Anonymised, illustrative composite. Every other registry problem is a defect — the wrong name, a missed discharge, a stale search. This one is not. The correct search, run correctly, against the correct legal name, returns the wrong answer, because the security is not in that register at all.
At a glance
The target wholesaled roofing, cladding and insulation products to contractors and lumber yards from two Ontario yards. The buyer was a larger distributor buying assets, not shares, precisely to leave historic liabilities behind. Counsel ran the standard security diligence: a PPSA search against the exact legal name, against the registered business name, and against the two former names disclosed in the corporate profile.
The bank's payout letter, requested as a courtesy rather than as a condition, referred to a release of “section 427 security”. Nobody on either side of the transaction had seen that phrase in a deal file before.
Security taken by a bank under the Bank Act is a federal regime that predates the provincial personal property registers and runs entirely beside them. It is not registered under the PPSA, does not appear on a PPSA search, and is perfected by a notice of intention registered with an agency of the Bank of Canada. The whole of the target's inventory — $3,410,000 of the $7,300,000 the buyer was paying — was pledged to the bank, and every search the buyer had run was incapable of showing it.
The reason nobody looked is structural, not careless. A firm whose practice is service businesses, professional practices and software companies will never encounter this, because those targets cannot give this security. It exists only for a defined list of borrowers.
Purchase price $7,300,000. Net-asset schedule: inventory $3,410,000, accounts receivable $1,620,000, equipment $740,000, the balance goodwill. Bank operating line drawn to $2,180,000, secured over inventory alone.
The exposure was not $2,180,000 of debt the buyer would owe — it would owe nothing. It was $3,410,000 of inventory acquired subject to a prior claim of $2,180,000, enforceable against the goods in the buyer's hands, with the buyer's own lender's general security agreement ranking behind it on the same collateral.
One boundary matters for scope. The s.427 security reached the inventory and nothing else. It did not touch the $1,620,000 of receivables, which were unencumbered because no general security agreement had ever been registered against them. A buyer that finds a Bank Act security should not assume it covers the book debts, and a buyer with a clean PPSA search should not assume the inventory is clear. The two registers cover different property under different statutes.
Bank Act s.427(1) authorises a bank to lend “to any wholesale or retail purchaser or shipper of, or dealer in, products of agriculture, products of aquaculture, products of the forest, products of the quarry and mine, products of the sea, lakes and rivers or goods, wares and merchandise, manufactured or otherwise, on the security of such products or goods, wares and merchandise”. Paragraph (b) does the same for a manufacturer, and later paragraphs cover farmers, fishers, foresters and aquaculturists.
Two things follow from that opening, and both are units. The borrower must fall within the listed classes; a services business cannot give this security at all. The collateral is goods, wares and merchandise — inventory and the packing material for it. It is not a charge over the business, and it does not reach accounts receivable.
Perfection is s.427(4)(a), and it is the provision that puts the security outside the provincial system. The bank's rights “are void as against creditors of the person giving the security and as against subsequent purchasers or mortgagees in good faith of the property covered by the security unless a notice of intention signed by or on behalf of the person giving the security was registered in the appropriate agency not more than three years immediately before the security was given”. Section 427(5) then defines the agency as, “in a province, the office of the Bank of Canada or its authorized representative but does not include its Ottawa office”. A different registry, a different search, a different request form.
Read s.427(4)(a) the other way and it is the buyer's only defence: if no notice of intention had been registered, the bank's rights would have been void against a subsequent purchaser in good faith, and the clean PPSA search would have been enough by accident. One had been registered, in 2024, so that door was shut.
What remained was s.428(1), which gives the bank's rights, subject to s.427(4) and to later subsections, “priority over all rights subsequently acquired in, on or in respect of that property, and also over the claim of any unpaid vendor or of any person who has a security interest in that property that was unperfected at the time the bank acquired its security in the property”. A buyer acquiring inventory after the bank took its security acquires rights subsequently — and takes them behind the bank.
For contrast, PPSA s.45(1) provides that “In order to perfect a security interest by registration under this Act, a financing statement shall be registered”. That is the only register a PPSA search reads. Nothing about a clean result speaks to a federal security perfected somewhere else.
The funds flow was rebuilt. $2,180,000 was paid to the bank directly out of the purchase price at closing, ahead of anything to the vendor, against delivery of a release of the s.427 security and a certificate of release of the notice of intention. Closing slipped nine days while the bank's security administration group produced both documents, which was the whole delay: the money was never in dispute.
The buyer would have closed, taken $3,410,000 of inventory subject to the bank's prior claim, and left the vendor corporation holding $7,300,000 of proceeds and an unrepaid $2,180,000 line. The vendor intended to repay it. Had anything gone wrong — and the reason security exists is that things occasionally do — the bank's remedy under s.428(1) runs against the goods, wherever they are, ahead of the buyer and ahead of the buyer's own lender.
A target in one of the s.427 borrower classes, with a bank operating line on its balance sheet, and no bank registration on the PPSA search. That combination is the signal. A bank does not advance a margined operating line to a wholesaler against nothing; if the provincial register shows no bank, the security is somewhere else.
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