Anonymised, illustrative composite. Every other registration on this search was an encumbrance on something the target owned. This one disclosed that the target no longer owned the asset at all — and the Personal Property Security Act makes the two look identical.
At a glance
The target placed industrial temporary labour on weekly assignments, paid its workers weekly and invoiced its clients on thirty- to forty-five-day terms. That gap is the defining feature of the sector and the reason so many staffing businesses factor: payroll leaves before revenue arrives.
The search disclosed two registrations. The first was a chartered bank's general security agreement over all present and after-acquired personal property — the ordinary shape, described in the general security agreement glossary entry. The second was a finance company, with the collateral classification limited to accounts. Counsel treated it the way the first one was treated: obtain a payout statement, pay it at closing, obtain a discharge.
The payout request came back with a sentence that changed the deal. There was no payout figure because there was no loan. The finance company had bought invoices, not lent against them. The registration was there to protect its ownership of invoices it had purchased and not yet collected, and it would not be discharged until the last purchased invoice was collected or repurchased.
This is the distinction that separates the file from every other lien problem in a diligence programme. A conventional registration says: the target owns this asset and somebody else has a claim against it, extinguishable with money. A factoring registration says: the target does not own this asset. Money does not fix the second one, because there is no obligation for money to discharge.
Of the $1,384,000 ledger, $1,102,000 in face value had been sold to the factor at an eighty-five per cent advance rate — $936,700 already advanced against it. The target had recorded the advance as a liability, “factoring loan payable $936,700”, and left all $1,384,000 of receivables on the asset side. That is the accounting equivalent of the legal error: a sale recorded as a borrowing.
Correcting the gross-up removes $1,102,000 from assets and $936,700 from liabilities, so net working capital falls by $165,300. That is the balance-sheet answer and it understates the problem badly. The cash answer is that only $282,000 of the ledger was collectable by the company at all, plus the factor's fifteen per cent holdback as and when it collected — up to $165,300, arriving over months, net of fees. Against a first-quarter payroll plan built on $1,384,000.
The agreement was full recourse, with an obligation to repurchase any invoice unpaid ninety days after purchase. At signing, $138,000 of the sold invoices were already past ninety days. That repurchase obligation appeared on no schedule, in no note and in no commitments listing.
The Personal Property Security Act deliberately erases the difference between a sale of receivables and a loan against them, for registration purposes, and it says so twice. Section 2 provides that the Act applies to “a transfer of an account or chattel paper even though the transfer may not secure payment or performance of an obligation”. The definition of “security interest” in s.1(1) is built the same way: it means “an interest in personal property that secures payment or performance of an obligation” and then includes, whether or not the interest secures anything, “the interest of a transferee of an account or chattel paper”. An “account” is “a monetary obligation not evidenced by chattel paper or an instrument, whether or not it has been earned by performance”.
The reason for that design is sound — it puts every claimant to a company's receivables into one register on one set of priority rules. The side effect is that the register cannot tell a searcher which kind of claimant it is looking at. Section 46(2.1) confirms what a registration actually carries: it is a document in which “a financing statement or financing change statement sets out a classification of collateral”. A class, not a transaction type. The word “Accounts” on a search result is consistent with a lender, a factor, or a purchaser of a single invoice.
What the Act does give a buyer is a way to find out. Section 18(1) entitles a debtor, a judgment creditor or any person with an interest in the collateral to require the secured party to furnish, among other things, “a true copy of the security agreement”. That request — not the search summary, and not the payout statement — is the diligence step this file exists to argue for.
Two related provisions matter for what happens next. Section 40(2) governs the customers: “An account debtor may pay the assignor until the account debtor receives notice, reasonably identifying the relevant rights, that the account or chattel paper has been assigned”. So which invoices are safely collectable by the company turns on which customers have been notified, a fact that lives in the factor's files rather than the target's. And s.4(1)(g) takes the buyer's own acquisition outside the Act: it does not apply “to a sale of accounts or chattel paper as part of a sale of the business out of which they arose unless the vendor remains in apparent control of the business after the sale”. The buyer does not register; the factor did.
Three changes and an eleven-day delay. The purchased receivables were carved out of the working capital definition entirely, so the peg measured only the $282,000 the company still owned. The $138,000 repurchase obligation was treated as debt and deducted from the price on a cash-free debt-free basis. And the closing conditions picked up a delivery of the factoring agreement itself, a schedule of every invoice sold and not yet collected, a list of every customer notified under s.40, and a covenant that no further invoices would be sold between signing and closing.
The buyer would have paid $1,102,000 of purchase price, inside the peg, for invoices belonging to somebody else, and then found out when it tried to collect them. Add $138,000 of unrecorded repurchase liability. Add the operational failure that would have arrived first: a payroll plan short by roughly $1,100,000 in the first forty-five days, in a business that pays weekly.
A registration whose collateral is limited to accounts, held by someone who is not a chartered bank. Banks generally take a general security agreement over everything; a registration confined to receivables, in the name of a finance company, is the shape a factoring facility makes. It is a question, not a conclusion — and the question is answered by s.18(1)(d), not by a payout request.
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