Arrangements with third-party creditors: Conducting and reviewing PPSA searches

Hi my name is Richard Dusome and I'm a Financial Services lawyer at Gowling WLG. You are watching video #2 of our Arrangements with Third Party Creditors video series.

In this video we're going to take a closer look at the Ontario Personal Property Security Act (also known as the PPSA), and conducting searches under the PPSA on the proposed borrower and guarantors (known in the PPSA as the debtor or debtors). We will also examine a few things to keep in mind in doing those searches and reading the search report.

When a Lender is considering financing a new borrower, one of the most common and important due diligence searches to be conducted is a search under the PPSA.

The PPSA is a central government electronic registry system where all creditors claiming a security interest in the personal property assets of a debtor must file notice of their claim. This notice takes the form of a document called a Financing Statement. The Financing Statement must include a number of details, including the name and address of the debtor, the name and address of the secured party and the classifications of personal property collateral over which the security interest is claimed.

Conducting an electronic search under the PPSA against the name of the debtor will generate a print-out revealing the names and other particulars of all secured parties claiming a security interest in the personal property of a debtor to which the PPSA applies.

When you or your counsel receive the results of the PPSA search, the search report will need to be carefully reviewed to identify the third party secured creditors that have competing interests in the debtor's collateral you are financing. Those competing interests will need to be addressed before you proceed with your loan to the debtor.

Depending upon the circumstances, this could involve obtaining PPSA estoppel letters or subordination agreements from other secured creditors, or entering into formal priorities agreements or inter-creditor agreements with them.

So the PPSA search report is your starting point and roadmap for the next steps of your financing transaction.

Here are six key points to remember about PPSA searches:

1. Personal Property, not Real Property. The PPSA extends to security interests claimed in personal property, not real property, of the debtor. Mortgages and other claims of creditors against the real property of a debtor are registered against title to the real property in the relevant land registry office. They will not show up on a PPSA search report.

2. Correct Debtor Name. The PPSA uses a rather old computer system with limited search capabilities. Getting the correct legal name of the debtor from a government corporate database is key. Its also essential to both the perfection of any security interest and to conducting a proper search to identify the existence of other secured creditors of the debtor. If you search the wrong name, you will not receive all of the information you need, and you could easily miss the identification of another prior-ranking creditor.

3. Other Unregistered Interests. It is important to note that although the PPSA is extremely useful, it does not identify all other interests in the collateral of a debtor. There are other interests in favour of governmental authorities and other entities that do not have to be registered under the PPSA. They can however still impact the priority of your security.

4. Order of Registration. Generally speaking, the PPSA provides that the first creditor to register has priority over a debtor's assets. Having the first registered security interest is the goal for most lenders. However, the order of registration is not always an indication of the order of priority or ranking of registered security interests. There can be other special interests under the PPSA like purchase money security interests that can jump the line and acquire priority over a Lender's prior registered Financing Statement. Or there can be other unregistered interests of governmental entities that never had to be registered in the first place.

5. Notice Registry, not Document Registry. The PPSA is a Notice Registry, not a documentary register. The only documents that are filed are Financing Statements, Financing Change Statements and Discharges. Copies of the actual security agreements creating the security interests are not registered for public viewing.

6. Security Agreement Essential. You cannot register under the PPSA unless the debtor has signed a security agreement, or is about to sign a security agreement, in your favour that includes the grant of a security interest. Random registrations just to save a spot in line are not permitted. Indeed, making an inappropriate or overly broad registration against a debtor just to prevent a debtor from dealing with other creditors will have consequences for the Lender, including a possible claim for damages.

There are of course other due diligence searches you will want to do to reveal other potential liens against the assets of a debtor. However, the PPSA search gives you a very important bundle of information to proceed with the financing.