Corporate Commercial Law Blog
Do you have any security registered at the Personal Property Registry? Many people do not realize that filings may be accidentally discharged without the secured party’s consent or knowledge. A recent case of the BC Court of Appeal came to the conclusion that a secured party can lose priority even if they are not aware that their PPR filing was discharged.
KBA’s financing statement in respect of its security interest in a printing press was discharged by a third party, apparently inadvertently. By the time KBA became aware of the discharge and re-registered a financing statement, it had lost priority over other secured interests. It applied to a judge of the Supreme Court to reinstate the priority of its security interest. The judge found that the court had equitable jurisdiction to grant the relief sought, and gave KBA’s interest priority over the interests of two other creditors. One of those creditors appealed.
ON APPEAL, THE COURT OF APPEAL HELD: Appeal allowed. The statutory priorities scheme of the Personal Property Security Act applies and cannot be overridden by courts on equitable grounds.
The Court of Appeal stated the issue on appeal as follows: “The issue on this appeal is whether the Supreme Court may exercise equitable jurisdiction to adjust the priority regime set out in s. 35(1) of the Personal Property Security Act, R.S.B.C. 1996, c. 359 (the “PPSA”) where it considers the results of that regime to be unfair.” The court’s rather blunt conclusion was as follows: “…[T]he clear priority scheme set out in the PPSA applies in this case, and there was no room for the court below to override that scheme in the interests of ‘fairness’.”
Notable aspects of the case include the following:
- The PPSA allows any person to discharge the security interest of a registered party (ss. 46(2)) without proof of authorization from that party.
- In the event of a non-party discharge, the registrar will send a verification statement to the discharged party via mail. In this case, KBA indicated it had received nothing.
- The PPSA does have a 30-day re-registration provision (without loss of priority) (ss. 35(7)) but KBA, not knowing about the discharge, did not re-register during this period.
- The court below had been asked to re-order the priorities given the unfairness of the result (i.e. that KBA lost priority through no fault of its own). This equitable jurisdiction appeared to be consistent with ss. 68(1) of the PPSA which retains equitable principles notwithstanding the legislative provisions of the PPSA.
The Court of Appeal’s finding in KBA essentially ousts any residual discretion in the courts to relieve against unfairness as it pertains to secured creditors. The PPSA is a complete code in this regard. This rigid interpretation of PPSA priority rules, coupled with the lack of any restrictions on who can discharge a secured party’s registration, has the potential for abuse. For example, a debtor (D) could have a third party discharge a lender’s security (L1) over D’s assets, then seek financing from a second lender (L2) and grant that party security over its assets. Unless L1 learned of the discharge in time and managed to re-register within 30 days, their security would be subordinate to that of L2, through no fault of their own.
To be clear, however, no wrongdoing need occur. In KBA itself, the secured party lost priority while subordinate secured parties improved their positions purely on the basis happenstance. The prejudice to KBA was justified, according to the Court of Appeal, merely by virtue of the existence of the priority rules in the PPSA, and (presumably) commercial certainty in the application of those rules.