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Canadian Perspectives on Chattel Security Law Reform in the United Kingdom
Published online by Cambridge University Press: 16 January 2009
Extract
BRITISH commercial law scholars, of whom Prof. Roy Goode and Prof. Aubrey Diamond are two conspicuous examples, have long been attracted to the possibility of using Article 9 of the American Uniform Commercial Code as a basis for modernising and restructuring the English law of chattel security. As readers of Part V of the Crowther Report1 will know, this was the road to reform which the Crowther Committee recommended to the British government as long ago as 1971. In the course of his eighth Crowther Memorial Lecture, given at Queen Mary College in 1983,2 Prof. Goode expressed the hope that before the end of the decade England and Wales would enact the recommendations in the Crowther Report. We know now that he was too sanguine but our hopes were revived when Prof. Diamond submitted his lucid, and in the view of this writer and many others, highly persuasive recommendations to the Department of Trade and Industry in 1989.3
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References
1 Report of the Committee on Consumer Credit, Cmnd. 4596 (1971).
2 (1984) 100 L.Q.R. 234.
3 Diamond, A.L., A Review of Security Interests in Property (London 1989).Google Scholar
4 H.C. Deb. vol. 189, col. 482, 24 April 1991, quoted by M.G. Bridge [1992] J.B.L. 1, n. 2.
5 For the details see Ziegel, , “The New Provincial Chattel Security Regimes” (1991) 70 Can. Bar Rev. 681.Google Scholar
6 For an empirical study of the reactions of Ontario commercial lawyers to the (pre-1989) Ontario Personal Property Security Act, see Ziegel and Denomme, “How Ontario Lawyers View the Personal Property Security Act: An Empirical Survey” (1992) 20 Can.Bus.L.J. 90.
7 Farrar and O'Regan, Reform of Personal Property Security Law: A Report to the Law Commission, N.Z.L.R.C, Paper No. 6, 1988; New Zealand Law Reform Commission, Report No. 8, 1988, A Personal Property Securities Act for New Zealand (Wellington, 1989)Google Scholar; Australia, Law Reform Commission, Discussion Paper No. 52, Law Reform Commission of New South Wales, Discussion Paper No. 28, August 1992: Personal Property Securities; Queensland Law Reform Commission, Discussion Paper No. 52, and Law Reform Commission of New South Wales, Discussion Paper No. 28, Personal Property Securities, August 1992.
8 Ulrich, , Report of the Secretary-General: Study on Security Interests, UNCITRAL Yearbook 1977, vol. VIII, p. 171.Google Scholar
9 He also referred to Article 9 of the American Uniform Commercial Code as the “most modernised, rational and comprehensive system of security interests in the present world”. Ibid., s. 2.6.2.3
10 The new Quebec Civil Code also contains substantial elements of an Article 9 approach to security interests in movables.
11 Security Interests in Personal Property (Boston 1965).Google Scholar
12 Ibid., vol. I, pp. 288–289.
13 A typical province had a conditional sales Act, a bills of sale and chattel mortgages Act, an assignment of book debts Act, and a corporation securities registration Act or provisions in the relevant companies Act imposing registration requirements for charges and other security interests granted by a debtor company against its assets.
14 Companies Act 1985, Pt. XII, added by Companies Act 1989, Pt. IV.
15 [1895] A.C. 471.
16 For the details see Goode, R.M.Hire-Purchase Law and Practice, 2nd ed. (1970), ch. 18, pp. 383–393.Google Scholar
17 Aluminium Industrie Vaassen B.V. v. Romalpa Aluminium Ltd. [1976] 2 All E.R. 552 (C.A.). For a lucid discussion of the British position see Goode, R.M., Proprietary Rights and Insolvency in Sales Transactions (1985),Google Scholar ch. 5.
18 See Ziegel, , “The Legal Problems of Wholesale Financing of Durable Goods in Canada” (1963)Google Scholar 41 Can.Bar Rev. 54.
