Law Times

Page 12 March 23, 2015 • Law Times www.lawtimesnews.com Insolvency bar eager for changes to Personal Property Security Act BY MICHAEL McKIERNAN For Law Times nsolvency lawyers say Ontario risks losing ground to Quebec in the finan- cial services sector unless it imple- ments amendments to the province's Personal Property Security Act to facili- tate cash collateral. The provincial government indicated in its 2012 and 2013 budgets it was ready to make changes that would allow perfec- tion of a security interest in cash by con- trol rather than registration. However, nothing has happened since to imple- ment the amendments and the govern- ment dropped the proposal from subse- quent budget announcements. "These amendments are long over- due," says Rob Scavone, a partner in the Toronto office of McMillan LLP. Scavone has spearheaded the Ontario Bar Association's ongoing drive for the changes and co-authored a submission on the issue to the provincial government in February 2012. "Ontario is at a competitive disadvantage with respect to a large variety of capital mar- ket transactions compared with the U.S. and the European Union, which already have regimes that permit perfection of a security interest in cash collateral by control," he says. In November, Quebec's provincial government introduced legislation that would make it the first Canadian prov- ince to permit counter parties to obtain first-priority security interest on cash. "If Quebec gets there first, Ontario would no longer be the Canadian leader with re- spect to financial markets," says Scavone. "I could foresee some businesses mov- ing to Quebec because of the absence of a cash-collateral friendly regime here." Under the Ontario act as it stands, se- curity interest in cash collateral can only be perfected by registration, something that effectively rules it out as a viable op- tion in today's fast-paced capital markets environment, according to Scavone. "To do the due diligence, you need a lead time of maybe one or two months," he says. "In a lot of these transactions, time is of the essence. If they have to take place in days or even hours, you don't have the luxury of doing the registration and all the searches that are going to give counter parties the assurances they need." In addition, Scavone says the complex- ity of the rules surrounding perfection by registration mean secured parties can nev- er be entirely certain of first priority against other creditors when dealing in cash. In 2006, the province introduced the Securities Transfer Act that provided for automatic and instant first priority to se- cured parties where the collateral is in the form of securities in an account under the creditor's control. The OBA's proposal, reflected in the 2012 budget announcement, would extend the control regime beyond collateral held in securities to include collateral held in cash. Margaret Grottenthaler, a partner in the Toronto office of Stikeman Elliott LLP, says the 2006 reforms have been very success- ful but notes cash is a much more desirable form of collateral than securities. "It's a much cheaper and more straight- forward form of collateral for a business to provide than buying securities or pro- viding a letter of credit," she says. Grottenthaler says she has been dis- couraged by the provincial government's lack of action since 2012 and believes the Supreme Court of Canada's 2013 decision in Re Indalex Ltd. may have played a part in spooking it. According to Grottenthaler, s. 30(7) of the Personal Property Security Act creates a super priority for beneficiaries of deemed trusts arising under the Pension Benefits Act. Since Indalex drastically ex- panded the potential scope of deemed trusts to include wind-up deficiencies, there has been a concern the super priority could also trump the cash collateral. "I don't believe that's what was intended but because it's about pensions, it becomes a political issue and everything is delayed even though, if you ask the big pension en- tities, they would completely support the amendments," says Grottenthaler. "I'm hoping it's just a delay and not a complete negation of support." Shane Pearlman, a partner in the fi- nancial services group at Borden Ladner Gervais LLP, says the cash collateral issue isn't the only one the provincial govern- ment should act on to improve the Per- sonal Property Security Act. Back in 2006, the provincial legislature passed Bill 152 that included a number of amendments to the act that the government has never proclaimed to be in force. One would change s. 7 of the act to create a clear test for determining a debt- or's location. For debtors incorporated under the laws of a Canadian province or territory, it would deem them to be lo- cated in the jurisdiction where they were incorporated. For federally incorporated debtors, the location would be the same as their head office. And for debtors in- corporated under the laws of a U.S. state, they would be deemed to be located in that jurisdiction. Currently, the act deems the debtor's lo- cation to be the jurisdiction where it has its place of business. When there's more than one place of business, the debtor's "chief ex- ecutive office" determines jurisdiction, but the act doesn't define that term. "The test is quite difficult, which can sometimes lead to inefficiencies and du- plication where you have various juris- dictions involved. It can get very costly," says Pearlman. Bill 152 also promised to remove the act's outdated system for describing col- lateral. Introduced as part of an early computerization project, the goal was to save computer memory by having par- ties check general descriptors of collateral rather than give a narrative description. "These changes are needed to improve and modernize the [act], and I'm hopeful they will be made," says Pearlman. LT FOCUS When your area of practice is shaped by the courts, your job's tougher than most. You need to know which cases matter – and why they matter. Fortunately, bankruptcy/insolvency practitioners can turn to Rescue! The Companies' Creditors Arrangement Act, 2nd Edition for expert insight on the most important decisions and developments in this critical area of legislation. Learn how the latest decisions in insolvency law have shaped and defined the scope of the Companies' Creditors Arrangement Act (CCAA) – and exactly how they'll affect your next corporate restructuring proceeding. You'll get accurate, practical guidance to the most important piece of legislation in bankruptcy/insolvency practice. An invaluable research tool, a convenient reference to procedure, and a welcome source of practice aids, Rescue! 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