Anonymised, illustrative composite. A supplier had registered against the target for eleven years without ever taking security. The standard discharge demand does not work on a registration with nothing behind it, and the vexatious-registration provisions that look like the answer are not one.
At a glance
A buyer was acquiring the assets of a wholesale bakery in the Greater Toronto Area for $2,900,000, funded with $1,750,000 of senior debt from a Schedule I bank against a first general security agreement. The bank's commitment carried the ordinary condition that at funding there be no registrations against the acquired assets other than those being discharged at closing.
The PPSA search, run correctly against the target's incorporated name, returned four registrations. Two were the vendor's operating bank. One was an equipment lessor on a spiral mixer. The fourth was a flour and ingredient supplier that had registered in 2014 against inventory, equipment, accounts and other, and had renewed it since.
The supplier had never taken security. The relationship had always run on open account with a personal guarantee from the founder and nothing else. Asked for its security agreement, the supplier's credit department answered after eleven days that there wasn't one: a former clerk had registered against every account crossing a $75,000 credit limit, whether or not the customer had signed anything. The registration had sat on the register for eleven years describing a security interest that never existed.
That is not a registration left behind after a loan is repaid, and it does not have the same fix. The buyer's lawyer had already sent the standard demand and the supplier had already, and correctly, declined. Compare an undischarged lien from a repaid equipment loan, where a real security interest had been satisfied and the usual machinery worked.
Purchase price $2,900,000. Senior debt $1,750,000. One registration, made in 2014, covering four collateral classifications, securing nothing. Trade account outstanding at the time of the search: $41,600, all current, none of it in default. Eleven days to get an answer from the supplier's credit department and a further nine to get the registration off, against a rate hold with sixteen days left on it. The statutory penalty for refusing was $500 — which is to say, no deterrent at all next to a delayed closing.
First, what a registration proves. Under Ontario's Personal Property Security Act s.46(5), registration “does not constitute constructive notice or knowledge to or by third parties of the existence of the financing statement or financing change statement or of the contents thereof” and “does not create a presumption that this Act applies to the transaction to which the registration relates.” The register records that somebody registered. It is not evidence that a security interest exists.
Why the usual demand failed. Section 56(1) is the provision every closing checklist reaches for, and it is keyed to a security agreement that has been satisfied. It operates where “all the obligations under a security agreement to which it relates have been performed”, or where part of the collateral is to be released “upon payment or performance of certain of the obligations under the security agreement”. With no security agreement, there are no obligations to have performed and nothing for s.56(1) to operate on. The supplier was right to say there was nothing to discharge.
The provision that does apply. Section 56(2), headed Discharge where no security interest acquired, is written for precisely this case: where the person named as secured party “has not acquired a security interest in the property to which the financing statement or notice relates, any person having an interest in the property may deliver a written notice to the person named as the secured party demanding registration of a financing change statement” or a certificate of discharge, and that person “shall register” it. Note who may demand: any person having an interest in the property, which includes a buyer under an agreement of purchase and sale — not only the debtor.
Refusal has a price. Under s.56(4), a secured party who without reasonable excuse fails to register within 10 days after receiving the demand “shall pay $500 to the person making the demand and any damages resulting from the failure”, recoverable in any court of competent jurisdiction. Section 56(5) then allows an application to the Superior Court of Justice for an order that the registrar amend the central file to show the registration discharged.
What is not the answer. Part V.1 looks inviting and does not fit, for three reasons that are each about the unit the provision governs. First, the definition in s.66.1(1) is conjunctive: a “vexatious registration” is one the registrar considers to have been tendered “for the purpose of annoying or harassing the person named as the debtor in the document, or…for any other improper purpose” and tendered by a person who “does not hold the security interest referred to in the document”. A clerk following a bad internal policy satisfies the second limb and fails the first. Second, s.66.3 is a power to reject a document being tendered — s.66.1(2) defines “document” that way — so it cannot reach a 2014 registration at all; only s.66.4 can. Third, s.66.7 provides that “nothing in this Part is to be construed as requiring the registrar to…reject a document or discharge a registration”. It is a registrar's power, not a buyer's entitlement.
The demand was reissued under s.56(2) rather than s.56(1), addressed to the supplier as the person named as secured party and delivered by the buyer in its own right as a person having an interest in the property, with the ten-day period and the $500 consequence on the face of it. The discharge was registered on day eight and the deal funded on the original date.
The realistic downside was never that the supplier could enforce — it had nothing to enforce. It was that the bank would not fund over an undischarged registration in the same collateral classifications as its own security, because that is what its commitment letter said. A lost rate hold on a $1,750,000 facility, and a vendor entitled to treat a missed closing date as the buyer's failure, are large numbers attached to a registration worth nothing.
The tell is the shape of the search result, not its length. A registration by a trade supplier with no matching entry in the debt schedule, no corresponding balance in the accounts, and a collateral description that reads like a form default is a candidate for having no security behind it. The reflex to test is the demand letter: a checklist that sends the s.56(1) demand to every registrant treats all four as the same thing when only three are.
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