Bill S-5 (Financial System Review Act) Will Restore Priority Of Bank Act Security Over Unperfected PPSA Security Interests

On November 23, 2011, the federal government introduced Bill S-5 on the Senate floor as part of the five-yearly update and review process of legislation governing federally regulated financial institutions.1 The bill passed third reading in the Senate on December 16, 2011 and is awaiting first reading in the House. One of the most notable changes in this omnibus bill are the proposed amendments to sections 425-428 of the Bank Act, which will effectively override the Supreme Court of Canada's decisions in Bank of Montreal v. Innovation Credit Union and Royal Bank of Canada v. Radius Credit Union Ltd.2 relating to the priority of federal Bank Act security vis à vis provincial personal property security.3

Last year, in two companion decisions that took many in the banking community by surprise, the Supreme Court of Canada ruled that a prior but unperfected PPSA security interest has priority over a subsequent Bank Act security interest. In each of those cases, a debtor had executed a general security agreement in favour of a credit union providing security for all present and after-acquired property. Before either credit union had registered a Saskatchewan PPSA financing statement to perfect their respective interests, the debtor obtained further financing from a bank and provided Bank Act security over much of the same collateral. The dispute involved competing federal and provincial regimes with no rules of priority as between the two. The Court held that the later registered Bank Act security ranked behind the earlier but unregistered (and therefore unperfected) PPSA security even though no search would have disclosed the existence of the PPSA security: in the absence of any statutory priority rules, the common law rules of "first in time" and "nemo dat quod non habet" dictated that the registered Bank Act security must be subject to the earlier unregistered PPSA security. In so deciding, the Court noted that the "bank's argument that this interpretation leads to commercially absurd results echoes the numerous cries for legislative reform and is not without merit."

In Bill S-5 the cries for reform have been answered, although perhaps not as clearly as one might wish. Under the proposed amendments to sections 426(7) and 428(1), a Bank Act security interest has priority over the rights of "any person who had a security interest in that property that was unperfected at the time the bank acquired its security in the property". Further, section...

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