Ontario Court Of Appeal Clarifies Requirements For Foreclosure On Investment Property Under The Personal Property Security Act

• Published date: 12 May 2021
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Litigation, Mediation & Arbitration, Financial Services, Commodities/Derivatives/Stock Exchanges, Trials & Appeals & Compensation, Securities
• Law Firm: Stikeman Elliott LLP
• Author: Mr Malcolm Peck-McQueen

In its recent decision in Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd., 2021 ONCA 221, the Ontario Court of Appeal (ONCA) clarified the requirements for foreclosure on investment property under the Personal Property Security Act (Ontario) (the PPSA). The decision confirmed that a secured creditor's right under Section 17.1(2) of the PPSA to "sell, transfer, use or otherwise deal" with investment property over which it has control does not include an independent right of foreclosure without notice. A secured creditor that wishes to foreclose on such collateral must comply with the applicable procedural requirements in Part V of the PPSA. However, the ONCA also underscored the need for courts to take a flexible approach to the foreclosure notice requirements where a clear intention to retain collateral in satisfaction of the debt has been demonstrated to the debtor in advance of the foreclosure.

Background

The principals of Romlex International Ltd. and Canada Grace Park Ltd. incorporated Atlas Springbank Developments Ltd. (Atlas Springbank) in connection with a plan to develop certain commercial real estate. Romlex held 55% of Atlas Springbank's shares (the Pledged Shares) and Canada Grace held the remaining 45%.

For reasons not disclosed in the decision, Atlas Springbank made a loan to Atlas (Brampton) Limited Partnership (Atlas Brampton), a limited partnership owned by the principal of Romlex. Atlas Brampton promptly defaulted on the loan by failing to make its first interest payment. Atlas Springbank, Romlex, Atlas Brampton and Canada Grace, among others, entered into an agreement (the Security Agreement) pursuant to which Romlex agreed to pledge the Pledged Shares to Canada Grace and agreed that the Pledged Shares would be "transferred" to Canada Grace for the nominal sum of $2 upon (further) default by Atlas Brampton, thereby allowing the principal of Canada Grace to take complete ownership and control of Atlas Springbank. (Presumably, there was some disagreement between the principals of Romlex and Canada Grace with respect to the loan arrangement, which gave rise to the security being granted to Canada Grace, although there is no mention of this in the decision.)

Atlas Brampton again promptly defaulted by (i) being put into receivership by a third party almost simultaneously with the execution of the Security Agreement and then (ii) subsequently failing to pay the balance of the loan when it came due. In response, Atlas Springbank's solicitor sent a notice of default (the Notice of Default) informing the principal of Romlex that she had transferred the Pledged Shares to Canada Grace pursuant to the Security Agreement. Atlas Brampton, Romlex and the principal of Romlex (collectively, the Debtor Entities) applied to the Ontario Superior Court of Justice (SCJ) for, among...