Borrowers grant security interests in their property to lenders as a condition of financing every day. Security interests are property interests, created by agreement, over assets to secure the performance of an obligation, usually the payment of a debt. It gives the beneficiary of the security interest certain preferential rights in the disposition of secured assets. Most people grant a security interest in their homes in the form of a mortgage.
British Columbia implemented a system that allows parties to register security interests over another person’s personal property (property other than real estate). The British Columbia Personal Property Security Act (“PPSA”) governs the rules and operation of the system. Personal property is found in many different and unique forms, (from your car lease to a milk quota). As a result the PPSA is very complex and careful attention is required to ensure security interests and property are protected.
Although complex, the PPSA provides borrowers with the ability to leverage their personal property to obtain lower financing rates. Businesses would be less willing to accept orders without full payment in advance if they could not obtain security in the goods being sold. Next time you renew your car lease appreciate that the lease payment would be much higher if a security interest could not be granted in the leased vehicle.
A security interest may be granted by the parties signing a security agreement with an accurate description of the parties, the personal property subject to the security interest (referred to as collateral) and the financial or other obligation owed to the secured party.
A secured party that has been granted a security interest receives only limited protection unless and until the secured party registers their security interest using a financing statement. A successful registration must be in the correct form, have the full legal name of the borrower, correctly describe the collateral and provide for an adequate registration term. Errors in the financing statement’s descriptions of the borrower or the collateral often invalidate the registration leaving the secured party with limited protection. Something as simple as the incorrect spelling of a borrower’s name can invalidate your registration.
The British Columbia personal property registry does not offer generic boxes to describe collateral and generic descriptions such as “Equipment” or “Inventory” are generally insufficient. To complicate the registration process further the serial number of certain goods is required at times. Secured parties must be diligent to ensure the correct description of the property subject to the security interest is provided.
The basic rules of the priority system for the preferential rights of security interests are:
1. a registered security interest takes priority over an unregistered security interest; and
2. the first (in time) registered security interest takes priority over subsequently registered security interests.
The general rule is to ensure that you register first. Before you register, or agree to take a security interest from a borrower in exchange for granting a loan, search the personal property registry to ensure that the borrower has not already granted a security interest.
Although the personal property registry is complex your legal counsel can ensure that your financial interests are fully protected.
If you require advice on securing your financial interests against a borrower, please contact a member of the Pushor Mitchell LLP team.