Amendments to the Ontario Personal Property Security Act (PPSA) were enacted on May 29, 2019, which will make it easier for lessors and financiers to originate, finance and securitize electronic chattel paper (e.g., leases, conditional sale contracts and chattel mortgages) once they have implemented secure electronic-vaulting systems. These amendments are based on, but are not identical to, the electronic chattel paper provisions in Article 9 of the United States Uniform Commercial Code (UCC). These changes will be of great interest to automotive and other equipment finance companies, especially those who finance the sale or lease of vehicles and equipment through dealer networks.
Ontario is the second province to make such modernizing amendments. Similar amendments to the Saskatchewan Personal Property Security Act were enacted on May 15, 2019. As of the date of this bulletin, neither the Ontario government nor the Saskatchewan government has announced when its electronic chattel paper amendments will come into force.
Some of the more notable changes that will be made to the PPSA when the electronic chattel paper amendments come into force are described below.
TWO TYPES OF CHATTEL PAPER
The PPSA now recognizes two types of chattel paper:
- Electronic chattel paper. This term refers to chattel paper created, recorded, transmitted or stored in digital or other intangible form by electronic, optical or mechanical means.
- Tangible chattel paper. This term refers to chattel paper evidenced by information inscribed on a tangible medium (e.g., the “wet-ink” signed document).
SECURITY INTEREST PERFECTED BY “CONTROL”
A security interest in electronic chattel paper can be perfected by control, which is a new and better method (over perfection by registration) for a buyer or lender to perfect its ownership interest or security interest in electronic chattel paper. Control of electronic chattel paper is intended to be equivalent to perfection by possession of the “wet-ink” original chattel paper. In order to achieve perfection by control, six enumerated requirements in section 1(3) of the PPSA must be satisfied.
Essentially, there must be a single authoritative record of the electronic chattel paper that:
- Is unique, identifiable, distinguishable from any copies and, subject to limited exceptions, unalterable;
- Identifies the secured party as the transferee of the record; and
- Is communicated to and securely maintained by the secured party or the secured party’s designated custodian.
CHATTEL PAPER SUPER-PRIORITY RULE REPLACED
The existing chattel paper super-priority rule in section 28(3) of the PPSA, which only applied to what is tangible chattel paper, will be repealed and replaced by a new chattel paper super-priority rule for purchasers (i.e., buyers and lenders) of tangible chattel paper and electronic chattel paper:
- Tangible chattel paper. The purchaser will have priority if it takes possession of the “wet-ink” original chattel paper in the ordinary course of the purchaser’s business and for new value.
- Electronic chattel paper. The purchaser will have priority if it obtains control of the electronic chattel paper in the ordinary course of the purchaser’s business and for new value.
- Exception to chattel paper super-priority rule. The purchaser cannot take advantage of this super-priority rule if the purchased chattel paper indicates or is “marked” that such purchased chattel paper has been assigned to an identified assignee that is not that purchaser. Accordingly, knowledge of prior interests in the chattel paper will not adversely affect the purchaser’s rights (as it could do under the existing chattel paper super-priority rule and continues to do so under Article 9 of the UCC), unless those interests are indicated in or marked on such chattel paper.
NEW PRIORITY RULE ADDED
To deal with the possibility that chattel paper may exist at the same time in both tangible and electronic formats, a new priority rule will be added to the PPSA to deal with a priority dispute between a purchaser of tangible chattel paper and a purchaser of the same chattel paper in an electronic format.
Under new section 28(3.1) of the PPSA, if the rights arising out of tangible chattel paper are transferred to a purchaser in the form of electronic chattel paper in the purchaser's ordinary course of business and for new value, and if the tangible chattel paper itself is transferred to another purchaser who takes possession in the ordinary course of that purchaser’s business and for new value, then the interest of the purchaser of the tangible chattel paper will have priority over the interest of the purchaser of the electronic chattel paper, so long as the tangible chattel paper does not indicate that it has been assigned to an identified assignee that is not the purchaser of such tangible chattel paper.
There is no priority rule under Article 9 of the UCC that corresponds to this new priority rule in section 28(3.1) of the PPSA.
These amendments will reduce the overall costs of originating electronic chattel paper and the financing thereof. In addition, because the requirements to achieve control of electronic chattel paper under section 1(3) of the PPSA track the safe-harbour provisions under Article 9 of the UCC, we expect Ontario lessors and finance companies will be able to take advantage of U.S. tested, approved and accepted electronic-vaulting systems to control the origination, storage and transfer of their electronic chattel paper. Using such U.S. systems and approaches should facilitate acceptance by their funders, rating agencies, investors and other securitization parties of such electronic chattel paper.
For further information, please contact:
Michael Burke 416-863-3866
Nadir Ali Khan 416-863-2234
or any other member of our Financial Services group.
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