Personal property security is just fancy law wording for a person wishing to expose title in some of his or her non-real estate property (personal property) in exchange for credit or financing.

You buy a car and borrow money for it.

The bank says "do you mind if I keep my claws in this car until the loan is paid off"?

You say: "No".

The bank says: "Then you can't have the money"

Then you say: "Yes".

Et voila! Personal property security legislation!

Before we get into the nuts and bolts of this awfully complicated legal beast affectionately known to lawyers as the "PPSA", we wish to make some clarifications and disclaimers.

The "PPSA" is generally similar in most of the common law provinces which have enacted, in one form or another, a PPSA (Ontario, New Brunswick, Saskatchewan, British Columbia, Manitoba and Yukon). But there remain some important differences, especially in Ontario.

At a 1990 paper on the subject of the PPSA, the Canadian expert (J. Ziegel, see below) said that the:

"... lack of uniformity ... is the all too familiar saga of Canadian (lawyers) shooting themselves in the foot."

This article is based on the law in place in British Columbia. Any reference to the PPSA will be based on the B.C. statute. This is another reason why if you have a legal problem, do not rely on this general information as legal advice.

snakes and laddersThirdly, the law of Québec is substantially different. The new Québec Civil Code, which went into effect on January 1, 1994, finally incorporated into Québec law the concept of chattel mortgages. Oddly, the Québec government decided to call them hypothec, a literal rendition of the French word hypothèque which, in every other French-English jurisdiction in the world, is translated as "mortgage." In any case, the Code goes on to call all property which would be considered as "personal" under PPSAs, as moveables. This is consistent with the distinction in the PPSA which covers all property except real property or, to repeat the Québec law term, immoveables.

Furthermore, as we will see with the PPSA, there is now, in Québec, a central registry of all personal property security interests or, to use the official Québec government term, a registry of hypothecs. Other differences is the disregard in the PPSA for the title holder. The hypothec provisions of the Civil Code continue to emphasize legal title. There are other differences (for an excellent review of the topic, readers are referred to an article written by A. Grenon at page 391, 1996 Canadian Business Law Journal).

Finally, the current version of the British Columbia PPSA is a plain language nightmare. Understandable only to trained lawyer, the average citizen has little chance of fully understanding the complex 78-article statute. This had lent credence to the proposition that the PPSA "is not a consumer law" but is, instead, a law which gives creditors wide powers of enforcement on their debts through quick and easy access to the security given for it. The vast majority of users of the registry are big lenders that can afford lawyers and who prefer a law which is more readily understandable to them.

The PPSAs

The Canadian PPSAs have two "fathers," as it were.

The first is article 9 of the Uniform Commercial Code of the United States. This comprehensive commercial code has been adopted in just about every American state, providing certainty of law for business and promoting free-trade between the states.

The second "father" of the Canadian PPSA is Jacob Ziegel, a distinguished consumer law expert and chair of a Canadian uniform PPSA committee.

Ontario was the first to bring in a PPSA, enacting one in 1967, but then taking nine years before bringing it into force. A Canadian uniform act was published in 1969, followed by Manitoba legislation in 1973, and then other provinces including, in 1990, British Columbia and Alberta.

PPSA legislation in Canada's western provinces differ primarily in that they allow for remote computer access to the personal property registry. In BC, for example, through BC Online, you can not only search, but also register Financing Statements online.

The PPSA legislation in Western Canada is primarily based on uniform legislation so there is greater similarity. This promotes trade between those provinces as businesses can extend security across provincial borders with greater confidence.

When it was enacted in 1990, the Personal Property Security Act of BC was characterized as "the most profound change in commercial law and practice ever to take place in B.C."

Unfortunately, while the new law was an improvement over the quagmire of common law, statute and equity remedies used in the pre-PPSA era, we still have a system that commands its own peculiar technical vocabulary and to which, for every rule, there is a multitude of exceptions. Again, and because of all the cross references required before giving a legal opinion in this area of the law, it is not possible, in this article, to review all the fine details of the PPSA. To do so would justify the existence of a separate web server!

The general intent of the PPSAs is to allow lenders and sellers register their interest in the personal property of a debtor to secure payment of the debt and to establish a priority position in the collateral. Garage keepers might want to register liens under the PPSA to ensure that they receive payment on repair bills. Taxing authorities might want to register a lien under the PPSA and against the personal property of a tax debtor.

All these security interests are registered in a public and searchable registry. Registration serves as a public notice that the interest exists against the collateral. The BC registry does not accept builders or warehousemen liens, judgments or motor vehicle ownership.

Personal property is different from real property. Generally, real property security interests, such as mortgages, are registered in land title offices, not in personal property security registries. The PPSA does not even define personal property. Instead, it uses the word "collateral" and says that this even includes intangibles, licenses, crops, accounts receivables or inventory.

