Update On Bank Act vs. Unregistered PPSA Security Interest

In our newsletter dated December 2010, we reported on two decisions rendered by the Supreme Court of Canada concurrently on November 5, 20101, wherein the Supreme Court concluded that, as between a security interest registered under Section 427 of the Bank Act2 (the "Bank Act") and a prior but unregistered, or unperfected, security interest secured under the Personal Property Security Act (Ontario) ("PPSA"), the latter has priority. The Supreme Court's rationale can be summarized as follows:

Registration, or perfection, is a different concept than the security interest that is created under the PPSA, and the order in which the creditors obtained a security interest, whether or not that interest is registered, is the determining factor in deciding a priority dispute between a creditor secured under the Bank Act and a creditor secured under the PPSA. The requirement of perfecting a security interest in order to achieve priority over another security interest only comes into play when determining the priorities as between PPSA security holders, not when determining the priorities between Bank Act security interests and PPSA security interests. Bank Act security conveys no more than a debtor's legal interest in the assigned property at the time Bank Act security is taken. Where prior PPSA security interests exist, they will take priority over Bank Act security, even where such security interests are...