The PPSA and You: Becoming A Secured Creditor
When you lend money or extend credit to another person or company, you establish a relationship which you could call a lender/borrower relationship or a creditor/debtor relationship. Lenders need to protect themselves by ensuring they will get their money back, ideally by being repaid. But if that doesn’t happen the lender needs to gain legal access to something owned by the borrower that has equal value to the amount being borrowed.
The Personal Property Security Act RSO 1990, also known as the PPSA, is a set of rules created to protect the people involved in both sides of a transaction where lending and borrowing are involved. We have a companion article that describes the act in more detail: What You Need to Know about the PPSA).
But here we will talk about what it means to become a secured creditor. A secured creditor generally has the first right to seize and sell collateral in order to recoup losses when a borrower defaults. In many cases, a defaulting borrower might leave several people in their trail, all of whom want compensation for a failed lending/borrowing arrangement. Secured creditors generally get to go to the front of the line and stand a better chance of getting some or all of their money or assets back. But there are some exceptions and some rules. This is what the PPSA helps to clarify.
Acronym alert: there are three acronyms in this document that look very similar to each other. They are: PPSA, PPSR and PMSI. To make it easier to keep track of these, here’s a trick:
- The A in PPSA stands for Act. It is the statute that makes the rules for lending and borrowing.
- The R in PPSR stands for Registry. It’s where people register the details of the lending/borrowing arrangement
- PMSI is a priority registration that helps ensure a creditor gets paid before other creditors in a default situation. So, think of the phrase Pay Me Soonest, I Insist! – PMSI!
The PPSA gives guidance about the rights of the parties involved: the lender and borrower, (also known as the lessor and lessee, or the creditor and debtor), specifically when personal property is used as collateral. Once a loan agreement has been made, it is especially important that the creditor registers their interest in the borrower’s collateral, (called a security interest) under the PPSA. This means that a subsequent lender cannot also register a potentially superior interest in the same subject item, whether it is property, a vehicle, or equipment.
What Defines Personal Property
In 1997, Justice Epstein of the Ontario Court of Justice issued a ruling that led to the definition of Personal Property as everything that can be owned that is not real estate. This includes “moveable and tangible things,” as well as “incorporeal” property, which consists of personal annuities, stocks, shares, patents and copyrights.”
How to Become a Secured Creditor
To become a secured creditor, you must become familiar with the PPSA’s registration system, called PPSR for Personal Property Security Registration. It’s a database managed by Service Ontario that provides for the central registration of liens. More information on the PPSR is available in our article What You Need to Know about the PPSA ).
First, some terminology:
- You are a creditor if you (as a person or as an organization) are owed a sum of money or specific performance.
- The debtor is the person or entity that owes a sum of money or specific performance and who has received a benefit from you, the creditor. A debtor can also be called a borrower, but for simplicity’s sake we will stick to the term debtor.
- Your security interest is your legal right over the debtor’s property. This is granted by the debtor in exchange for terms of payment or loan. The property at stake is often referred to as collateral. A lien is the actual legal claim against this collateral. And this is where you become a secured creditor, since the loan is essentially protected by your right to seize an asset to recoup the money being loaned. NOTE: All liens are a security interest, but not all security interests are liens. For example, if a parent offers themselves up as a co-signor on an adult child’s car loan – both parties have given a security interest” to the lender but only the personal property owner has a lien.
- A Lien Claimant is a person or entity entitled to claim an interest against tangible personal property that has been conferred as a security interest (collateral) under a contract.
A special note about liens: Most security interests happen when a contract is created between parties. But it is also possible for a lien to arise by Operation of Law. For example, in many jurisdictions, a mechanic who repairs a car has lien rights over the car which can be invoked if the car owner fails to pay for the repairs. This lien arises automatically, which is what Operation of Law means. To learn more about this, check out our article, Repair and Storage Liens Act (RSLA).
Using the PPSA to Become a Secured Creditor
To become a secured creditor, the PPSA demands that there is a written mutual agreement that identifies:
- the names of all parties involved
- the legal rights of all parties involved
- the values or amounts owed
- clear descriptions of the collateral
- terms and deadlines
A Special Note About Point-Of-Sale Financing
When a retailer offers point-of-sale financing and secures the transaction with a registered lien, they are generally protected by a Purchase Money Security Interest (PMSI) which is also registered on the PPRS. The item that was sold in the transaction, such as a vehicle, serves as collateral that can be seized in the case of nonpayment. In general a creditor who holds a PMSI gets to go to the “front of the line” in terms of recovering the collateral. It’s easily remembered as “Pay Me Soonest! I Insist!”
