Ontario amends the Personal Property Security Act to include electronic chattel paper

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Finance Alert

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On May 29, 2019, Bill 100, Protecting What Matters Most (Budget Measures) 2019 (“Bill 100”) received Royal Assent, with the Personal Property Security Act (the “OPPSA”) among the approximately 200 Ontario statutes scheduled to be amended. Some of the most significant amendments to the OPPSA proposed by Bill 100 concern the recognition of “electronic chattel paper” and the manner of perfection of a security interest in this new type of collateral. These amendments should be a welcome addition for secured parties who will be able to choose to rely on electronic documentation as opposed to paper to facilitate their lending transactions.

Ontario follows Saskatchewan in recognizing electronic chattel paper as Saskatchewan’s Bill 151 received Royal Assent on May 15, 2019. However, as of the date of this article, neither province has proclaimed in force these amendments.

Chattel paper: tangible and electronic

The OPPSA will be amended to include the definition of “electronic chattel paper”, revise the definition of “chattel paper” and add the definition of “tangible chattel paper”. “Tangible chattel paper” refers to chattel paper evidenced by a record or records consisting of information inscribed on a tangible medium; that is, a hard copy, originally signed document. “Electronic chattel paper” is chattel paper created, recorded, transmitted or stored in digital or other intangible form by electronic, magnetic or optical means. Thus, it is an electronic record that evidences a monetary obligation to pay and a security interest in or lease of specific goods. 

Electronic chattel paper perfected by control

In order to enable perfection in electronic chattel paper, provisions relating to control of this paper had to be added to the OPPSA, similar to the provisions for certificated and uncertificated securities. As a result of these proposed amendments, perfection by control is to be the equivalent of perfection by possession of the tangible or hard copy of the tangible chattel paper. A new subsection (3) is proposed to be added to section 1 of the OPPSA and sets out the six elements required to effect perfection by control of electronic chattel paper.

A secured party has control of electronic chattel paper if there is only one (1) authoritative record of the electronic chattel paper that is created, stored and transferred so that the record that exists is unique, identifiable and, except for certain limited exceptions itemized in this subsection, is unalterable. The record must identify the secured party as the transferee of the record and the record must be communicated to and securely maintained by the secured party or its designated custodian. Copies of amendments to the authoritative record that add or change a transferee may only be made with the consent of the secured party.  Each copy of the authoritative record must be readily identifiable as a copy (and not the original) and any amendment must be readily identifiable as to whether it is authorized or unauthorized. 

Conflict of laws

The sections of the OPPSA dealing with conflict of laws are to be revised to provide for separate provisions relating to the perfection location of chattel paper. For a possessory security interest in tangible chattel paper, the validity, perfection and effect of perfection or non-perfection of a security interest is to be governed by the law of the jurisdiction of the location of the tangible chattel paper when the security interest attaches. However, the validity, perfection, the effect of perfection and non-perfection, and the priority of a security interest in electronic chattel paper and a non-possessory security interest in tangible chattel paper will be governed by the law of the jurisdiction where the debtor is located at the time the security interest attaches.

Super priority for chattel paper

Section 28 of the OPPSA sets out rules relating to transactions in the ordinary course of business. The current subsection 28(3) deals with purchasers of chattel paper, who take possession of the chattel paper in the ordinary course of business and who give new value. These purchasers have priority over other security interests if the security interest was perfected by registration and if at the time the purchaser took possession of the chattel paper, the purchaser did not know that the chattel paper was subject to a security interest. Since the current provision only addressed tangible chattel paper, it will be repealed and replaced with new priority rules for both tangible and electronic chattel paper.

Subject to a new exception, the proposed amendment will provide that a purchaser of chattel paper will have priority over any other security interest in the chattel paper, if the purchaser, in the ordinary course of business and for new value, takes possession of the (original) tangible chattel paper or obtains control of the electronic chattel paper, provided that the chattel paper does not indicate (on it) that it has been assigned to an identified assignee other than the purchaser. Knowledge is no longer required. The chattel paper must indicate on it that it has been assigned.

In addition, section 28 will include an exception addressing the possibility of a priority dispute between tangible and electronic formats of chattel paper that cover the same goods. It will provide that if the rights arising out of tangible chattel paper are transferred to a purchaser as electronic chattel paper for new value and in the ordinary course of the purchaser’s business, and if the tangible chattel paper is transferred to another purchaser who takes possession of it for new value and in the ordinary course of that purchaser’s business, the interest of the purchaser of the tangible chattel paper has priority over the interest of the purchaser of the electronic chattel paper if the tangible chattel paper does not indicate (on it) that it has been assigned to an identified assignee other than the purchaser of the tangible chattel paper. This type of amendment is in the proposed revisions of Saskatchewan's Bill 151.

Priorities

Bill 100 contains a provision to amend subsection 30(1) of the OPPSA dealing with priorities. This additional subsection 3.1 provides that where priority is to be determined between perfected security interests in a prescribed class of collateral, priority will be determined in accordance with the regulations.  This will be the first time that a determination of priority in security interests will be subject to regulation.

Summary

As the largest number of registrations under the OPPSA are in respect of sales or leasing of automobiles, many financial institutions and lenders in Ontario will welcome the amendments to the OPPSA proposed by Bill 100. Allowing for electronic chattel paper to be perfected by control should reduce costs and facilitate transactions.

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