Banking & Financial Services Law : Canadian and U.S. / Cross-Border Credit Market Lawyers & Attorneys : Osler Hoskin & Harcourt Law Firm

The Ontario government has taken steps to “fix” its inadvertent repeal of former section 46(3) of the Personal Property Security Act (Ontario)(“PPSA”). The repeal occurred on August 1, 2007 as part of former Bill 152 which contained a number of amendments to the PPSA. The repealed section 46(3) provided that a collateral description could limit the scope of a collateral classification in a financing statement to perfect only the collateral described. That section read as follows:

Except with respect to rights to proceeds, where a financing statement or financing change statement sets out a classification of collateral and also contains words that appear to limit the scope of the classification, then, unless otherwise indicated in the financing statement or financing change statement, the secured party may claim a security interest perfected by registration only in the class as limited.

This section was sometimes relied upon by secured lenders when reviewing PPSA search results prior to advancing funds. Lenders could choose not to obtain a subordination of a prior secured party’s security interest, or an acknowledgement of that secured party’s limited collateral, where the scope of that secured party’s PPSA registration was sufficiently limited by a collateral description. This could reduce transaction costs by reducing the number of documents to be obtained from third parties. After this section was repealed in 2007, collateral descriptions could not technically be relied upon to limit the scope of the prior registration.

Schedule 5 of Bill 68 (An Act to promote Ontario as open for business by amending or repealing certain Acts) received first reading on May 17, 2010. It includes an amendment to the PPSA that would add a new section 46(2.1) to reinstate the language excerpted above. Further, the legislation would deem this amendment to have come into force as of August 1, 2007, the date that this provision was inadvertently removed. 

This amendment will restore some certainty regarding the effect of a collateral description in a financing statement. It will also reduce transaction costs where prospective secured parties choose not to obtain acknowledgements or subordinations due to the limited nature of certain prior registrations.

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In its recent decision in Ted Leroy Trucking v. Century Services Inc., the Court of Appeal for British Columbia upheld a decision of that province’s Supreme Court which determined that employee “wages” recoverable under the Wage Earner Protection Program Act (Canada) ("WEPPA") include components from an employee's compensation package that are remitted by an employer to third parties on behalf of an employee. This would include payments for items such as union dues or extended health coverage provided by a third party service provider. This determination affects the scope of employee wage claims that would benefit from a super-priority charge under the Bankruptcy and Insolvency Act (Canada) ("BIA"). As a result, lenders should account for such payments when structuring a loan transaction, including in the calculation of any borrowing base.

Protection for “Wages” Under the WEPPA

The WEPPA and consequential amendments to the BIA were proclaimed in force in 2008. Under section 7 of the WEPPA, an employee can recover wages owing that were earned in the 6 months immediately before the date of bankruptcy or the first day on which there was a receiver in relation to the former employer.

"Wages" is defined in the WEPPA as follows:

2 (1) In this Act, "wages" includes salaries, commissions, compensation for services rendered, vacation pay, severance pay, termination pay and any other amounts prescribed by regulation.

The maximum amount recoverable is the greater of:

• $3,000, and
• an amount equal to four times the maximum weekly insurable earnings under the Employment Insurance Act (Canada)

Section 81.3(4) of the BIA creates a super-priority for outstanding wages of up to $2,000. The government is entitled to subrogate to recover any monies it pays under WEPPA and on such a proceeding is entitled to the benefit of the BIA $2,000 super-priority.

The Lower Court Decision

The union representing employees at the bankrupt trucking company argued that all monetary liabilities arising from the compensation package in the applicable collective agreement ought to be included in the calculation of wages protected by WEPPA, irrespective of whether the amount is payable directly to the employee or to a third party on an employee’s behalf. The receiver of the company disagreed, asserting that the only certain wages directly payable to an employee are protected.

The Supreme Court of British Columbia found that "wages" do include payments directed to third parties on an employee's behalf pursuant to an agreement, including a collective agreement. The Court stated, in part:

“To answer this question one must consider the definition of "wages" in s. 2(1) of the WEPPA. It is relatively expansive; it defines wages as including "compensation for services rendered". In my view any reasonable definition of "compensation for services rendered" must mean all compensation earned by the employee. It cannot be limited to only that portion of the compensation earned by the employee and due to be paid directly to him, as opposed to being paid to third parties at the direction of and for the benefit of the employee.”

The Appeal Decision

The Court of Appeal for British Columbia dismissed the appeal of a secured creditor. Many of the issues on the appeal focused on statutory interpretation. The Court of Appeal agreed with the interpretation of the lower court. The appellants also claimed that the lower court decision distorted the balance between workers and secured creditors. The Court of Appeal disagreed saying that the protection of wages under WEPPA is limited temporally and by amount, and that Parliament had considered this balance when passing the legislation. 

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The Nova Scotia legislature has introduced Bill 33, the Securities Transfer Act (STA). The bill received third reading on May 4th, 2010.

STA legislation in Canada is based on the Uniform Securities Transfer Act ("USTA") - a model act that was developed and endorsed by the USTA Task Force of the Canadian Securities Administrators. The intent behind this legislative initiative is to have substantively uniform statutes across the country governing the holding and transfer of securities and other investment property. The STA affects how security interests in investment property are granted and perfected.

If the Act comes into force in Nova Scotia, then Prince Edward Island will be the only Canadian province without STA legislation.

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