A lender or lien claimant must register their security interest on the registration system (PPSR). The Ontario Ministry of Consumer and Business Services currently accepts mail-in registrations and runs an online real-time registration system. A claimant can also retain the services of a reporting agency to do the registration for them.
There are five vital steps to the process:
- Search the PPSA database and do a routine credit check to make sure there are no existing liens or other conflicts on the collateral.
- Obtain a signed agreement that contains all of the details about the loan and includes an agreement between the parties to register the security interest (collateral) for the loan.
- Register your security interest as soon as possible after completing the transaction.
- Do a final PPSA search to ensure your registration is properly recorded.
- After receiving a validation certificate from the Ministry, sign and send a copy to the borrower within 10 days of effecting the lien. This is required to make the lien valid (also known as “perfecting”).
Recent Ontario Legislative Changes
Effective December 31, 2020, a new PPSA rule requires that location information of the debtor/borrower is complete and up-to-date, and that any changes must be submitted promptly.
Liens Need to Be Registered In More Than One Province
Liens need to be registered in more than one province if it is anticipated that the debtor might move the asset outside of Ontario. The onus is on the lien claimant (lender) to monitor their debtor's location changes and act accordingly.
Liens registered under the PPSA can exist for periods up to 25 years or even perpetually. Registrations are renewable only if they are renewed before the current lien expiration date. Financing statements cannot be renewed after they have expired.
RSLA liens which focus on repair or storage of items such as vehicles are restricted to no more than three years.
If a Debtor Defaults
If a debtor defaults under the terms of your agreement and there is an active registered security agreement, you can contact an Ontario bailiff to discuss the situation. You must provide the required documentation to request repossession, at which point, the bailiff will take care of locating, repossessing and storing the asset lawfully and safely, and ensuring that PPSA-specific notifications are prepared and served on the debtor(s) and any other related parties.
Informing the Debtor as to Your Next Steps
Once you have seized the collateral asset, the PPSA requires that you serve the debtor and all other registered lien claimants with a Notice to Sell or to Retain, depending on your preference. The Notice should mention vital details such as the amounts still owed, loan arrears, interest, recovery costs, and storage costs. The parties must be allowed a maximum of 15 days to respond, (25 days if sent by registered mail) before a sale can proceed.
The debtor or anyone entitled to receive the notice has the right to pay back what is owed (called “redeeming”) within the allowed time frame and for the amount provided in the Notice of Intention to Sell.
Who Gets Paid First When There are Multiple Creditors?
When there is more than one lien on the same asset, figuring out who gets paid first can be a challenge. It is critical to know who registered first, because any claimants registered ahead of you will be paid before you from the sale of the asset. So it is important, if you are making arrangements for a seizure, to ensure that the seizure doesn’t cost more than what you stand to recover from the sale of the asset.
When there are multiple creditors, an RSLA lien will take top priority, followed by a PSMI interest. Following these, any PPSA registered liens will be considered in the order they were registered.
Revenues from the Sale of the Asset
Sometimes, the revenue from the sale of the asset might not equal the amount of money owed by the debtor. So, when you prepare your agreement/contract, make sure to confirm if the debtor is liable for any financial shortfall, since PPSA regulations do provide for the recovery of any shortfall if the contract allows. If the lien claimant sells the seized collateral for fair market value, and if that amount is less than the balance due plus costs, the lien claimant may be able to bring a court claim to recoup the shortfall.
Conversely, if the collateral sells for more than is owed to the lien claimant, the residual funds, subject to other registered liens, may be refundable to the debtor.
Napier Bailiffs Ltd. is a private corporate Civil Enforcement Agency appointed by the Ontario Government to act on behalf of business, individuals, or municipalities to seize or repossess property and Commercial Landlords to evict Tenants. Pursuant to regulations within the Personal Property Security Act, Repair Storage Lien Act, Commercial Tenancies Act and Municipal Tax Act.
DISCLAIMER: We are not a law firm, the information provided is not intended to substitute for legal advice. Always seek appropriate legal counsel for your unique circumstances.