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).

Important sections of the PPSA for the creditor are ss 58 and 59, which contain rules for seizing and disposing of collateral. These sections provide that, unless the security agreement states otherwise, where the debtor defaults on their payment, the creditor may elect to take possession of the collateral pursuant to the contract, dispose of the collateral and then sue for any amount still owing. Section 67, provides for a more limited set of remedies where the collateral takes the form of consumer goods – known as the “seize or sue” rule. Formerly, under legislation repealed by the PPSA, all creditors could only seize or sue but not both. The principle of “seize or sue” still applies to “consumer goods” (see Section II.A.6: Seizure, below); it no longer applies to commercial goods.

6. Seizure

Where the security interest does not involve fixtures, accessions, crops, or consumer goods, s 58 provides the fundamental rule for realization upon non-possessory security interest in tangible personal property: the secured party has a right to seize (in the case of a secured loan transaction) or to repossess (in the case of a secured credit sales transaction) the collateral. Upon seizing the collateral, s 17 defines the rights and obligations of secured parties in possession of collateral. The section imposes a standard of reasonable care on the secured party in possession of the collateral and the secured party must follow the notice provisions outlined in ss 59(6) – (12) before they are entitled to carry through with disposal.

7. Disposal of Collateral

After seizing collateral, the secured party under s 59(2) may dispose of it either in its present condition or after repairing it (though s 68(2) protects the debtor from incurring unnecessary expenses because all rights, etc., under the PPSA must be discharged “in good faith”). Further, s 59(3) provides that the secured party may dispose of the collateral by a private or public sale (either as a whole or in commercial units or parts) and, if the security agreement so provides, by lease. See also Section II.A.10: Voluntary Foreclosure.

Section 59(2) provides a priority scheme regarding application of the proceeds of sale: first, toward the reasonable expenses of seizing, repairing, etc.; second, toward the satisfaction of the obligations owed to the secured party; and last, if any surplus exists, to the satisfaction of obligations owed to persons holding a subordinate security interest, and then toward the debtor (s 60).

A person who buys an item from a disposal sale takes the good free and clear of the debtor, the secured party, and any subordinate creditors whether or not the secured party complied with the requirements of the section. In the case of a prior secured creditor’s interest, if the goods are “consumer goods” of a value less than $1,000 and the purchaser gave value for the goods, the purchaser takes them free of the prior secured creditor’s interest (see s 59(14)).

8. Notice of Intention to Dispose of Collateral

NOTE: The forms of notices under the PPSA depend on a number of factors, including the nature of the security and the terms of the security agreement. Advice concerning the validity of notices should be referred to a lawyer.

Subject to the circumstances where notice is not required as per s 59(17) (e.g. for perishable collateral, collateral requiring disproportionately high storage costs relative to its value, etc.), the requirements for notice are outlined in ss 59(6) and (10). These sections require that the secured party, or receiver, as the case may be, must provide at least 20 days’ notice of their intention to dispose of the collateral to parties including the debtor and any other creditor.

When a secured party is considering methods of disposal, they must give notice to the following parties (see s 59(6)):

• i) the debtor;
• ii) any other person who is known by the secured party as the owner of the collateral (where that is not the debtor);
• iii) any creditor or person with a security interest in the collateral whose interest is subordinate to the secured party, who registered a financing statement, or whose security interest is perfected by possession at the time of seizure or repossession of the collateral; and
• iv) any other person with an interest in the collateral who has given notice to the secured party of their interest in the collateral before the notice of disposition is given to the debtor.

The secured party is required to include specific information in the notice (see s 59(7)):

• i) a description of the collateral;
• ii) the amount required to satisfy the obligation secured by the security interest;
• iii) the arrears owing (exclusive of the operation of an acceleration clause);
• iv) the expenses associated with seizure and repossession; and
• v) the date, time and place of disposition.

In the case of a receiver attending to the disposition of the collateral, the receiver must give notice to (see s 59(10)):

• i) the debtor;
• ii) any other person known by the secured party to be an owner of the collateral;
• iii) any creditor with a security interest subordinate to that other secured party, who has either registered the financing statement, or who has perfected its security interest by possession at the time of the seizure or repossession of the collateral; and
• iv) any other person with an interest in the collateral who has notified the receiver of that interest in the collateral before the notice of disposition is given to the debtor.

The notice that the receiver must provide need contain only (see s 59(11)):

• i) a description of the collateral;
• ii) a statement that unless the collateral is redeemed it will be disposed of; and
• iii) the particulars relating to the place of disposition or where tenders may be delivered.

9. Surplus or Deficiency

When a secured party is left with a surplus after disposal of the collateral, it must be accounted for and paid to the parties in the order specified in s 60(2). If a dispute regarding entitlement arises, s 60(4) provides for the secured party to pay the secured funds into court, which gives those claiming entitlement the opportunity to make an application under s 70 for payment.

Under s 60(5), the debtor is responsible for any deficiency balance unless the secured party and the debtor have agreed otherwise and made provisionsas such in the security agreement.

NOTE: This section does not apply to consumer goods.

10. Voluntary Foreclosure

After default, a secured party may make a proposal to the debtor and other interested parties to take the collateral to satisfy obligations secured by it (s 61).