Timely Modernization of Ontario PPSA Chattel Paper Provisions

On May 15, 2020, the Government of Ontario proclaimed into force electronic chattel paper amendments to the Personal Property Security Act (“PPSA”) that were enacted in May 2019.  The amendments provide for the perfection of security interests by control of electronic chattel paper and set out related priority and other rules, similar to the electronic chattel paper provisions in Article 9 of the United States Uniform Commercial Code (“UCC”).  This is a welcome development, particularly for automotive and equipment finance companies, and is especially timely in light of the recent shift to increased electronic contracting necessitated by the COVID-19 pandemic.

With these amendments, there are two categories of chattel paper under the PPSA: “tangible” chattel paper, which is evidenced by information inscribed on a tangible medium; and “electronic” chattel paper, which is created, recorded, transmitted or stored in digital or other intangible form by electronic, optical or mechanical means. 

Perfection

A security interest in chattel paper of any form can be perfected by way of registration. The PPSA also provides that perfection of a security interest in (1) tangible chattel paper can be achieved by possession, and (2) electronic chattel paper can be achieved by control.

To perfect a security interest in electronic chattel paper by way of control, the PPSA specifies that a number of requirements must be satisfied, including that there is a single authoritative record of the electronic chattel paper that:

  • is unique, identifiable and may only be amended in limited circumstances,
  • identifies the secured party as the transferee of record, and
  • is securely maintained by the secured party or its designated custodian.

Entities with operations in the United States are likely to be familiar with these requirements, given their similarity to those under the UCC. We anticipate that service providers will be able to adapt existing US electronic vaulting solutions to address the Canadian-specific requirements to allow secured parties to make use of these new provisions in the near term.

One complication that secured parties will need to keep in mind until other jurisdictions implement corresponding electronic chattel paper amendments is the conflict of laws analysis. The PPSA provides that the validity, perfection and priority of a security interest in electronic chattel paper is governed by law of the jurisdiction where the debtor is located, as determined according to the PPSA. If the “location” of the debtor is not Ontario, the secured party will need to consider the conflict of laws provisions of the PPSA-equivalent statute in the other jurisdiction to determine which laws will govern.

Priority and Conflicts

Previously, in order to benefit from the super-priority rule for chattel paper under the PPSA, a secured party was required to take possession of the original hard-copy chattel paper. This process can be cumbersome and costly and finance companies have long been advocating for a modern solution. While possession of the original is still required to have the benefit of this provision for tangible chattel paper, a secured party can now achieve a super-priority in electronic chattel paper by obtaining control of the electronic chattel paper (as described above). In either case, in order for a secured party to have super-priority, the chattel paper must not indicate that it has been assigned to a party other than the secured party.

The amended super-priority rule also contemplates the situation where rights under tangible chattel paper are transferred as both electronic chattel paper and tangible chattel paper, in each case for new value and in the ordinary course of the purchaser’s business. Provided that the tangible chattel paper does not indicate that it has been assigned to an identified party other than the purchaser of the tangible chattel paper, that purchaser’s interest will be in priority to the interest of the purchaser of the electronic chattel paper.

Next Steps

These amendments represent a long-awaited modernization that will help streamline the origination and financing process for lessors and lenders. In order to take full advantage of these new processes, however, entities with cross-Canada operations will be looking for other provinces to implement similar changes. To date, Saskatchewan is the only province to enact similar amendments, but those provisions are not yet in force.

For more information please reach out to the authors or any member of McCarthy Tétrault’s Structured Finance & Securitization group.

Authors