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

Secured parties reviewing Ontario Personal Property Security Act (PPSA) searches can now rely upon an appropriate collateral description to limit the scope of a collateral classification to perfect only the collateral described.

As described in an earlier entry on our blog, on August 1, 2007 section 46(3) of the PPSA was inadvertently repealed as part of former Bill 152 which contained a number of amendments to the Act. The repealed section 46(3) provided that a collateral description could limit the scope of a collateral classification in a financing statement to perfect only the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.

Ontario Bill 68 (An Act to promote Ontario as open for business by amending or repealing certain Acts) received Royal Assent on October 25, 2010. Schedule 5 of the legislation provides for the reinstatement of the old section 46(3) as a new section 46(2.1), 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.

Further, the legislation deems this amendment to have come into force as of August 1, 2007, the date that the original 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 a prospective secured party chooses not to obtain acknowledgements or subordinations due to the limited nature of certain prior registrations.
 

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As the cross-border financing market begins to heat up after its long slumber, many U.S. and other foreign lenders are again making their way into the Canadian market place. In addition, as activity in the U.S. debt market returns, many Canadian companies are guaranteeing and providing security for their U.S. affiliates’ debt. While many seasoned U.S. lenders understand the importance of taking separate Canadian security, such a concept is still foreign to many. Many U.S. lenders would prefer that a Canadian debtor execute U.S. law governed security documents. While familiarity is a good reason to stick to tried and tested U.S. security documents, U.S. lenders need to understand that there are several reasons why Canadian law governed security is preferable. On a cross-border deal where U.S. security is being granted by U.S. credit parties, there’s no reason why the Canadian credit parties cannot also execute such documents. However, in such cases, Canadian law governed security should still be obtained.

First, Canadian conflict of laws rules often direct that the validity, perfection, effect of perfection or non-perfection of a security interest granted by a Canadian debtor will be governed by Canadian law. The choice of laws rules under Canadian law are more varied than the U.S. rules. For example, with respect to most tangible personal property, Ontario conflict of laws rules provide that the governing jurisdiction shall be the jurisdiction where the collateral is situate at the time that the security interest attaches. With respect to security interests in intangible property (such as accounts and intellectual property), Ontario conflicts of laws provide that the governing jurisdiction shall be the jurisdiction where the debtor is located at the time of attachment. If, for example, Ontario is the jurisdiction that governs the validity of a security interest, it makes sense that the security interest be governed by Ontario law. While U.S. law governed security documents may very well be sufficient to create a security interest under Ontario law, relying on U.S. law governed documents to achieve the desired legal consequence in Ontario is not without material risk.

Further, if the law governing the validity, perfection, effect of perfection and of non-perfection of a security interest is the law of a Canadian province, or if the debtor is incorporated in Canada or has a material presence in Canada, enforcement of the security interest and the assertion of the rights of the lender (either inside or outside of an insolvency proceeding) will necessarily be subject to the jurisdiction of Canadian courts. If such interest or rights are governed by U.S. law, U.S. law may need to be proved to the Canadian court before action may be taken (assuming, of course, that the Canadian court even agrees to apply U.S. law). In addition to the delay this will involve, the legal meaning and interpretation of a U.S. document will thus become subject to subjective interpretation of the Canadian court and the conflicting positions of the debtor and its counsel; that can never be a good thing from a lender’s perspective. Of course, using Canadian law governed documents also provides the intangible benefit of not inconveniencing the court with the need to apply law it is not qualified to understand in order to enforce or protect a lender’s rights or interests; that is always a good thing.
 

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The United States Federal Deposit Insurance Corporation (FDIC) has recently adopted new safe harbour rules for securitizations completed by insured depository institutions which are subject to insolvency proceedings. In broad terms, if these rules are complied with the FDIC will not exercise its repudiation or avoidance powers with respect to the securitization. The FDIC is using its repudiation and avoidance powers as a basis for regulating the substantive terms and conditions of securitizations completed by insured depository institutions. If the securitization transaction complies with the FDIC rules, then it will not be challenged and assurances are available as to relatively uninterrupted cash flows.

While the primary protection for any securitization is characterization as a “true sale” so that the securitized assets are not subject to any insolvency proceedings affecting the Seller, there is additional comfort for investors and rating agencies in knowing that the transaction will not be challenged by FDIC because the securitization transaction complies with a set of safe harbour rules.

The legislation governing the Canada Deposit Insurance Corporation (CDIC) and other applicable Canadian legislation does not include any comparable safe harbour provisions to facilitate securitizations by Canadian depository institutions. Canadian transactions must rely solely on the true sale analysis. While the absence of Canadian safe harbour provisions has not precluded securitizations by depository institutions to date, it may be something to consider if for policy reasons the federal government wanted to encourage such transactions.
 

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The Honourable Jim Flaherty, Canadian Minister of Finance has announced a scheduled review of legislation governing financial institutions that are regulated by the federal government.   According to the announcement, this review is scheduled to occur every five years.  In soliciting comments, the Minister noted that "some fine-tuning to the system may be required, but wholesale change is not necessary."

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