Conflicted About Choice of Law? Saskatchewan’s PPSA Amendments on Conflicts of Laws Rules – Part 1

( Disponible en anglais seulement )

22 janvier 2019 | David G. Gerecke, Q.C.

As we summarized in a recent Financial Services & Insolvency Communiqué, Saskatchewan has introduced Bill 151 (the Bill) which amends The Personal Property Security Act, 1993 (Saskatchewan) (the PPSA or the Act).  Over the coming weeks and months our Saskatchewan Financial Services team will bring you a number of posts to inform you about the coming changes and how they may impact you.

This post will focus on changes to the rules on conflicts of laws.  Those are the rules that determine what jurisdiction’s laws will govern priority and perfection, where must a secured party register to be perfected, and what happens when collateral is moved or the debtor changes jurisdictions.

Background to the Conflicts of Laws Amendments

The new conflicts of laws rules are based largely on provisions that came into effect in Ontario at the end of 2015. Ontario’s legislature passed its amendments in 2006, followed by Saskatchewan and British Columbia, but by 2015 no province had proclaimed (made effective) the conflicts of laws amendments into force, as they were hoping that others would join them to achieve the intended effect of generally harmonizing the laws across the country.  Ontario finally proclaimed its amendments into force as at December 31, 2015 and to date is the only province to have done so.

While the new Saskatchewan amendments largely follow those in Ontario, there are some differences.  For readers familiar with the Ontario rules, we will highlight the most significant differences between Bill 151 and the current rules in Ontario.

Validity, Attachment and Perfection

For readers who are not lawyers, there are three terms relating to security interests that will be used frequently in this post: validity, attachment and perfection.  Briefly, they mean the following:

  • Validity of a security interest is simply the question of whether a security interest has been created in collateral. This is a question between debtor and creditor.  If a security interest is not valid, then there is little else to talk about.
  • Attachment is the term used in the PPSA to describe the moment when the creditor obtains a security interest in particular collateral. If the debtor already has an interest in the collateral, the security interest will “attach” when it is granted by the debtor to the secured party.  If the debtor has granted a security interest in property it obtains in the future, attachment will occur at the moment when the debtor obtains an interest in the collateral.
  • Perfection is the combination of attachment and registration by the secured party at the appropriate personal property registry. What is registered is a financing statement.  A secured party is entitled to register in advance under most or all Canadian PPSAs so often the moment that perfection is achieved with respect to particular collateral is when attachment occurs.

Current Saskatchewan Rules

For many goods, the location of the collateral when the security interest attaches will generally determine the applicable law and where the secured party must register to achieve perfection.  That rule applies to most equipment and inventory, for example.  That is not changing under the amendments.

The main exceptions relate to mobile goods (such as, vehicles), intangibles (such as, accounts receivable and intellectual property), and tangible forms of money or similar property (such as, cheques, bills of lading and chattel paper (i.e., rights to payment under a lease of property)), and investment property.

The current rules for most mobile goods and intangibles provide that the applicable law will be that of the jurisdiction where the debtor is located.

For money, cheques, and other financial property that is represented by documentation, if the secured party is in possession, the location of the collateral will govern.  Again, that is not changing under the amendments.  If the debtor is in possession of the documentation, the debtor’s location will govern.  For investment property, the debtor’s location will govern.

As will be apparent, for many types of property it matters where the debtor is located.  The PPSA’s current rules on how to determine a debtor’s location can be summarized as follows:[1]

  • A debtor is located at the debtor’s place of business.
  • A debtor who has no place of business is located at the debtor’s principal residence.
  • A debtor that has a place of business in more than one jurisdiction is located in the jurisdiction where it has its chief executive office.

At times it can be difficult to determine with certainty as to where a debtor is located.  It does not help that the term “chief executive office” is not defined in the PPSA.  Certainty is needed, particularly if creditors are to avoid having to register in every jurisdiction where a debtor might be held to be located.  A major thrust of the amendments is to try to create greater certainty and predictability for creditors.

Please note that some of the points below have been greatly simplified from the actual provisions in the Bill, partly due to the technical nature of the legislative drafting, and partly to reduce the volume of detail.

The Amendments – Location of the Debtor

Pursuant to the Bill, the location of a debtor will vary according to the type of debtor.  The following table sets out the current Saskatchewan rules, the new rules under Bill 151, and the current Ontario rules.

We have included the current Ontario rules because the Bill 151 rules are very similar to Ontario, and Ontario readers may be particularly interested in how the “next” province to address this issue plans to do so.

To make the table simple to read, we have omitted some details, which will be discussed further down in greater length, so the rules are somewhat over-simplified in the table.  Note that when we refer to where a debtor is “incorporated”, that also includes amalgamation or continuance, and it assumes the requirement of Bill 151 that there is an available public record from the relevant jurisdiction.

