PPSA Case Alert - What's in a Name?
The decision of the Ontario Court of Appeal in Fairbanx v. Royal Bank of Canada contains some useful information about how courts view inaccurate debtor names in financing statements and their approach to s. 46(4) of the Personal Property Security Act (Ontario)(“PPSA”) regarding materially misleading filings. The case also reminds secured parties to use a debtor corporation’s name as found in its articles of incorporation when filing a financing statement, in accordance with section 16(4)2 of the PPSA Minister’s Order.
In this case, a factor called Fairbanx Corp. purchased receivables from a debtor. The incorporated name of the debtor was “Friction Tecnology Consultants Inc.” However, it often carried on business with an additional letter “h”, as “Friction Technology Consultants Inc.”, and the company used that form of name on the receivables purchase documents entered into with Fairbanx. Fairbanx registered its PPSA financing statement in respect of the receivables purchase (an assignment of accounts) against the business name of the debtor but did not file against the debtor’s correct corporate name.
The debtor then obtained bank financing from Royal Bank of Canada (“RBC”). Over the course of negotiating the loan, RBC had searched the debtor’s name with, and without, the “h”. RBC then registered against the proper incorporated name. Subsequently, the debtor went bankrupt and a priority contest ensued between Fairbanx and RBC.
The first secured party, Fairbanx, argued that their registration against the misspelled debtor name remained effective to perfect their security interest due to section 46(4) of the PPSA, which provides as follows:
46(4) A financing statement or financing change statement is not invalidated nor is its effect impaired by reason only of an error or omission therein or in its execution or registration unless a reasonable person is likely to be misled materially by the error or omission.
Fairbanx asserted that since the debtor carried on business using the misspelled name, and RBC had searched against that name, a reasonable person would not be materially misled since they would search the incorrect name of the debtor. The Court did not agree. Its reasoning provides a good overview for interpreting s. 46(4):
- a financing statement with an error is prima facie effective - it loses effect if a reasonable person would be materially misled by the error;
- whether a person would be materially misled by the error is an objective test - RBC’s subjective knowledge of the registration against the wrong name was irrelevant;
- a financing statement with an error in a debtor’s name is unlikely to be saved by s. 46(4) of the PPSA because,
- a search against the debtor’s correct name will not reveal the registration, or
- even when a reasonable person searches against an incorrect name and finds the registration, that person may not be able to know whether the misspelled name is an error or the proper spelling of the name of another similarly named person or corporation.
When registering a financing statement against a corporate debtor, a secured party should use the name found in a government certified copy of the articles of incorporation of the debtor.
