September 2012 

In November of 2010, The Supreme Court of Canada held that where a provincially governed (Personal Property Security Act) security interest came in conflict with a security assignment taken by a chartered bank under the Bank Act (Canada), that is, where both the security interest and the security assignment covered the same property with each secured party claiming priority for its respective interest, the priority rules set out in the Bank Act did not provide an answer to the question, at least for the fact situations in the two cases the Court then considered.  In these two cases (the "Innovation Case" and the "Radius Case", hereinafter, collectively, the "Previous Cases"), in essence, the Court held that, due to the constitutional primacy of the federal Parliament over the provincial legislature, a provincial Personal Property Security Act could not set out rules to solve priority disputes; the Bank Act did set out rules for determining priority between these types of interests in some situations, but not the situations in the Previous Cases.

In both of the Previous Cases, a credit union took a provincially governed personal property security interest in certain collateral and failed to register notice of same in the appropriate Personal Property Registry.  Thereafter, a chartered bank took a Bank Act, Section 427 security assignment affecting the same property, and the bank did everything it was supposed to do under the Bank Act to establish the priority of its security assignment (including filing a Notice of Intention by the debtor to grant the security assignment to the bank in the appropriate registry office).  The Court held that the fact that the credit union had not registered a financing statement under the Personal Property Security Act did not adversely affect its priority position vis-à-vis the bank with respect to its Bank Act security assignment, because (as noted above), the Bank Act did not provide a rule to determine priority in this particular situation.  The Court then went back to basic principles to determine priority, including concepts such as "first come, first served" and "once you've given away all your rights in property, you have nothing further to give to anyone else".

The result of the Previous Cases was to put chartered banks taking only Bank Act security in a difficult position.  Even where a bank searched the debtor's name in the appropriate Personal Property Registry, the bank will not find any record an unregistered provincially governed security interest against the debtor's name.  In an earlier paper dealing with the Previous Cases, the writer suggested that one solution to this dilemma would be for a bank to take both Bank Act security and Personal Property Security Act security.  However, by far, the best solution would be for Parliament to amend the Bank Act to provide an appropriate priority rule for this situation.  This has now been done.

Sections 426(7), 426(7.1), 428(1), 428(1.1) and 428(2) of the Bank Act now make it clear that where a provincially governed security interest is not duly registered ("perfected"), a properly taken and subsequently acquired Bank Act security assignment will prevail over the charged secured property.  The legislation does however make it clear that if a bank takes a Bank Act security assignment with the knowledge that the affected collateral is already subject to a previously created but unregistered provincially governed personal property security interest, then the bank's security will be subordinate.  In the Previous Cases, the debtors, either intentionally or unintentionally, did not advise the banks of the previously granted provincially governed security interests.  Thus the banks didn't know about the pre-existing security, and searching in the Personal Property Registry would have told them nothing.

This is a big improvement in the law of secured debt transactions.