Types of Securities
PPSA Registrations - Is this the Weakness in Your Armour?
As the saying goes, an ounce of prevention is worth a pound of cure. This expression is particularly apt when it comes to secured creditors and their registrations under the Ontario Personal Property Security Act (the "PPSA"). Although "getting it right the first time" has always been the mantra of secured creditors, the economic roller coaster ride of recent months has heightened the need to ensure a properly perfected secured claim. To avoid the potentially disastrous consequences of losing secured creditor status, it is imperative for a secured creditor to get its registration right the first time.
Here are 3 tips to avoid frequent registration problems which we recommend that you keep in mind when registering your security under the PPSA:
- Check the name. Carefully review your registration with your security agreement in hand. While it sounds trite to say, the most common problem that we have seen is that the debtor's name is misspelled or not entered correctly or the corporate descriptor has a typo. Unless the name is entered correctly, your registration will not be seen and may be ruled invalid.
- Where the debtor carries on business with both an English and French name, you should ensure that both names are noted in the registration. It is not correct to enter the English and French name on the same line. The correct way is to enter the names on separate lines.
- In some cases, where the secured creditor's file shows the debtor as a numbered company "operating as XYZ Company", the proper way is to enter both the legal name (1234 Ontario) and the business name (XYZ Company) as separate names in the registration. This ensures that searches against both names by other creditors will pick up the registration.
- Ensure that the corporate descriptor is accurate. (Ltd., Limited, Corp., etc.) A typo in the corporate descriptor can invalidate your registration (i.e. error of entering "Lt" instead of "Ltd").
- Check that the security type is selected. On many occasions when consulted about enforcing a creditor's security, we have found that the creditor has neglected to select the nature of its security or failed to select the appropriate security type (i.e. inventory, equipment, etc.).
- Make sure that all PMSI registrations requirements are met. A purchase money security interest or "PMSI" registration is first ranking security over an asset where the creditor advanced value for the asset to be obtained. If properly taken and perfected, the PMSI holder will rank ahead of a prior registered PPSA creditor with a security interest in the same collateral. In the event of a bankruptcy or a challenge by a third party creditor, the PMSI-holder will need to show:
- a signed and dated security agreement;
- with respect to inventory security, copies of the PMSI notices together with the signed cards from the post office or other evidence of personal service and receipt;
- with respect to non-inventory security, a registered financing statement registered before or within 10 days of when the debtor or its agent received the asset and a delivery receipt, signed shipping order or other document that shows when the debtor or its agent received the asset.
If you find that any of your existing registrations contain errors, then the time to correct them is now. While it may still be possible to address error in conjunction with an insolvency or enforcement proceeding, it will be far easier to seek to correct any errors in your security or registration prior to any insolvency. In insolvency proceedings, you will need to be prepared to protect your security from being challenged by a trustee in bankruptcy, receiver or other creditors (secured and unsecured) who are all trying to maximize their respective recoveries and avoid being caught by the short-fall caused by the debtor's liabilities exceeding the debtor's assets.
These issues can be tricky, so a careful eye and expert advice can make all the difference in spotting the "red flags".