We frequently work with small businesses on a variety of matters, from leasing to employment contracts. As the business becomes more successful, plans often turn to expansion and our clients will meet with their bank to obtain financing. Without a property to mortgage, they are usually concerned about what they can offer the bank to get sufficient funds for their business. When I then mention that the bank can register security under the Ontario Personal Property Security Act (the “PPSA”) against some of their company’s assets, they will often ask “what is a PPSA registration?”.
In order to understand what a PPSA registration is, it is important to know what the PPSA is. The PPSA is legislation that governs debtors who use their personal property as security for the repayment of their debt to a creditor (or, in simpler terms, a business offers their personal assets as collateral to get a loan). The specific types of personal property being pledged are usually outlined in a security agreement between the debtor and creditor and involves items like equipment, motor vehicles, accounts, and inventory. Furthermore, the personal assets secured will often cover both those already owned by the business and items acquired in the future. Once the security agreement is signed and the loan is given, the security has attached to the collateral. However, another step is required to “perfect” the security. A security agreement will not be effective as against all other interests unless it has been formally recognized under the PPSA. Perfecting the security agreement accomplishes this formality.
Registration of the security under the PPSA will perfect the security. The form submitted will list the types of personal assets being secured, the length of time for the registration, and other relevant information. With the security registered, there is now notice on the record of the creditor’s interest in personal assets of the business. As a result, the creditor can take possession of these assets in the event of default by the debtor. One way to think of a PPSA registration is that it is like a mortgage but, instead of registering something on title against land that is owned, the registration is against other personal property owned.
There are many other aspects of the PPSA that are important, such as priority, renewals, and discharges. However, hopefully this blog gives you a basic understanding of the PPSA and why registration of a security interest is so important.