Recent amendments to the Ontario PPSA provide clarity with respect to errors in financing statements relating to motor vehicles

Bill 154, also known as the Cutting Unnecessary Red Tape Act (the "Act"),^[1] received Royal Assent November on 14, 2017 and, as the name suggests, is aimed at reducing regulatory burdens and practices that cost businesses time and money. While the Act amends over 100 pieces of legislation in Ontario, one change that will be of particular interest to secured creditors that often take motor vehicles as collateral relates to what constitutes a materially misleading error in a financing statements under s. 46 of the Ontario PPSA^[2].

S. 46(4) of the PPSA states that a financing statement is not invalidated or otherwise impaired by an error or omission in the registration unless a reasonable person is likely to be misled materially by the error or omission.^[3] While s. 46(4) is meant to protect the priority of registrations that contain minor errors, the PPSA does not contain any guidance with respect to what errors can be considered materially misleading.

For example, a creditor registering a financing statement in respect of a particular motor vehicle it has financed generally has access to the vehicle's VIN and can therefore ensure it is correctly set out in the financing statement. However, with respect to the debtor's name, the creditor might only rely on a driver's licence as it is often impractical to require a debtor to present his or her passport, birth certificate or citizenship card. In such a circumstance, the creditor can be reasonably certain that the VIN is correct, but what if the name on the debtor's driver's licence is not the debtor's legal name or there is a clerical error and the debtor's name is spelled incorrectly on the financing statement?

Prior to these amendments to the PPSA pursuant to the Act, a secured creditor could never be sure if such an error could be considered "materially misleading" and whether the error had compromised their priority amongst other secured creditors with respect to the collateral of the debtor. While case law exists to the effect that a minor typographical error in a debtor's name will not invalidate a registration relating to a motor vehicle so long as the VIN is correctly set out,^[4] this position had never before been codified in the PPSA.

Fortunately, the new sections of the PPSA introduced by the Act do just that. Specifically, the newly added s. 46.1 states that, in the case of a financing statement where the collateral is a motor vehicle, a reasonable person will not be materially misled by an incorrect debtor name or date of birth in the financing statement so long as:

1. the motor vehicle's VIN is set out correctly and is located in the correct place on the financing statement;
2. the statement contains the name of at least one debtor and his or her date of birth; and
3. the statement otherwise complies with the requirements of the PPSA.

In other words, so long as the VIN is correctly set out and is located in the correct place on the financing statement, the debtor's name does not have to be correct (although, as a matter of practice, secured creditors should always try to ensure all information in the financing statement is correct).

Further, the newly added s. 46.2 provides greater clarity by setting out specific instances in which a reasonable person will be deemed to be materially misled by an error in a financing statement depending on whether the motor vehicle is classified as consumer goods or as equipment or inventory of the debtor.

If the motor vehicle is classified as consumer goods, an error will be deemed to be materially misleading if:

1. the VIN is not set out in the statement;
2. the VIN is not set out in the correct place; or
3. the VIN is not correct.

If the motor vehicle is classified as equipment or inventory, an error will be deemed to be materially misleading if:

1. the VIN is not set out in the correct place; or
2. the VIN is incorrect.

The above requirements are different based on the collateral classification because, where a motor vehicle is classified as equipment or inventory of a debtor, it is not an absolute requirement that the VIN be set out in the statement at all.^[5]

While the Act makes a number of amendment to the PPSA and other statutes in Ontario, these particular amendments to the PPSA will provide some comfort to secured creditors taking motor vehicles as collateral. No longer will secured creditors be at the mercy of bankruptcy trustees and other secured creditors if, upon an attempted realization of the motor vehicle collateral, it is discovered that the debtor's name or date of birth was not set out correctly in the financing statement and the error is deemed to have been materially misleading. So long as the debtor's name is at least included in the statement and the VIN is correctly set out and set out in the correct place, the secured creditor's priority position is maintained.