Ch-ch-changes: Saskatchewan’s PPSA amendments are here

In late 2018, the Saskatchewan Legislature introduced Bill 151 to amend The Personal Property Security Act, 1993 (Saskatchewan) (the « PPSA »). Our Saskatchewan Financial Services team spent the next many months analyzing the amendments and explaining them in a series of Financial Services & Insolvency Communiqué posts. Bill 151 was passed into law on March 12, 2019 as The Personal Property Security Amendment Act, 2019 (the « Amending Act ») but was not proclaimed into force at the time.

For the past year, we have been waiting to learn when the amendments (the « Amendments ») would take effect. Now we need wait no longer.  The Saskatchewan Government has just announced by Order in Council that the Amendments will come into force on June 22, 2020.

Further down in this post we will discuss some technical points, but here are the highlights of the Amendments, with links to where you can find more detail.

Electronic Chattel Paper

On May 15, 2020, Ontario’s amendments to enable perfection by control of electronic chattel paper (« ECP ») came into force.  Miller Thomson’s Jennifer Babe has already written about the new Ontario ECP rules in our May 14, 2020 communiqué.

On June 22, 2020, Saskatchewan will be the second Canadian province to have perfection by control of ECP become a (virtual) reality.  ECP has the potential to create massive efficiencies for industries that use chattel paper to raise funds – the auto finance industry is a prime example.  Similar rules have existed in the United States for some 20 years, so electronic vault systems already exist though it will be interesting to see what the rate of adoption is in Canada when only two provinces have passed enabling legislation.

Eric Johnson and I analyzed the new Saskatchewan ECP rules in substantial detail in our May 3, 2019 communiqué.

Changes to Rules for Serial Number Goods/Changes to Rules on Errors that Invalidate Registrations

The Amending Act introduced several changes with respect to serial number registrations and what will represent errors. The two most significant ones are:

1. Elimination of the distinction between the treatment of consumer goods and equipment.

Previously, consumer goods had to be registered by serial number to avoid invalidation of the registration.

Equipment could be registered by debtor name only and perfection would still exist, even if there was potential to lose priority to another secured creditor who registered by serial number or to a bona fide purchaser for value, but the registration by debtor name would still take priority over a non-bona fide buyer/lessor, a trustee in bankruptcy, and judgment creditors.

The new rules give the same treatment to consumer goods as exist for equipment. Nonetheless, we don’t expect that auto financiers and lessors will stop registering by serial number, so the change may be largely cosmetic.

2. The rules on what errors will invalidate registrations are changing. The new provisions are modelled on the approach currently used by Yukon and several of the Atlantic provinces. Under the new provisions, a registration will be invalid if it is not disclosed by a search of the correct name or serial number, as applicable.

Further, the fact that a registration is disclosed on a search as an inexact match does not automatically cause an erroneous registration to be valid. That seems likely to result in increased litigation until some case law is developed.

We had hoped that new regulations, would reduce the uncertainty experienced by lenders and lessors with respect to what name should be used for an individual, by specifying the source of the definitive name information. That did not occur, as is apparent from the new consolidated Regulations. Saskatchewan has elected not to create that rule. As a result, lenders and lessors will be faced with uncertainty until the courts impose some clarity.

For more detail on those and other related changes, refer to our April 12, 2019 article by Sean Bryden and me.

Growing Crops – Elimination of the Requirement to Take a New Security Agreement Every Year

The PPSAs of many provinces require a lender to take a fresh security agreement every year with respect to growing crops.  In those jurisdictions a security interest attaches only to crops that start to grow within a year after the security agreement was entered into. Failure to obtain a fresh security agreement means that the lender relying on PPSA security will have no security interest at all in the crop for the relevant year(s). Unfortunately, this is not universally understood, even among experienced lenders in the ag space.

The Amendments eliminate that rule for Saskatchewan. This change will be particularly welcomed by lenders, such as credit unions who do not have the ability to take Bank Act (Canada) security.  The change will increase the efficiency of secured lending to farmers, and will eliminate an existing disparity, in that no similar rule exists with respect to offspring of livestock.