19 Ibid., pp. 96 et seq. Indeed, in Flinloft v. Royal Bank of Canada (1964) 47 D.L.R. (2d) 141 at 145; [1964] S.C.R. 631, Judson J. asserted that an inventory financer has a continuous claim to the proceeds of disposition of inventory, whether or not the security agreement (usually a wholesale conditional sale agreement) contains a proceeds clause, and these dicta have been frequently applied in subsequent Canadian decisions. See further Ziegel, J.S. and Denomme, David L., The Ontario Personal Properly Security Act[:] Commentary and Analysis (Can. Law Book, 1994), p. 177,Google Scholar n. 2
20 [1980] Ch. 228.
21 The puzzlement becomes even greater in light of the House of Lords' decision in Armour v. Thyssen Edelstahlwerke A.G. [1991] 2 A.C. 339 holding that there is nothing objectionable about a clause reserving the seller's title in goods until payments due under other contracts of sale as well as the present contract have been satisfied, and that the “add-on” provision does not change the character of the clause.
22 Roy Goode describes it as “one of the most subtle creations of Equity”: Goode, R.M., Legal Problems of Credit and Security, 2nd ed. (1989), p. 46.Google Scholar This is surely a dubious compliment for a basic instrument designed to serve the everyday needs of commerce.
23 [1979] 2 Lloyds Rep. 142.
24 E.g. Evans v. Rival Granite Quarries Lim. [1910] 2 K.B. 979Google Scholar, per Fletcher Moulton L.J. at 995.
25 Re Woodroffe's (Musical Instruments) Ltd. [1986] Ch. 366; Re Brighllife Ltd. [1987] Ch. 200.
26 U.C.C. 9–205.
27(1925) 268 U.S. 353, 45 S.Ct. 566.
28 For the details see Gilmore, supra note 11, vol. 1, ch. 8.
29 See U.C.C. 9–203(1) (time of attachment of security interest), U.C.C. 9–303 (when security interest is deemed perfected), and U.C.C. 9–301 (effect of unperfected security interest).
30 Ontario Act, s. 1(1), definition of “security interest”. The definition in the other provincial Acts is the same or substantially so. Unless otherwise indicated, all references hereafter are to the Personal Property Security Act, R.S.O. 1990, c.P.10.
31 The other provincial Acts contain an almost identical provision. See, e.g., the British Columbia Personal Property Security Act, Stat. B.C. 1989, c. 36, s. 12(1).
32 Ziegel & Denomme, supra note 19, pp. 116–118, and the additional sources cited on p. 116, n. 35.
33 The cases are collected in Ziegel and Denomme, op. cit., p. 118, n. 43. A caveat is necessary with respect to the Ontario position. Recent case law suggests that both bar and courts have not fully absorbed the meaning of section 11(2) of the Act. See, e.g., Re Standard-Modern Technologies Corp. (1992) 87Google Scholar D.L.R. (4th) 442 (Ont. C.A.); Saunders, J.'s decision in Re Access Advertising Management Inc. and Servex Computers Inc. (1993) 15 O.R.(3d) 635Google Scholar, and Ziegel, Comment (1994) 23 C.B.L.J. 470, but see contra the all too brief judgment in National Bank of Canada v. Grinnell Corp. of Can. (1993) 5 Pers. Property Sec. Act Cas. (2d) 266 (Ont. Div. Ct.) The waters have recently been muddied by revivals of concepts of implied licence in priority conflicts between secured parties and statutory liens and deemed trusts under federal and provincial legislation in favour of the Crown and the debtor's employees. See Roynat Inc. v. Ja-Sha Trucking & Leasing Ltd. (1992) 89 D.L.R. (4th). 405 (Man. C.A.); Ford Motor Co. v. Coopers & Lybrand Ltd. (1994) 115 D.L.R. (4th) 256 (Sask.); and Royal Bank of Canada v. Sparrow Electric Corp. (No. 3) [1994] 9 W.W.R. 338 (Alta.).
34 This problem, which is not new, is attracting increasing attention from commentators. See inter alia Goode (1983–84) 8 Can.Bus.L.J. 53, Ziegel (1990) 28 Alta L.Rev. 739, and Cuming (1994) 24Can.Bus.L.J.17.
