PPSA estoppel letters uncooperative creditors

Why Estoppel Letters Are Needed

Ontario uses a “check-the-box” system on financing statements to secure personal property under the PPSA¹. This means that creditors must, when filing a financing statement, indicate which categories of collateral their registration relates to by marking the appropriate check-boxes, which include “consumer goods,” “inventory,” “equipment,”, “accounts,” “motor vehicle” and “other”. From a practical perspective, this leads to the convention whereby creditors will often mark the “other” box as a way to broadly cover their bases with respect to describing the assets subject to their security interests. There is nothing problematic with this practice in and of itself, but it can sometimes pose problems for a debtor down the road if attempting to obtain new or additional financing from a different creditor.

When a secured creditor is considering extending new financing, an essential part of the due diligence process is checking the PPSA for any previous registrations made against the debtor’s personal property. If a previous creditor has secured its loan by filing a registration against the debtor’s assets and marked the “other” box, then the new creditor may be unable to move forward with its transaction until knowing precisely what property is covered by the “other” category. Similarly, if an equipment lessor has made a registration against the debtor’s equipment, the new creditor will want to confirm that only equipment financed by the lessor is covered by the registration. To that end, a new creditor will often request from the existing creditor(s) an estoppel letter in which the existing creditor(s) provide specific details regarding the collateral that their registration secures. An estoppel letter thus serves to clarify and limit the scope of the registration of the existing creditor so that a subsequent creditor can proceed knowing exactly what collateral the debtor can offer.

Uncooperative Creditors

Generally, most existing secured creditors will be co-operative and will provide an estoppel letter following an informal request for same made by telephone or email. In some cases, however, existing creditors may be difficult to deal with and delay the delivery of their responses, which can in turn delay the funding of a new transaction. When dealing with a difficult existing creditor who is unreasonably slow in responding, it is essential to formally issue a request for an estoppel letter to the existing creditor under Section 18 of the PPSA.² These requests – if made in full compliance with Section 18 – Statements of Account – will trigger a statutory obligation on the part of the existing creditor to respond within fifteen days. If the existing creditor does not respond within fifteen days, they become liable under Section 18(5)(a) for any loss or damage caused to any person entitled to receive the information requested.³ The provisions of Section 18 of the PPSA is the only practical remedy available under the PPSA for rectifying these types of situations and the only practical way to ensure prompt reply from an existing creditor. As such, it is important to understand what constitutes full compliance under Section 18 so that the fifteen day response obligation is properly triggered and funding can proceed without delay.

Section 18 Compliance

There are several aspects to full compliance with Section 18 that one must bear in mind when making a formal request for an estoppel letter. The requesting party must directly refer to Section 18 in its cover letter to the existing creditor. This helps ensure that the existing creditor understands that a formal, statutory request is being made and that in turn, certain obligations are being triggered. The cover letter must also contain a proper address for reply so that the existing party is aware of where the estoppel letter should be directed.

In addition, the requesting party must enclose the relevant documentation along with its request. This often includes a draft of the estoppel letter itself, which contains a description of the relevant PPSA registrations.  Then, in the cover letter, the existing creditor is requested to approve of or clarify the registrations in their favour by providing further description and detail. The requesting party can then either verify that the existing creditor’s registration is broad and covers all collateral, or that the registration is in fact limited to select assets as described in the estoppel letter. The process of approving or correcting collateral statements is provided for under Section 18(1)(b) of Ontario’s PPSA.⁴

Section 18(7) of the PPSA states that an existing creditor may require payment in advance for any charges associated with producing financing statements or security agreements. Full compliance with Section 18 therefore includes sending a cheque for the existing creditor’s estimated costs. To ensure that the fifteen day response obligation is triggered early, it is prudent to send this money as soon as possible.

Sophisticated creditors are generally familiar with the estoppel letter process and have employees dedicated to responding to requests from third parties. It is common, therefore, to deal with sophisticated creditors informally by requesting the estoppel via email as mentioned above. It is only when the existing creditor is unco-operative, however, that one must employ the formal estoppel letter process. The process provides one’s only practical recourse for dealing with such creditors, and is the only way to make sure that the timing of an existing creditor’s response will allow a transaction to proceed apace. Because it is a formal, statutory request process, full compliance with Section 18 is necessary if one wishes to receive a timely response.