Rules Governing Conflicts of Laws, Mobile Goods, Location of Debtor and Related Matters

Even lawyers (or most lawyers) don’t enjoy dealing with conflicts of laws rules. The Amendments modernize the PPSA’s rules on conflicts of laws, mobile goods and defining the location of the debtor.  Briefly, these rules govern where (in what jurisdiction) a creditor must register to be perfected. The Amendments in this area are too extensive to try to summarize here, and it took us two posts to explain them last year: one to address the new conflicts rules and a second post to explain how the transition to the new rules will work.[1]

Effects of Lapses or Discharges of Registrations

The Amendments address what happens to the priority of a security interest that becomes unperfected after another party commences enforcement.  What date and status should be used for determining priority? Katlyn Cooper and I wrote about the amendments in our March 29, 2019 communiqué to address what turns out to be a complex set of issues.

Another part of the Amendments deal with the situation where a secured party’s registration is discharged by error or lapses due to a failure to renew, but the secured party re-registers within 30 days of the discharge or lapse. Previously, if the debtor became bankrupt and the security interest was unperfected at the date of bankruptcy, the PPSA gave priority to the bankruptcy trustee. The Amendments provide that the secured party’s priority status will be maintained if it re-registers within 30 days from the date of discharge or lapse.  A similar change is made with respect to intervening enforcement charges (the modern equivalent to a writ of execution).  Wuraola (Wura) Dasylva and I explained those amendments in our February 12, 2019 communiqué.

Super-priority for Deemed Trusts Under The Pension Benefits Act, 1992

In scouring Bill 151, we learned that, in a relatively subtle provision, the Amendments will create a super-priority for amounts deemed to be held in trust by employers under The Pension Benefits Act, 1992 (refer to our January 15, 2019 issue for more information).  Employee contributions that are made or withheld from payroll, and employer contributions that are required to be made under a pension plan, will be subject to this priority and it appears that this enhanced priority will probably also apply to unfunded pension liabilities.

We wrote a post about that, which you can find at the above link.  In addition, Jordyn Allan, Greg Azeff and I published an expanded analysis of these significant amendments and their potential impact in the Banking & Finance Law Review at (2019) 34 BFLR 449.

While Ontario has provisions giving priority to pension shortfalls in respect of current assets (accounts receivable and inventory), the Amendments apply to all personal property in Saskatchewan by characterizing the pension deemed trusts as security interests.  There are uncertainties about the scope of the obligations that will be secured by the super-priority, i.e., whether it will be merely the amortized obligations of an employer that has a shortfall to make up, or whether it will encompass the full unfunded liability or solvency deficiency. Unless Saskatchewan amends The Pension Benefits Act, 1992, that will have to be resolved by the courts.

Changes to the Purchase Money Security Interest (PMSI) Rules

While the new provisions concerning PMSIs are not the biggest changes among the amendments, they are still noteworthy. In particular they strengthen cross-collateralization in purchase money financing arrangements involving inventory. Fraiba Jalal and I wrote here about the changes to the PMSI rules in our February 12, 2019 communiqué.

There’s More!

The Amendments cover even more ground than what we’ve discussed above in this post.  As examples:

1. A new provision confirms what has already been understood in Saskatchewan: that statutory licences (such as quota in the ag sector) are personal property that can be the subject of PPSA security.
2. There are amendments addressing security interests in negotiable collateral and money, relevant to deposit-taking institutions and secured parties who take cash collateral as security.
3. There is a new rule requiring that the notice of disposition under section 59 must be served on all registered secured parties, not just those who appear to have an interest in the collateral.

Fraiba Jalal and I explained those amendments and more in our December 13, 2018 communiqué, in what has to date served as our master post on Bill 151.

We must again acknowledge an invaluable resource, the Report to the Canadian Conference on Personal Property Security Law on Proposals for Changes to the Personal Property Security Acts (the « Report »), prepared by a working group of the Canadian Conference on Personal Property Security Law (CCPPSL) and ratified at the CCPPSL Annual Meeting in Edmonton, Alberta, 21-23 June 2017.

Many of the Amendments were based on the recommendations made in the Report, which provides excellent background, context and policy explanations. The Report was invaluable to us in analyzing the Amendments and we cannot write about the Amendments without acknowledging the Report.  If you want to learn even more about the Amendments, we highly recommend the Report as a resource.

Finally, our practice support lawyer, Elizabeth Hutchison, has provided editing (lots of editing!), guidance and wisdom throughout this project – now on its 12th post – and we couldn’t have done it without her. We are so grateful for Elizabeth’s invaluable contributions to our work.

[1] In our post analyzing the transition rules we identified some drafting errors in the Amendments. Those were corrected by an amendment to Bill 151 in a manner that we had anticipated, so the discussion in that post still applies.