Creditors' Remedies against Debtors (10:III)

Prior to taking action against a debtor, the creditor must provide a reasonable time for payment on a demand loan or term loan. That time begins to run from the date of the demand for payment and not the date of the loan. What constitutes a reasonable demand period depends upon the facts of each case: see Redhawk Drilling Ltd. v TD Bank (1986), 49 Alta LR (2d) 38; Whonnock Industries v National Bank of Canada (1987), 16 BCLR (2d) 320, 42 DLR (4th) 163; Lister v Dunlop (Ronald Elwyn Lister Ltd vDunlop Canada Ltd), [1982] 1 SCR 726. For a list of factors to be considered see Mister Broadloom Corporation (1968) Ltd v Bank of Montreal (1979), 25 OR (2d) 198 (Ont HCJ). As a result of the recent passage of a revised Limitation Act in British Columbia the period for commencement of proceedings for the collection of a debt in B.C. is 2 years from the “date of discovery” of the claim. The date of discovery is defined as the day on which the claimant knew or ought reasonably to have known all of the following:

• a) That injury, loss or damage had occurred;
• b) That the injury, loss or damage was caused by or contributed to by an act or omission;
• c) That the act or omission was that of the person against whom the claim is or may be made;
• d) That, having regard to the nature of the injury, loss or damage, a court proceeding would be an appropriate means to seek to remedy the injury, loss or damage

If however, the cause of action occurred prior to the coming into force of the revised Limitation Act, the previous limitation periods remain in effect. Therefore, if the debtor’s acknowledgement in writing of the cause of action, or the last payment on the debt occurred prior to June 1, 2013, then the limitation period for the commencement of proceedings for the collection of debt is 6 years from that time.

NOTE: The limitation period does not apply to claims exempted under sections 3 or 7.

A. Secured Creditors

1. Definition

A secured creditor holds a lien, mortgage, or charge against the debtor’s assets or collateral as security for the repayment of the debt.

2. General Introduction to the PPSA

The Personal Property Security Act [PPSA] establishes a system for the registration, priority, and enforcement of secured loan and credit transactions involving personal property in B.C. Secured creditors holding agreements that create or provide for security interests (i.e. chattel mortgages and conditional sales agreements) must register these security agreements in order to “perfect” its interest and establish its priority vis-à-vis third parties.

For agreements that are subject to the PPSA, Part 5 of the PPSA outlines the creditor’s remedies (ss 56 - Rights and remedies, 57 - Collection of payments under intangibles or chattel paper, 58 – Right of seizure or repossession, and 67 - Rights and remedies: consumer goods). For agreements that involve fixtures, crops or accessions, ss 36 – 38 apply. In addition, Part 6 contains some sections (i.e. ss 68(2) - Good faith and commercially reasonable, and 72 - Notice) that are of procedural importance.

NOTE: These are examples of issues that may be encountered by clinicians while dealing with the PPSA. Remember that PPSA issues, particularly those involving priority disputes or matters relating to the transitional provisions, are complex and may have to be referred to a lawyer.

3. What Does the PPSA Govern?

The scope of the PPSA is defined in s 2 as including every transaction that in substance creates a security interest without regard to its form. As well, under s 3, a transaction involving either a transfer of an account or chattel paper, a commercial consignment, or a lease for a term of more than one year that does not secure payment or performance of an obligation (i.e. does not create a security interest) is subject to the PPSA. Section 55 provides that Part 5 does not apply to transactions brought within the PPSA by s 3. It is necessary to look to the terms and the common law.

NOTE: Section 4 lists types of transactions that are exempt from the PPSA. The PPSA does not apply to a “lien, charge or other interest given by a rule of law or an enactment unless the enactment contains an express provision that the PPSA applies”. Generally this excludes real property and natural resources.

a) Perfection

For a creditor’s interest in a good to be practically effective, s 35(1)(b) of the PPSA states that the interest must be “perfected”, whereby the creditor becomes a “secured” party. By virtue of s 19, a security interest must satisfy two conditions to be “perfected”:

• i) the security interest must have “attached” (see below); and
• ii) the secured party must ensure that “all steps required for perfection under this Act have been completed” (see below).

In general, attachment will ensure that the security interest is enforceable against the debtor, while perfection will protect the security interest against competing third party claims.

“Attachment”: Section 12 states that a security interest attaches to the good when:

• i) value is given;
• ii) the debtor has rights in the collateral; and
• iii) except for the purpose of enforcing rights between the parties to the security agreement, the security interest becomes enforceable under s 10 (unless the parties specifically agreed to postpone the time for attachment in which case the security interest will attach at the time specified in the agreement).

4. Methods of Perfection

i) perfection by possession of collateral applies to all forms of security interests (s 24);

ii) perfection by registration. Subject to s 19, registration of a financing statement perfects a security interest in collateral. (s 25); and

iii) temporary perfection (ss 5(3), 7(3), 26, 28(3), 29(4) and 51).

5. Remedies

Where a debtor defaults on a security agreement, s 56 provides that the only rights and remedies the secured party has against the debtor are those provided in the security agreement (as long as they do not derogate those rights given to the debtor by the PPSA), as well as those specifically provided by the PPSA (s 17 and ss 36 – 38).