Conditional Sales Contracts and Security Agreements (11:VI)

The Personal Property Security Act, RSBC 1996, c 359 [PPSA] governs conditional sales agreements and security contracts. It established a new unified system for the registration, priority, and enforcement of transactions where collateral is given to secure payment or the performance of an obligation. The main purpose of the PPSA is to offer lenders or creditors a system of priority vis-à-vis other creditors where it is necessary for the lender or seller to take an interest in personal property to ensure the obligations of the borrower or purchaser are met. The legislation effectively creates a system for the registration and enforcement of a security interest against personal property.

Under s 2, the PPSA governs every transaction that creates a security interest. A “security interest” is defined in s 1 as an interest in goods that secures payment or the performance of an obligation.

Chapter 10: Creditors’ Remedies and Debtors’ Assistance has a discussion on the protection offered to a consumer by the PPSA, including the requirements of enforceable security. The PPSA has some special considerations applicable if the goods in which the collateral was taken were consumer goods. Consumer goods are defined in s 1 as goods that are acquired primarily for personal, family, or household purposes.

A. Creditor’s Remedies Against the Debtor

1. Seizure by the Creditor

Section 58 provides that where the debtor defaults on a security agreement, the creditor can seize the collateral item unless the security agreement states otherwise (s 56). Where, however, the collateral is a consumer good and the debtor has paid two-thirds of the total amount secured, the creditor may not seize the goods without an application to the court.

2. Action by the Creditor

A creditor can sue the debtor for breach of contract and seek repayment of the monies owed. Unless the security interest has been taken in consumer goods, the secured party can seize and sue for any deficiency. When consumer goods form all or merely a portion of the collateral, the secured party must elect to seize or sue, subject to s 58(3).

B. Restrictions on the Creditor’s Right to Dispose

Section 59 provides that a creditor cannot sell the seized goods before the expiration of the 20 day notice period since every party entitled to notice under ss 59(6) and (10) may redeem the collateral by fulfilling the obligations secured in the security agreement (s 62). Where the collateral is a consumer good, the redeeming party need only pay the amount in arrears (s 62(1)(b)), plus reasonable seizure fees. This is known as the right of re-instatement. It cannot be used more than twice in a 12 month period (s 62(2)).

C. Disqualification from “Seize or Sue” Provisions

A party with a security interest in consumer goods may avoid the “seize or sue” restriction where:

• a) the debtor has engaged in wilful or reckless acts or neglect which have caused substantial damage or deterioration to the goods, and the secured party may seek a court order pursuant to s 67(9) disqualifying the debtor from the rights and remedies ordinarily available under ss 67(1) - (7); or
• b) the secured party discovers after seizure that an accession that was collateral has been removed and not replaced by other goods of equivalent value and free from prior security interests; a claim may be advanced against the debtor for the value of the accession (s 67(8)).

The seizure of consumer goods generally extinguishes the debt in relation to the security agreement. However, there are exceptions under s 67:

• If the creditor returns the consumer goods within 20 days after the seizure, that will revive the debt;
• If the security agreement is a mortgage or an agreement for sale and the consumer goods are part of this security, in the case that the lender exercises his or her rights under the mortgage or agreement of sale but does not seize the goods, the debt is not extinguished;
• If the creditor has a purchase money security interest in the seized consumer goods and other consumer goods, the debt is extinguished to the extent identified in the security instrument as relating to the seized consumer goods.

These qualifications also apply in the event of a voluntary foreclosure and a voluntary surrender of consumer goods rather than a seizure.

D. Third Party Purchaser’s Rights

Under ss 30(3) and 30(4), where a third party purchases collateral in the form of consumer goods worth less than $1,000, and the third party does not have knowledge of the security agreement between the vendor and the creditor, the third party takes the item free of the creditor’s interest, even if registered. This is known as the “garage sale” defence.

The third party’s priority over the creditor ends if there is knowledge of the security agreement itself rather than knowledge that the sale constitutes a breach. Under s 1(2), “knowledge” is judged objectively rather than subjectively (i.e. would a reasonable person know?).

NOTE: Even if the creditor’s interest in the collateral does not continue because the third party purchaser takes title free of that interest, the creditor’s interest will continue in the proceeds of the sale by the debtor to the purchaser (s 28).

E. Application of PPSA to Leases

Many consumers lease cars instead of buying on credit under a financing agreement. A lease can qualify as a security agreement: see Re Bronson (1995), 34 CBR (3d) 255 (BCSC). Therefore, if they default and the car is repossessed, the “seize or sue” restriction may apply, but the situation is not always clear cut. LSLAP clients should be referred to a lawyer.

F. Bills of Exchange Act

Under Part V of the Bills of Exchange Act [BEA], a bill of exchange or promissory note given for a consumer purchase must be clearly marked “Consumer Purchase” (s 190(1)), and where it is marked, the rights of an assignee of the bill or note are subject to any defence the purchaser would have against the vendor (s 191). Where it is not marked, it is void except in the hands of a holder in due course without notice (s 190(2)). The purpose of Part V is to codify the rule in Federal Discount Corp v St Pierre 32 DLR (2d) 86 (1962).

Part V does not cover private sales (where the seller is not engaged in the business of selling the goods in question), or sales to small businesses or corporations of items to be used in their business. Nor does it cover a purchaser’s loan, i.e. a loan from a lender to a person to enable that person to buy goods and/or services from a seller (subject to s 189(3) below).

Section 189(1) defines a consumer bill and s 189(2) defines a consumer note. Under s 189(3), a consumer bill or note is conclusively presumed if:

1. the consideration for its issue was the lending of money, etc. by a person other than a seller, to enable the purchaser to make a consumer purchase; and
2. the seller and the person who lent the money, etc. were, at the time the bill or note was issued, not dealing with each other at arm’s length within the meaning of the Income Tax Act.

If an instrument meets the definition of a consumer note, any defence that consumer would have for an action against him or her by the seller would also be available as against subsequent note holders.

Therefore, if the consumer does not get what he or she has paid for, that person may not be required to pay the loan back when pressed for payment by the assignee. Also, if the seller does not fulfil obligations under a warranty, the consumer will be able to resist payment. (See Canadian Imperial Bank of Commerce v. Geldart [1985] BCJ No 1973 and Canadian Imperial Bank of Commerce v. Kabatoff [1986] BCJ No 942.)