35 Supra note 5.
36 So much so that when recently the Alberta government was considering privatising its personal property security registry system it quickly changed its mind when it learned that privatisation would deprive it of a substantial source of revenue. In Ontario, the registry's principal source of revenue is related to motor vehicles, which is not surprising given the importance of motor vehicles as collateral for commercial and consumer financing in North America.
37 Ont. Act, s. 46(1) and O. Regs., s. 2. Ziegel and Denomme, op. cit., supra, note 19, s. 46.3. Electronic registrations were also authorised in 1991 under the Electronic Registration Act (Ministry of Consumer and Commercial Relations Statutes) 1991, S.0.1991,c. 44, and supporting regulations (O. Reg. 75/92), and now account for a major part of all registrations.
38 O. Regs. ss. 3(l)(c) and 16; Ziegel and Denomme, op. cil. supra note 19, pp. 600 el seq.
39 Ziegel and Denomme, op. cil., pp. 312–319.
40 This is because s. 46(4) of the Ontario Act only excuses an error or omission in the financing statement or financing change statement where a reasonable person is not likely to be misled materially by the error or omission. The voluminous (but inconsistent) case law is discussed in Ziegel and Denomme, op. cit., pp. 361 et seq. See also Adelaide Capital Corp. v. Integrated Transportation Finance Inc. (1994) 16 O.R. (3d) 414, esp. at 426–429.
41 The Ontario Court of Appeal discussed the conflicting case law in detail in Re Lambert (1994) 20 O.R. (3d) 108 and adopted a compromise solution which raises difficulties of its own. See Wood, Comment (1995) 24 C.B.L.J. 444.
42 Viz. by encouraging trustees in bankruptcy and other adverse parties to challenge the validity of a registration on trifling grounds, even though they themselves were not prejudiced by the error or omission and, in the case of competing secured parties, may have known the true position before making their own advance.
43 As well as much litigation involving the constitutionality of the provincial provisions since the federal government has paramount jurisdiction in bankruptcy and insolvency matters. See inter alia Kenneth Morlock, C., “Priorities Outside the PPSA” in Law Society of Upper Canada, Dept. of Education, PPSA Update, 5 03 1992,Google Scholar ch. J; W.A. Bogart (1983–84) 8 Can.Bus.L.J. 129; and Ziegel (1995) 46:1 S. Carol. L. Rev.—(pub. pending.)
44 Stat. Can. 1992, c. 27, amendg. R.S.C. 1985, B–3.
45 Section 67(2) and (3).
46 Section 86(2).
47 Section 87(2)(a).
48 Section 136(l)(d) of the BIA confers preferential status on unpaid wages u p to a maximum of $2,000, but preferential claims d o not override pre-bankruptcy perfected security interests. The bill version of the 1992 amendments would have created a wage earner protection fund but the provisions were widely opposed on the ground that they would impose another tax burden on employers. The then Conservative government undertook to consider other alternatives and to include them as part of the Phase II amendments t o the BIA which must be presented to the Canadian Parliament in 1995. The new Liberal government has not yet shown its hand in the matter.
49 Sections 81.1 and 81.2.
50 See further R.A. Klotz, (1993) 21 Can.Bus.L.J. 161.
51 The established Canadian practice is for such suppliers not to retain a security interest for the unpaid price since Canadian banks have made it clear that if they d o retain, title the buyer's line of credit will be reduced by a commensurate amount. The introduction of the 30-day provision has led the banks to make good their threat so it is clear, at least from the merchant buyer's point of view, that section 81.1 results in a zero sum game.
52 E.g., Ont. Act, ss. 5(2), 12(2)(b), 14(1), 45(2), 51(5), 54(2), 57, 65(1), 66(2), 67(2), 73.
53 Ont. Act, s. 59(5).
54 At the substantive level, the Canadian Acts generally are more consumer oriented than Article 9 and its American state variations. The scope of the Western provinces' Acts is also wider since it includes chattel leases with a term of a year or more and commercial consignment agreements, whether or not the lease or consignment agreement is a true security agreement. The Ontario Minister's Advisory Committee recommended a similar extension in what became the revised Ontario Act of 1989, but these recommendations were not adopted. Ziegel and Denomme, op. cit. supra note 19, §§ 2.2.4.2. and 2.2.3. esp. at pp. 49–50. The Ontario case law has overtaken legislative developments (or the lack of them) and recent cases have evinced a readiness to find a security lease where the lessor is a financial intermediary. See Adelaide Capital Corp. v. Integrated Transportation Finance Inc. (1994) 16O.R. (3d) 414.
