Canada’s Provincial Personal Property Security Acts (“PPSA”) have set many tiny tripwires for secured lenders. In Part 1 we saw how misspelling a borrower’s name stripped a factoring company of its security in the borrower’s accounts receivable. In Part 2 we will look at the change-of-name provisions in Ontario’s PPSA and the consequences of failing to heed them.
Subsection 48(3) of the Ontario PPSA is as follows:
Where a security interest is perfected by registration and the secured party learns that the name of the debtor has changed, the security interest in the collateral becomes unperfected thirty days after the secured party learns of the change of name and the new name of the debtor unless the secured party registers a financing change statement or takes possession of the collateral within such thirty days.
This provision ensures that when a borrower changes its name, there can continue to be only one party subject to PPSA registrations, since the registrations under the old name must either be transferred or they will automatically expire 30 days after the secured party is notified.
A corporate name that has value, whether as a brand, a trademark, or for some other reason, is treated as one of the assets of an insolvent business and is subject to sale to realize on its value. The usual practice is to sell the right to use the corporate name and then change the name of the insolvent to its original corporation number.
Such was the case in 1231640 Ontario Inc. (Re), where the original name, The State Group Limited, was sold by a court-appointed interim receiver, whereupon the corporation number became the new name. The Royal Bank of Canada (“RBC”) was the first secured lender to The State Group and as party to the receivership had received notice of the name change. RBC did not register its security under the new name. More than 30 days later, the receiver assigned the company into bankruptcy. The company later received tax refunds of $4,325,000, bringing the total receipts held by the Trustee in Bankruptcy to approximately $5,515,000.
RBC filed a proof of claim with the Trustee comprised of an unsecured claim in the amount of $420,822,000 and a secured claim in the amount of $20,000,000. The Trustee asked four different lawyers for their opinions on the validity of RBC’s security and received four different answers, so the Trustee applied to the Court for direction. This diversity of opinion arose from a question in insolvency law, namely, whether the position of secured parties is fixed by the appointment of a receiver by the Court, but I will not tease out the intricacies of this question here. We need note only that the Trustee’s and RBC’s difficulties could have been avoided by RBC having filed the security under the new corporate name when they were notified of it.
When the trial court found that RBC’s security had expired 30 days after the name change, RBC appealed. The Ontario Court of Appeal upheld the lower court’s finding.
If RBC had been successful at trial, they would have been entitled to all of the receipts of the bankrupt estate. Now they will receive a fraction of the proceeds along with all the other unsecured creditors.
The second secured lender, St. Paul Guarantee Insurance, also did not register its security under the new name. If they had thought to do so, they might have scooped all of the proceeds. But like RBC’s, St. Paul’s claim is now unsecured.
Implications for lenders:
- The various PPSAs provide strict rules that lenders must ensure they follow. Failure to comply can be disastrous.
- Lenders must maintain a system of internal control to reduce the risk of failures under the PPSA. While lawyers are needed to detail the risk exposures, the development of internal controls that are sufficient yet economic requires specialized expertise. Contact me directly if you need to discuss your options.
- Front-line staff on both the sales and the recovery sides of lending must be trained on a continuing basis to recognize and react to PPSA risks.
