Conditional Sales Contracts and Security Agreements (11:VI)
|This information applies to British Columbia, Canada. Last reviewed for legal accuracy by the Law Students' Legal Advice Program on August 8, 2021.|
The Personal Property Security Act, RSBC 1996, c 359 [PPSA] governs conditional sales agreements (e.g. the contract is subject to some condition to be fulfilled later) and security contracts. The PPSA established a new unified system for the registration, priority, and enforcement of transactions where collateral is given to secure payment or the performance of an obligation. The main purpose of the PPSA is to offer lenders or creditors a system of priority vis-à-vis other creditors where it is necessary for the lender or seller to take an interest in personal property to ensure the obligations of the borrower or purchaser are met. The legislation effectively creates a system for the registration and enforcement of a security interest against personal property.
Under s 2, the PPSA governs every transaction that creates a security interest, regardless of the form of the agreement, even in agreements that do not appear to be security agreements, so long as it is creating a security interest in substance. A “security interest” is defined in s 1(1) as an interest in goods that secures payment or the performance of an obligation.
- NOTE: For the purposes of this section, goods is used to define security interests. However, the actual definition is broader than that. For more information, see ss 1(a) and ss 1(b) “security interest”.
Chapter 10: Creditors’ Remedies and Debtors’ Assistance has a discussion on the protection offered to a consumer by the PPSA, including the requirements of enforceable security. The PPSA has some special considerations applicable if the goods in which the collateral was taken were consumer goods. Consumer goods are defined in s 1(1) as goods that are acquired primarily for personal, family, or household purposes.
A. Creditor’s Remedies Against the Debtor
1. Control by the Creditor
Under s 58, the PPSA provides that, where the debtor defaults on a security agreement, the creditor can take control of the collateral item through any method authorised by law with a few select exceptions (s 56). Where, however, the collateral is a consumer good and the debtor has paid two-thirds of the total amount secured, the creditor may not seize the goods without an application to the court (s 58(3))
2. Action by the Creditor
A creditor (lender) can sue the debtor (borrower) for breach of contract and seek repayment of the monies owed. Additionally, the creditor can enforce their interest in the collateral by seizure (s 58) or possession (s 61). Generally, the secured party (lender) can seize and sue for any deficiency. However, when consumer goods form all or merely a portion of the collateral, the secured party must elect to seize or sue, subject to s 58(3).
3. Acceleration Clauses
A security agreement provides that a creditor may accelerate payment (or performance) by the debtor if the creditor, in good faith, believes and has commercially reasonable grounds to believe that the prospect of payment or performance is about to be impaired or that the collateral is or is about to be placed in jeopardy (s 16).
B. Restrictions on the Creditor’s Right to Dispose
Under s 59 of the PPSA, a creditor cannot sell the seized goods before the expiration of the 20-day notice period, as every party entitled to notice under ss 59(6) or ss 59(10) via approved methods outlined in s 72 may redeem the collateral by fulfilling the obligations secured in the security agreement (s 62). Where the collateral is a consumer good, the redeeming party need only pay the amount in arrears (i.e. debt owing to date) plus reasonable seizure fees (s 62(1)(b)). This is known as the right of reinstatement. It cannot be used more than twice in a 12-month period (s 62(2)).
C. Disqualification from “Seize or Sue” Provisions
A party with a security interest in consumer goods may avoid the “seize or sue” restriction where:
- a) The debtor (borrower) is a company, a partnership of corporations, or a joint venture of corporations (s 55(4)(a));
- b) The debtor has engaged in wilful or reckless acts or neglect which have caused substantial damage or deterioration to the goods, and the secured party may seek a court order pursuant to s 67(9) disqualifying the debtor from the rights and remedies ordinarily available under
ss 67(1) – (7); or
- c) The secured party discovers after seizure that an accession that was collateral has been removed and not replaced by other goods of equivalent value and free from prior security interests; a claim may be advanced against the debtor for the value of the accession (s 67(8)).
- NOTE: Accession means goods that are installed in or affixed to other goods. For example, a shovel attached to a truck. See ss 38 and 1(1) for more information about accessions.
The seizure of consumer goods generally extinguishes the debt in relation to the security agreement. However, there are exceptions under s 67:
- If the creditor (lender) returns the consumer goods within 20 days after the seizure, that will revive the debt;
- If the security agreement is a mortgage or an agreement for sale and the consumer goods are part of this security, in the case that the lender exercises their rights under the mortgage or agreement of sale but does not seize the goods, the debt is not extinguished; or
- If the creditor (lender) has a purchase money security interest in the seized consumer goods and other consumer goods, the debt is extinguished to the extent identified in the security instrument as relating to the seized consumer goods.
