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May 14, 2020
Modernizing Amendments to Ontario’s Personal Property Security Act to Come Into Force Amid Increased Need for Electronic Commerce
Amendments to the Ontario Personal Property Security Act1 (the “PPSA”) to allow for the perfection of security interests by control of electronic chattel paper will be proclaimed into force on May 15, 2020. The accommodation of electronic chattel paper in Ontario’s PPSA regime will streamline the process by which lessors and financiers originate, finance and securitize electronic chattel paper, including chattel mortgages, conditional sale contracts and leases. While these amendments were enacted in May of 2019, it is timely that they should take effect in the current context of the global COVID-19 pandemic, which has necessitated rapid modernization and accommodation of electronic forms across all industries.
As outlined in our previous article on this topic, the amendments to the PPSA adopt the concept of perfection by control of electronic chattel paper, which refers to chattel paper created, recorded, transmitted or stored in digital or other intangible form by electronic, optical or mechanical means. In addition to the rules for perfection by possession of “tangible” chattel paper (ie. physical control of hard copy chattel paper with a “wet-ink” signature) already prescribed by the PPSA, the amendments provide an equivalent process for perfecting a security interest in electronic chattel paper by control. In order to establish perfection by control of electronic chattel paper, the following six requirements, enumerated in the Section 1(3) of the PPSA, must be satisfied:
- a single authoritative record of the electronic chattel paper exists that is unique, identifiable and unalterable;
- the authoritative record identifies the secured part as the transferee of the record;
- the authoritative record is communicated to and securely maintained by the secured party or the party’s designated custodian;
- copies of or amendments to the authoritative record that add or change an identified transferee of the authoritative record can be made only with the consent of the secured party;
- each copy of the authoritative record and any copy of a copy is readily identifiable as a copy that is not the authoritative record; and
- any amendment of the authoritative record is readily identifiable as to whether it is authorized or unauthorized.
In addition, the existing super-priority rule for chattel paper in Section 28(3) of the PPSA, which required purchasers (ie. buyers and lenders) of tangible chattel paper to have physical possession of such chattel paper to obtain a super-priority interest, has been repealed and replaced by a new chattel paper super-priority rule that accommodates electronic chattel paper. Under the new rule, a purchaser of chattel paper will have priority over any other security interest if the purchaser either:
i. takes possession of the tangible chattel paper; or
ii. obtains control of the electronic chattel paper (in accordance with the requirements of Section 1(3)).
The amendments also add a new priority rule to the PPSA to address potential priority disputes between purchasers resulting from situations where chattel paper exists simultaneously in both tangible and electronic formats. Under the new section 28(3.1) of the PPSA, in the event the rights arising out of tangible chattel paper are transferred to a purchaser in the form of an electronic chattel paper for new value and in the ordinary course of the purchaser’s business, but then are subsequently transferred to a different party who takes possession of the tangible chattel paper for new value and in the ordinary course of that party’s business, the purchaser of the tangible chattel paper will take priority over the purchaser of the electronic chattel purchaser, so long as the tangible chattel paper does not indicate that it has been assigned to anyone other than the purchaser.
The coming into force of these amendments will contribute to ongoing modernization efforts with respect to Ontario’s laws in light of the increased need for accommodation of electronic forms, and will assist lenders and purchasers by expediting the chattel paper financing and securitizing process, while reducing costs associated with that process.