Canada: A Second Chance At Perfection: Saskatchewan's PPSA Amendments And Re-Registration

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 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 amendments that address two priority competitions that may arise when a secured party's registration is discharged in error or lapsed and then re-registered.

Currently, the PPSA contains the following provision:

Thus, there are protections for secured parties who have their registrations lapse, or discharged in error or without authorization. Discharge without authorization is, fortunately, less likely to occur in Saskatchewan than some other provinces because most registrations under Saskatchewan's PPSA generate a RIN number, which is essentially a password, which must be provided when amending or discharging a registration, but it can still happen.

There are two important scenarios that are not addressed by section 35(7).  Bill 151 seeks to address those scenarios.  They are as follows:

(a) before the secured party re-registers, the debtor becomes bankrupt, and

(b) before the lapse or discharge, the secured party had priority over an enforcement charge (i.e., a registered writ of execution), and the lapse or discharge of the secured party's registration would give the enforcement charge priority.

In this communiqué, we will explain how Bill 151 will provide additional protection to secured parties whose registrations lapse or are discharged in error or without authorization.

Secured Creditor whose security interest becomes unperfected vs subsequent trustee in bankruptcy: Who has priority?

The integrity of the PPSA's registration system is based on the presumption that a party may rely on a registry search result regarding the presence and priority of security interests against a debtor. The system is designed to be a "one stop shop" for learning about perfected security interests (though Saskatchewan has deliberately prevented any sort of integration with the Bank Act security registry thereby requiring a search of two separate registries). 

Where a security interest becomes unperfected due to an inadvertent lapse or discharge, section 35(7), reproduced above, allows the secured party to re-register within 30 days and maintain its priority.

There are, however, parties who interact with security interests but who do not actually rely on the registry.  Those include trustees in bankruptcy.  Section 20(2) of the PPSA provides that a security interest in collateral is not effective against a trustee in bankruptcy if the security interest is unperfected at the date of bankruptcy.  Under the current rules, it does not matter why the security interest is or has become unperfected at such date.

For those not as familiar with PPSA terminology, it is possible to have a security interest but not be perfected.  Perfection by registration is achieved where a secured party both has a security interest in collateral and is properly registered under the PPSA.

The logic behind section 35(7) is that where a secured party re-registers within the 30 days of the inadvertent lapse or discharge and there are no intervening registrations or subsequent registrants have not made any new advances, no one has relied on the registry to their detriment so the secured party who became unperfected may be permitted to re-register and maintain priority without anyone suffering harm.

Under the current PPSA, as a result of Section 20(2) a trustee in bankruptcy would take priority over the secured party who became temporarily unperfected – but since trustees in bankruptcy do not rely on the registry and are not thereby prejudiced by the re-registration of a lapsed or discharged registration there is a disparity in the application of the rules.  Bill 151 seeks to address that disparity by adding the following as subsection 20(2.1)(a):

Under the new section 20(2.1)(a) the secured party's priority status will be maintained if it re -registers within 30 days from the date of discharge or lapse. This amendment is specifically with respect to a security interest which lapses and is not renewed or is erroneously discharged. The opportunity afforded by the proposed amendment helps to avoid injustice to a party with a registered security interest in cases where there has been an inadvertent, fraudulent or otherwise unauthorized discharge or lapse of its registration, and recognizes that bankruptcy trustees do not rely on the register such that there is no prejudice where a temporary loss of perfection is corrected.

Priority between a security interest which becomes unperfected vs subsequent enforcement charge

The second situation addressed in section 20(2.1) is where an enforcement charge is already registered against the debtor and a security interest becomes unperfected and then is re-registered.

In Saskatchewan, an enforcement charge is a relatively new creation pursuant to The Enforcement of Money Judgments Act (Saskatchewan).  It replaced writs of execution.  An enforcement charge comes into being when a judgment is registered in Saskatchewan's judgment registry and will be treated as a registered security interest for priority purposes, taking priority over all subsequently registered security interests other than purchase money security interests.

Currently, where a secured party's registration lapses or is discharged and then is re-registered within 30 days, the PPSA has no language that addresses the priority vis a vis an already existing enforcement charge that had been behind the secured party's registration before it became unperfected.   Section 35(7) does not cover that situation.

As with subordinate security interests and trustees in bankruptcy, a subordinate enforcement charge is not prejudiced if the secured party is permitted to correct its temporary loss of perfection by re-registering within 30 days.  The new section 20(2.1) goes on to include the following subsection (b) which immediately follows section 20(2.1)(a) set out above:

Pursuant to the new provision, an enforcement charge will receive the same treatment as a subordinate security interest when a prior registered secured party suffers a temporary loss of perfection and then re-registers within 30 days.  This is entirely sensible, as a subordinate security interest and subordinate enforcement charge have similar status, and will not have changed their position in reliance on the registry (the difference being that the holder of an enforcement charge is not a creditor who would be making advances during the intervening period).

Key Takeaway

  The PPSA already contains provisions in section 35(7) that give a secured party the chance to cure an inadvertent lapse or discharge, or unauthorized discharge, by re-registering within 30 days, and thus preserving priority as against other secured parties. It makes little sense that such a re-registration would not maintain priority as against subordinate enforcement charges and trustees in bankruptcy who are appointed in the intervening period.  Bill 151 addresses these scenarios by introducing section 20(2.1).

While these amendments offer secured parties the chance to maintain priority by quickly re-registering, they should not detract from the need to have proper mechanisms in place to ensure continuous perfection. Every secured creditor ought to take prudent measures to renew its registrations before expiry to avoid the need to rely on section 35(7) or the proposed new section 20(2.1).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.