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Difference between revisions of "Security Agreements"
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→Priority of security interests
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=== Priority of security interests=== | === Priority of security interests=== | ||
Setting '''priorities''' for competing security interests is an important, and complicated, part of the ''[http://canlii.ca/t/8495 Personal Property Security Act]''. The following is a simple example of a priority issue, written using the terminology of the Act: | Setting '''priorities''' for competing security interests is an important, and complicated, part of the ''[http://canlii.ca/t/8495 Personal Property Security Act]''. The following is a simple example of a priority issue, written using the terminology of the Act: | ||
<blockquote> | |||
“Bank A and Bank B take security over the same collateral, a truck, from a debtor company called Mike’s Movers Ltd. Both banks have perfected their security by properly registering a financing statement. Mike’s Movers Ltd. defaults on both payment obligations. Who gets priority in taking the truck?” | |||
</blockquote> | |||
The answer is fairly predictable: the secured party that was first to “perfect” takes priority. Assume Bank A was the first. It gets to have the full amount of its obligation paid before Bank B gets anything — there is no pro rata sharing. It is important to remember that secured parties generally take priority over any unsecured creditor. A creditor who has a judgment and who wants the court bailiff to seize the truck to pay a judgment only gets paid after both banks are paid in full. | The answer is fairly predictable: the secured party that was first to “perfect” takes priority. Assume Bank A was the first. It gets to have the full amount of its obligation paid before Bank B gets anything — there is no pro rata sharing. It is important to remember that secured parties generally take priority over any unsecured creditor. A creditor who has a judgment and who wants the court bailiff to seize the truck to pay a judgment only gets paid after both banks are paid in full. | ||
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Here is an example of when a PMSI might be relevant: | Here is an example of when a PMSI might be relevant: | ||
<blockquote> | |||
“Bank C takes a security interest over all chattels (personal, moveable possessions) that a consumer owns now and might acquire in the future. (The ''Personal Property Security Act'' allows this type of agreement.) If the consumer owns household furnishings and one car now, and later buys a second car using cash, the second car becomes collateral under the Bank C security agreement. But, consider if the consumer only owned household furnishings when the security agreement with the bank was made. Suppose later the consumer wants to buy a car and does not have the cash to buy it. If a car dealership sells the consumer a car on credit, it will probably want security. (Or, if another creditor — such as a bank — gives the consumer a loan to buy the car, it too will probably want security.) When the car dealership searches the Personal Property Registry, it finds that Bank C has a security agreement that says it can claim collateral over the car that the consumer is about to buy.” | </blockquote>“Bank C takes a security interest over all chattels (personal, moveable possessions) that a consumer owns now and might acquire in the future. (The ''Personal Property Security Act'' allows this type of agreement.) If the consumer owns household furnishings and one car now, and later buys a second car using cash, the second car becomes collateral under the Bank C security agreement. But, consider if the consumer only owned household furnishings when the security agreement with the bank was made. Suppose later the consumer wants to buy a car and does not have the cash to buy it. If a car dealership sells the consumer a car on credit, it will probably want security. (Or, if another creditor — such as a bank — gives the consumer a loan to buy the car, it too will probably want security.) When the car dealership searches the Personal Property Registry, it finds that Bank C has a security agreement that says it can claim collateral over the car that the consumer is about to buy.” | ||
</blockquote> | </blockquote> | ||