The common law provinces each have legislation dealing with the registration of security agreements against personal property. These acts, each of which are named the Personal Property Security Act ("PPSA"), provide a complex but complete code for registering security interests against property, and for determining the priority between various creditors' claims to that property. Proper security can protect a creditor's rights when a debtor goes bankrupt.
It is generally the case that strict compliance with the provisions of the PPSA is required to secure a place in its priority scheme. However, a recent Alberta decision should serve as a reminder to both secured lenders and borrowers that errors in complying with PPSA requirements do not extinguish the obligations of debtors who have agreed to give security.
In Tremblay (Re), 2018 ABQB 158, the bank had been granted security over a mobile home owned by an individual who subsequently went bankrupt, and had registered that security pursuant to the Alberta PPSA. Normally, this registration would give the bank priority over the trustee in bankruptcy, and allow the bank to satisfy the amounts owed to it by realizing against the mobile home.
However, in this case, the bank's underlying security agreement was defective, as it failed to properly describe the security. The result was that the bank did not have priority over the trustee. The trustee sold the mobile home for $75,000 and received the funds in excess of $40,000.
The bankrupt claimed entitlement to the $40,000 based on the exemptions available to debtors under Alberta provincial law (the same law in BC allows an exemption of $9,000 or $12,000, depending on where a bankrupt's residence is located). However, the bank claimed it was still entitled to those funds on the basis that it had been granted security over the mobile home by the bankrupt, and therefore the bankrupt could not claim the exemption as against the bank.
The court found it was clear that the parties had intended the bank to lend money to the bankrupt in exchange for security over the mobile home, and the defective agreement between them was rectified to create effective security. The bank ultimately received the $40,000, and salvaged some of their loan.
Secured lenders or creditors who have questions about the validity of their security, or how it might be impacted by insolvency, would be wise to seek the advice of experienced counsel to determine their rights.