Ontario Bar Association proposes changes to Personal Property Security Act

Suggested amendments relate to purchase-money security interests

Ontario Bar Association proposes changes to Personal Property Security Act

The Ontario Bar Association has suggested amendments to the Personal Property Security Act, RSO 1990, c P.10 in an effort to assist the Ministry of Government and Consumer Services in reforming purchase-money security interest (PMSI) law.

The proposal, which was prepared by the Personal Property Security Law Committee of the OBA, aims to address the uncertainty that may arise under the Act in situations where there are both PMSI and non-PMSI security interests in the same collateral, where the PMSI secures multiple interests or where there is a question of how to allocate payments among different types of obligations.

The recommended amendments seek to resolve certain issues relating to PMSIs, which are the cross-collateralization by inventory financers, the allocation of payments and the status of renewed, refinanced, consolidated, restructured or so-called mixed PMSIs. These changes aim to improve commercial efficiencies, to lighten bookkeeping requirements and to increase the effectiveness of PMSIs as security instruments.

The submission of the Personal Property Security Law Committee discussed the challenges arising in the case of complex financing arrangements where both PMSI interests and non-PMSI security interests exist in the same collateral. On the issue of cross-collateralization by inventory financers, the varying priority positions involving PMSI and non-PMSI collateral can lead to complex situations which may force the secured party and debtor to engage in major item-by-item recordkeeping so that they can identify the priorities. If there are multiple creditors and numerous inventory items to deliver at various times, the situation may become unmanageable.

The proposed legislative amendments, fully detailed in the submission’s appendix A, will extend PMSI status to inventory financers with respect to their cross-collateral security interests in supplied inventory, with the priority restricted to security interests taken in related transactions falling within the scope of the inventory supply relationship.

On the issue of allocation of payments, the change recommended by the Committee will permit the debtor and the secured party to agree on how the payments will be allocated among different obligations. If an agreement is not reached, the debtor can express, before or when making the payment, an intention regarding the manner of allocation. If neither situation is applicable, the payment will first be applied to unsecured obligations, then to secured obligations that are not secured by PMSIs, then to secured obligations that are secured by PMSIs. This suggested change will address the silence of the Act on the issue of allocation of payments, and the potential uncertainty caused by such silence in certain situations.

On the issue of the status of renewed, refinanced, consolidated, restructured or mixed PMSIs, the submission proposed the addition of a subsection that would declare that the PMSI status would not be lost if the purchase-money collateral secured other obligations, or if the purchase-money obligation was secured by another collateral, or if the purchase-money obligation has been renewed, refinanced, consolidated or restructured.

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