Current Saskatchewan rules, new rules under Bill 151 and current Ontario rules
Type of Debtor Current Sask. Rules (no differentiation by type of debtor) Bill 151 Current Ontario Rules
Individual Place of business or, if no place of business, location of principal residence Location of individual’s principal residence Location of individual’s principal residence
“Organization” (which includes corporations, partnerships, limited partnerships and trusts) – note that we will break this down into types of Organizations below Place of business of debtor.  If debtor has places of business in more than jurisdiction, where its chief executive office is located Canadian province or territory where Organization is incorporated or otherwise registered Mostly similar to Bill 151, with some differences – see below for differences relating to specific types of organizations.
Corporations incorporated under provincial law (included in Organizations) Place of business of debtor.  If more than one place of business, where its chief executive office is located Location of registered office As set out in articles or other constating documents, or in Canadian province or territory where registered Canadian province or territory where incorporated
Corporations incorporated under federal law Place of business of debtor.  If more than one place of business, where its chief executive office is located Canadian province or territory where its registered office is located Canadian province or territory where its registered office is located
Partnerships other than limited partnerships (included in Organizations) Place of business of debtor.  If debtor has place of business in more than jurisdiction, where its chief executive office is located Canadian province or territory where registered.

If not registered then the default rule below will apply.

For partnerships that are not limited partnerships, the governing law set out in partnership agreement, if any.
Limited partnerships (included in Organizations) Place of business of debtor.  If debtor has place of business in more than jurisdiction, where its chief executive office is located Canadian province or territory where registered Canadian province or territory where the limited partnership is registered
Trusts (included in Organizations, but the rules for being “registered” would not frequently apply because most trusts are not registered) Place of business of debtor.  If debtor has place of business in more than jurisdiction, where its chief executive office is located Where there is a single individual trustee, the location of the individual’s personal residence.

Where there is a single corporate trustee, the Canadian province or territory where corporation is registered (or where its registered office is located if it is a federal corporation).

Where there are multiple trustees, the default rule below will apply.

The governing law set out in the trust instrument, if any.

If no governing law set out in trust instrument, then the jurisdiction in which the administration of the trust is principally carried out.

Default rules (none of the above rules apply) The Saskatchewan rules to date have essentially been what the default rules will be under Bill 151 (but without the relevant terms having been defined). A debtor with only one place of business will be located at that place of business. “Place of business” is defined as place from  where a debtor manages its affairs.

A debtor with multiple places of business will be located at its chief executive office. “Chief executive office” is defined as the place from which the debtor conducts or manages the  main part of its affairs.

The jurisdiction where the debtor’s chief executive office is located.

“Chief executive office” is not defined.

Note that we have covered the rules for Canadian organizations only.  The rules for US organizations follow a similar pattern.  The drafters used defined terms that align with US law, including by defining and using terms such as “public organic record”, “organization”, “registered organization” and “persons” in a manner consistent with recent Uniform Commercial Code amendments.

If an individual dies or is incapacitated, his or her location does not change.  Similarly, there is no change for any other type of debtor (such as a corporation, trust or partnership) that is dissolved, suspended or wound up.

One might ask, what will the rules be for a general partnership with multiple partners that is not registered, which appears to have multiple places of business and there is not a clear chief executive office?  The same can apply for a trust.  The approach in those situations should generally be to register in all of the jurisdictions that might be the location of the partnership or trust, as it generally does not cost much to register and the consequences of not having registered in the correct jurisdiction can be significant.

The most significant difference vis a vis Bill 151 and the Ontario rules is that for partnerships and trusts, the Ontario rule that the partnership agreement or trust instrument will determine the jurisdiction has been removed. This was done mainly for the sake of transparency, as partnership agreements and trust instruments would not be equally available to different types of creditors.

There are a number of other, more technical, differences between the Bill and Ontario law, the most significant of which are:

  • The specific Ontario rules concerning location of an organization apply only where the relevant provincial or territorial law “requires the incorporation, continuance, amalgamation or organization to be disclosed in a public record.”  Bill 151 removes the formulation that the legislation must require disclosure in a public record.  Instead, if a public record exists for an organization, Bill 151’s rules will use that public record to determine the organization’s location.
  • The reference in Ontario to a corporation being incorporated under a “special Act” has been removed.

New General Rules for What Law Applies

Goods Other than Intangibles, Mobile Goods and Electronic Chattel Paper

The new general rules for goods other than intangibles, mobile goods (i.e., goods of a type normally used in more than one jurisdiction) and electronic chattel paper will be as follows:

  1. With respect to these goods the location of the collateral when the security interest attaches will govern perfection (and the effect of perfection or non-perfection) and priority for so long as the goods are situated in a jurisdiction. There are further rules that are triggered if the goods are moved (discussed below). The same applies for a possessory security interest in an instrument, money or chattel paper.  This is fundamentally the same as the rules under the current PPSA.
  2. Where such goods are moved into Saskatchewan from another jurisdiction, there are time frames within which the secured party must register in Saskatchewan to maintain perfection. Those rules have not changed.
  3. Where the parties to a security agreement had planned for any such goods to be moved to another jurisdiction within 30 days of attachment of the security interest, the rules have changed somewhat. Under the existing PPSA, the law of the jurisdiction to which the goods are moved would apply. Under the Bill, the security interest will be valid if it is valid under the laws of either jurisdiction and it may be perfected under the law of either jurisdiction.