The next basic concept of the PPSA is security; something given to ensure the payment of a loan.

A security interest includes just about any interest in personal property which secures payment. The secured party is the one who holds the security interest (eg. the lender) and the person who owes the money is called the debtor.

As you can see, the PPSA does not care about who legally owns the property, who has title (eg. the PPSA allows the registration of a financing statement even before the debtor owns the personal property). In British Columbia, for example, there is no place to search for title (ownership) of personal property - just whether a security is attached.

Which brings us to the next concept, that of attachment. Attachment is when the security interest is "born"; from which point it is enforceable between the parties and gives rise to the priorities and remedies under the PPSA. Attachment only occurs, according to the PPSA, when value has been given by the secured party (i.e. a loan or a promise to lend money) and the debtor has some kind of right in the collateral that is being offered as security (typically, this would be as owner of the personal property). These criteria create some problems for personal property such as crops (only available for attachment once they're growing), animals (only available for attachment once they're conceived) and trees (only available for attachment once they're cut).PPS cycle

Security interests are certified by a process known as perfection. In most cases, this occurs by registration, using the government form, in the personal property registry. This, from the BC Government, circa 2009:

"The Personal Property Registry is a notice filing system which registers all of the encumbrances (e.g. mortgages, liens, debentures) created against personal property in British Columbia, whether it belongs to a corporation or an individual."

Once registered, the security interest is enforceable against third parties. Generally speaking, the date of registration determines the rank and order of priorities if the item has been attached by more than one creditor.

Registrations are indexed by the name of the debtor so you can do a search under a person's name to see if they have any security interests registered against their personal property. This is obviously helpful to lenders to make sure that the personal property being offered as security for a loan is free and clear of any encumbrances. Even buyers of personal property can search the registry to, again, ensure that the item they are buying is not the subject of a registration. In BC, searches can be made by debtor name or, if applicable, serial number.

The registration must be based on some underlying contract (the PPSA calls this the security agreement) which is signed by the debtor, and in which the debtor gives the creditor the security interest in the property.

The creditor completes the registration form. The debtor does not have to sign the statement.

The completed form is known as a financing statement. The security agreement does not have to be registered (it normally would be retained by the creditor); just the financing statement. This is an important feature of the legislation. The registry is not a place where all the formal documents created the security; just notice of the security in the form of the financing statement which will specifically identify the collateral. If a vehicle, mobile home or aircraft is given as collateral, the identification would be achieved by transcribing the serial number.

A word should be said about purchase money security interests or, as lawyers call them, PMSIs.

As the name suggests, these security interests are extended to lenders of money used to finance the purchase of personal property. A person leasing goods for less than a year, a consignor under a commercial consignment and conditional sales contracts are examples of persons allowed to register PMSIs. PMSIs are very valuable to creditors because they have a super-priority over other security interests. They are subject to special rules in the PPSA, the detail of which exceeds the scope of this article.

Between creditors, the general rule on priorities is, as mentioned above, based on date of registration. However, and this is where lawyers make big bucks, there are a plethora of rules governing priorities of competing security interests completely incomprehensible to the common folk.

But don't take my word for it. Consider this lovely sample of plain language statute drafting from the British Columbia statute:

"Subject to section 28, a purchase money security interest in (a) collateral or its proceeds, other than intangibles or inventory, that is perfected not later than 15 days after the day the debtor, or another person at the request of the debtor, obtains possession of the collateral, whichever is earlier, or (b) an intangible or its proceeds that is perfected not later than 15 days after the day the security interest in the intangible attaches, has priority over any other security interest in the same collateral given by the same debtor."

Getting the priorities right involves pitting the security against a bundle of other relevant facts, a veritable snakes and ladders analysis and not all all amenable to summary by a well-intentioned lawyer trying to share legal information without legalese.

Where a debtor defaults on a security agreement, the creditor can, unless otherwise agreed to, take possession of the collateral or otherwise enforce the security agreement by any method permitted by law. If the goods cannot be readily removed or storage cannot be arranged, the creditor may seize, without removal, on the premises of the debtor (the PPSA excepts consumer goods for which two-thirds of the bill has been paid and also gives the debtor of consumer goods a right to reinstate by paying the arrears but he or she cannot do this more than twice in a 12-month period). Once the collateral has been seized, the PPSA provides for quick disposal by the creditor including private or public sale, as a whole or in units. The law also provides for a whole series of notices to the debtor and a general statement to the effect that a court may supervise the enforcement of a security interest.

Note also the special "seize or sue" election in the case of consumer goods where the secured party must elect between suing to recover judgment against the debtor or seizing the collateral back from the debtor. If the latter option is chosen, the debt is considered to be extinguished.