May 7, 2024
In Ontario, the Personal Property Security Act protects lenders through a priority of registration system.
A key exception is the purchase money security interest, by which a supplier can maintain first claim in items supplied on credit, regardless of order of registration, or “perfection”.
THE ISSUE
For decades, there was confusion over leases of equipment and other movables. If the lease was a form of financing, it had to be registered under the PPSA to maintain the seller on credit or lender’s priority, regardless of who the owner might be under the terms of the lease.
This led to uncertainty as lenders would argue over whether the lease was a “true lease” or a form of purchase financing. Under a “true lease” since the supplier always owned the equipment, the other creditors, or a trustee in bankruptcy, could not sell the equipment.
In 2007, the PPSA was amended to require any lease of over one year to be registered to maintain priority. Priority of entitlement to the value of the property interest no longer turns on common law notions of title or ownership but on compliance with the provisions of the PPSA governing perfection of security interests. This brought Ontario into step with other provinces and was designed to reduce priority disputes and uncertainty.
Though the lease had to be registered for priority purposes, the rights to deal with the equipment (“realization”) remain outside the PPSA provisions on realization.
Some suppliers continued to argue that their lease was a “true lease” and not a sale in disguise. Thus, they claimed that they had priority over their equipment regardless of order of registration, since only they could realize upon the value.
In other provinces, the courts of appeal had ruled that this did not work, and the suppliers lost their priority by not registering. This was confirmed by the Supreme Court of Canada in a case out of British Columbia. As the Supreme Court put it: “the dispute is one of priority… and not ownership in it” .
But surprisingly, the Ontario Court of appeal had not considered the situation since the amendment.
THE CASE
In Royal Bank of Canada v. Cutler Forest Products Inc, the Court of Appeal confirms for Ontario what other provinces had decided – if the lease is for more than one year, it must be registered, or the purchase money security interest priority does not apply and the creditors registered first in line get paid first upon realization. In this case, it was trucks that were supplied under lease, with no option to purchase- what used to succeed as a “true lease”. No longer. The Court confirmed that if the lease is for more than one year, perfection through registration is required.
Despite the fact that a true lease does not fall within the realization provisions, the court could order sale of the trucks by a receiver.
TAKEAWAYS
- PPSA remains a complex and potentially confusing system.
- If you MIGHT be a supplier who must register, obtain legal advice about your rights.
- Though this result may seem harsh, the “a lease is a lease” approach reduces the confusion in managing the insolvency,
WHAT WEILERS LLP CAN DO TO HELP YOU
The Weilers LLP corporate commercial team has decades of success in advising clients about personal property security issues. Not every lawyer or law firm develops an expertise in insolvency, but it is part of our proud tradition.
Whether you have questions about registration or realization, or any other personal property security issues, give us a call. We might be the right lawyers for you.