If the secured party perfects in the second jurisdiction, the laws of that second jurisdiction will apply before the goods are moved to the second jurisdiction and while they remain in that second jurisdiction.  Note that this is not expected to relieve the secured party from registering in the second jurisdiction once the goods are moved; rather, it just gives the creditor the choice of which jurisdiction to register in first. After goods are moved, the PPSA would require timely registration in the second jurisdiction to maintain perfection (if that registration wasn’t made in the first instance).

For Ontario readers, these rules differ from Ontario’s section 6, which provides that the law of the second jurisdiction will govern.  The rationale given in the Report for the change is that a secured party should have the option of complying with the law of either jurisdiction, and then taking the steps necessary under the law of the second location to preserve the continuity of perfection.

Intangibles, Mobile Goods and Electronic Chattel Paper

The next set of rules relate to intangibles (i.e., accounts receivable, intellectual property and licences), goods of a type normally used in more than one jurisdiction – whether as equipment or inventory that is leased or held by lease by a debtor to others (i.e., a fleet of vehicles for short term leases), and electronic chattel paper (a new concept to the Act introduced in the Bill, which we will discuss in a separate post) the rules will be as follows.  Note that while the terminology has changed somewhat, this is essentially consistent with Saskatchewan’s current PPSA (the differences in how the amendments would apply arise from changes to the rules determining the debtor’s location).

  1. The validity of a security interest in intangibles, goods of a type normally used in more than one jurisdiction, and electronic chattel paper will be governed by the law of the jurisdiction where the debtor is located when the security interest attaches. The law of the same jurisdiction will govern perfection, the effect of perfection or of non-perfection, and the priority of the security interest.
  2. With respect to a non-possessory security interest in instrument, a negotiable document of title, money and tangible chattel paper, the law of the jurisdiction where the debtor is located will govern both validity and perfection.

Collateral Moved to Another Jurisdiction

A third set of rules speak to what happens when collateral is moved to another jurisdiction or, where the debtor’s location is what governs and the debtor changes its location.

  1. The validity of a security interest will continue to be governed by the law of the applicable jurisdiction when the security interest attached.
  2. Where collateral has been moved, or the debtor’s location has changed, issues relating to perfection (and effect of perfection or non-perfection) and priority will be determined by the law of the then current location of the collateral or debtor, as the case may be. While the wording has changed, the rules are essentially the same as they were before.
  3. Where a debtor relocates to Saskatchewan or collateral is moved to Saskatchewan, the rules will be the same as in the current PPSA, although the language used is slightly different. Thus, the secured party will need to perfect by registering in Saskatchewan within 15 days of obtaining knowledge of the change and in any event within 60 days of the debtor relocating or goods being moved.

Conclusion

The conflicts of laws rules are particularly important to lawyers representing creditors taking personal property security, who need to know what jurisdiction’s laws will apply, and where registrations against debtors must be made.  The rules covered by this post are quite technical, so the post itself has needed to be technical in nature.

If any readers would like more information about how the proposed rules will apply to a particular situation, please feel free to contact us and we would be pleased to discuss with you.

There is also an entire part of this topic that we have not covered in this post: the transition rules.  “Transition” is an unhappy word for secured creditors and their lawyers.  It means things will change, and one needs to pay very close attention to when and how they will change, or the creditor’s security and/or priority may be at risk.

We will address the transition rules in a further post to be published in the near future.


[1]   We have used the formulation set out in 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 (the “Report”).

Avis de non-responsabilité

Cette publication est fournie à titre informatif uniquement. Elle peut contenir des éléments provenant d’autres sources et nous ne garantissons pas son exactitude. Cette publication n’est ni un avis ni un conseil juridique.

Miller Thomson S.E.N.C.R.L., s.r.l. utilise vos coordonnées dans le but de vous envoyer des communications électroniques portant sur des questions juridiques, des séminaires ou des événements susceptibles de vous intéresser. Si vous avez des questions concernant nos pratiques d’information ou nos obligations en vertu de la Loi canadienne anti-pourriel, veuillez faire parvenir un courriel à [email protected].

© Miller Thomson S.E.N.C.R.L., s.r.l. Cette publication peut être reproduite et distribuée intégralement sous réserve qu’aucune modification n’y soit apportée, que ce soit dans sa forme ou son contenu. Toute autre forme de reproduction ou de distribution nécessite le consentement écrit préalable de Miller Thomson S.E.N.C.R.L., s.r.l. qui peut être obtenu en faisant parvenir un courriel à [email protected].