55 The Ontario and British Columbia systems also permit electronic searches and registrations and these features are expected to be added to the other provincial systems. See generally Cuming (1991) 23 Unif.Com.Code.L.J. 331.
56 Cf. LoPucki, “Computerization of the Article 9 Filing System: Thoughts on Building the Electronic Highway” (1992) 55 Law & Contem. Probs. 5.
57 Supra note 54.
58 Supra note 7.
59 Cantamar Holdings Ltd. v. Tru-View Aluminium Products (1979) 23 O.R. (2d) 572.
60 Section 1(1).
61 Arguably, the power is implicit in section 59(1) and (5) allowing the security agreement to determine the parties' rights and duties after the debtor's default unless otherwise provided in Part V. Section 60(l)(a) is still more helpful since it provides that nothing in the Act prevents the parties to a security agreement from agreeing that the secured party may appoint a receiver and receiver and manager and, “except as provided by this Act”, determining the rights and duties of the receiver. The “except” proviso was no doubt intended to refer subsection (2) conferring wideranging supervisory powers on the court although, as a matter of straight construction, it must also refer to the mandatory provisions in the rest of Part V. It is these that create the difficulties.
62 Ont. Act, s. 62.
63 Act, s. 61.
64 Section 63.
65 The 1972 Official Text has been adopted in every state with the exception of Vermont. The variations are collected in the UCC Reporting Service, State UCC Variations Binder. In 1990 the sponsoring organisations established a study group to recommend a revised version of Article 9 in light of the changes that had occurred since 1967. The Study Group reported in 1992 with detailed proposals. See PEB Study Group, Uniform Commercial Code, Article 9. Report 1992 (together with Appendices) (Dec. 1, 1992). Work has since continued on the drafting of the new provisions.
66 See Report of the UCC Article 9 Filing System Task Force to the Permanent Editorial Board's Article 9 Study Group, 1 May 1991, and Swift, “The UCC Filing System and the Need for Reform” (1994) 26 UCCLJ 283.
67 Supra note 65.
68 Ziegel and Denomme, supra note 19, lvii–lviii.
69 Stat. Can. 1991, c. 46, ss. 427 et seq.
70 Ziegel and Denomme, op. cit. supra note 19, pp. xlviii-xlix.
71 Supra note 7.
72 Ibid.
73 This view is based on information supplied to me by Australian colleagues.
74 The differences between common law and civil law regimes, and among the civil law regimes, are canvassed in Prof. Drobnig's excellent survey for UNCITRAL, supra note 8.
75 See EEC, Draft Directive on the Recognition, in the case of movables, of non-possessory securities and of retention of ownership clauses (Doct. X1/466/73/E (1973) (also referred to in Diamond Report, supra n. 3, s. 7.4); EEC, Working Paper and Questionnaire on Security Interests in Movable Properly (Doct. III/767/77-E (1977)); Goode (1980) 1 Co. Law 185; and Pennington (1978) 27 I.C.L.Q. 277.
76 UNIDROIT's and UNCITRAL's efforts in this area also deserve mention. UNIDROIT sponsored two Conventions which were adopted at a conferene held in Ottawa in 1988, one, a Convention on International Leasing, and the other a Convention on International Factoring. The Conventions came into effect in March 1995. UNIDROIT has also begun preliminary work to explore the feasibility of the adoption of uniform international rules to govern certain aspects of security interest in mobile equipment. Finally, UNCITRAL is considering a project for the drafting of uniform international rules relating to the assignment of claims. See United Nations Commission on International Trade Law, Yearbook, Vol. XXIV: 1993, pp. 244, 246, 247.
77 UCC 9–103. The corresponding, but not identical, Ontario povisions appear in ss. 5–8 of the Ontario Act.
78 See Fletcher, I.F. in , Ziegel (ed.), Current Developments in International and Comparative Corporate Insolvency Law, ch. 32 (1994).Google Scholar
79 Supra note 6.