legal opinions as to registration, significant doubt remains in situations where a debtor has operations in multiple provinces, and if the court finds that a debtor’s chief executive office is in Calgary when the officer’s certificate said it was in Toronto and the secured creditor did not register in Alberta, its security interest ends up being unperfected. The result of this was that secured creditors will ultimately register (and get registration opinions) in every jurisdiction that could possibly be considered as the “chief executive office” of a debtor, which can significantly add to transaction costs.
Summary of Ontario PPSA Amendments
Once the Ontario amendments are effected, where a debtor is located will now be established based on a few objectively verifiable criteria that are based on the organizational form of the debtor, in accordance with the following rules (collectively referred to herein as the “New Rules”):
- Partnerships (other than limited partnerships) and trusts will be located in the province or territory governing the partnership agreement or trust indenture, respectively (and in the case of a trust, if this does not apply, then such trust will be deemed to be located where the administration of the trust is principally carried out).
- Limited partnerships, corporations and organizations that are incorporated, continued, amalgamated or otherwise organized under a law of a province or territory of Canada that require disclosure of the incorporation to be made as a matter of public record will be deemed to be located in that province or territory.
- Corporations that are incorporated, continued or amalgamated under the federal laws of Canada will be deemed to be located in the province or territory where its registered or head office is located, as set out in (a) its articles or letters patent, or (b) if (as) does not apply, in its bylaws.
- “Registered organizations” (ie., those registered under the laws of a U.S. state or U.S. federal law that requires registration to be disclosed in a public record) will be deemed to be located in the applicable state or the District of Columbia.
- Only if none of the above categories apply will the location of the debtor be deemed to be its chief executive office (as determined under prior law).
Once a debtor’s “location” is determined under the New Rules, it will not change regardless of organizational changes such as lapse in its status in its jurisdiction, continuance, amalgamation or reorganization.
Since the “location” of many debtors will change as a result of these amendments, transitional rules have been developed in order to provide secured creditors with enough time to re-perfect their security registrations, if necessary. Therefore, security interests in collateral that were perfected prior to the New Rules coming into force will remain perfected under the Ontario PPSA for five years after the new rules come into effect (subject to perfection ceasing under the prior law). However, if a security agreement that is entered into before December 31, 2015 is amended , renewed or extended before the end of the 5 year transitional period and adds additional collateral to the collateral description, the location of the debtor used to determine the perfection and priority of the security interest in the new collateral will be governed by the New Rules.
Implications throughout the rest of Canada
The New Rules are coming into force in Ontario notwithstanding the lack of conformity with other Canadian Personal Property Security Act jurisdictions, whose criteria for determining where a debtor is located will, at least for now, stay consistent with the old rules in Ontario. While there is talk about the balance of these jurisdictions making conforming changes to their legislation, until this happens, care must be taken, as a debtor’s “location” might be different depending on which jurisdiction’s Personal Property Security Act applies. What this means is that secured creditors will need to consider the conflict of law rules in both the jurisdiction in which the chief executive office is located as well as the jurisdiction where the debtor is located under the New Rules when deciding where to perfect their security and where to conduct searches.