Parliament Seeks To Clarify Priority Between Bank Act And PPSA Security Interests

On November 23, 2011, the federal government proposed amendments to the Bank Act (the "Amendments") which effectively overturn two Supreme Court of Canada ("SCC") decisions in the area of banking and financial services law. These decisions relate to the priority between security taken under Section 427 of the federal Bank Act (a "Bank Act Security Interest") and security taken under one of the provincial Personal Property Security Act regimes (a "PPSA Security Interest").

In two concurrent decisions released in November 2010,1 the SCC ruled that a prior (i.e. first in time) but unperfected PPSA Security Interest had priority over a subsequent, but registered, Bank Act Security Interest. In its reasoning, the SCC cited the common law rules of "first in time" and "nemo dat quod non habet" (no one gives what they do not have). These decisions came as a surprise to many in the banking and legal communities because, when determining priority within each of the respective Bank Act and PPSA regimes, a registered security interest will always rank ahead of an unperfected or unregistered security interest.

The Amendments provide that a Bank Act Security Interest will have priority over any interest which is unperfected at the time the Bank Act Security Interest is acquired, regardless of whether such interest is acquired prior to the Bank Act Security Interest. While many believe this creates a more sensible approach for determining the interplay between both regimes, the absence of comprehensive statutory rules remains.

The Amendments also create an exception where a bank...