These qualifications also apply in the event of a voluntary foreclosure and a voluntary surrender of consumer goods rather than a seizure.
For consumer goods only, if the creditor (lender) chooses not to enforce their interest in the collateral and chooses to seek judgement instead, the security interest in the collateral is also extinguished (s 67(10)(a)).
D. Third Party Purchaser’s Rights
Under ss 30(3) and 30(4), where a third-party purchases collateral in the form of consumer goods worth less than $1,000, and the third party does not have knowledge of the security agreement between the vendor and the creditor, the third party takes the item free of the creditor’s interest, even if registered. This is known as the “garage sale” defence. The purchaser is known more commonly as a bona fide purchaser for value without notice.
The third party’s priority over the creditor ends if there is knowledge of the pre-existing security interest. Under s 1(2), “knowledge” is judged objectively rather than subjectively (i.e. would a reasonable person know?).
- NOTE: If the creditor’s interest in the collateral does not continue because the third-party purchaser takes title free of that interest, the creditor’s interest will continue in the proceeds of the sale of the security (collateral) by the debtor (borrower) to the bona fide purchaser if the original collateral is continuously perfected under s 28(2) or the proceeds are perfected within 15 days under s 28(3), unless the creditor authorized the deal. For more information on perfection and attachment, see s 19 and s 12, respectively.
Security is perfected when the requirements under the PPSA are met and has attached, meaning that the collateral has come into existence (i.e. if security has not attached, then there is no collateral). Under s 12, a security interest attaches when:
- a) Value is given;
- b) The debtor has rights in the collateral; and
- c) There is an enforceable security interest (see s 10 for writing requirements for security agreements) unless the parties specifically agree to postpone the time of attachment, in which case the security interest attaches at that specified date.
Generally, once security is perfected, the creditor’s interest has priority over the interests of third parties, whereas unperfected security takes a lower priority (s 19). However, as described above, one exception to s 19 is in s 30 where a creditor’s interest in the collateral does not continue because of a bona fide purchaser’s interest, but the creditor’s interest will continue in the proceeds.
E. Application of PPSA to Leases
Many consumers lease cars instead of buying on credit under a financing agreement. A lease can qualify as a security agreement: see Daimler Chrsyler Services Canada Inc. v Cameron, 2007 BCCA 144 for factors and Re Bronson (1995), 34 CBR (3d) 255 (BCSC). Therefore, if they default and the car is repossessed, the “seize or sue” restriction may apply, but the situation is not always clear-cut. LSLAP clients should be referred to a lawyer.
F. Bills of Exchange Act
Under Part V of the Bills of Exchange Act [BEA], a bill of exchange or a promissory note (i.e. an “I owe you”) given for a consumer purchase must be clearly marked “Consumer Purchase” (s 190(1)), and where it is marked, the rights of an assignee of the bill or note are subject to any defence the purchaser would have against the vendor (s 191). Where it is not marked, it is void except in the hands of a holder in due course without notice (s 190(2)). The purpose of Part V is to codify the rule in Federal Discount Corp v St Pierre (1962), 32 DLR (2d) 86.
Part V does not cover private sales (where the seller is not engaged in the business of selling the goods in question), or sales to small businesses or corporations of items to be used in their business. Nor does it cover a purchaser’s loan (i.e. a loan from a lender to a person to enable that person to buy goods and/or services from a seller), subject to s 189(3) below.
A consumer bill is defined in s 189(1), and a consumer note is defined in s 189(2). A consumer bill or note is conclusively presumed if (s 189(3)):
- The consideration for its issue was the lending of money, etc. by a person other than a seller, to enable the purchaser to make a consumer purchase; and
- The seller and the person who lent the money, etc. were, at the time the bill or note was issued, not dealing with each other at arm’s length within the meaning of the Income Tax Act.
If an instrument meets the definition of a consumer note, any defence that the consumer would have for an action against them by the seller would also be available against subsequent noteholders (the seller sells a good to the consumer and, in exchange, receives a note from the consumer, which is like an “I owe you” or a promise to be paid back). Therefore, if the consumer does not get what they have paid for, the consumer may not be required to pay the loan back when pressed for payment by the lender’s assignee. Also, if the seller does not fulfil obligations under a warranty, the consumer will be able to resist payment (Canadian Imperial Bank of Commerce v Geldart,  BCJ No 1973 and Canadian Imperial Bank of Commerce v Kabatoff,  BCJ No 942).
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