The vendor took a general security agreement over everything the buyer had bought. No financing statement was ever filed, and the trustee treated the vendor as unsecured.
At a glance
A retiring HVAC contractor sold the business as an asset purchase for $1.9 million: $1.3 million in cash funded by the buyer's bank, and a $600,000 five-year vendor take-back note at 7%. The vendor took a general security agreement over all of the purchased assets and, separately, agreed to postpone to the bank. The postponement was documented, signed and delivered. The registration was not made.
The vendor's lawyer had prepared the security agreement and assumed the buyer's lawyer would register, because the buyer's lawyer was registering the bank's charge. The buyer's lawyer registered his own client's lender and nothing else, which is exactly what he had been retained to do.
The sibling failure in this cluster is a vendor who ranks behind a senior lender because it agreed to. This vendor did not rank at all. An unperfected security interest is not a weaker version of a perfected one against a trustee in bankruptcy; against that particular class of person the statute does not subordinate it, it switches it off. The note's terms, its interest rate, its security package and its postponement were all irrelevant to the outcome. The defect was a $8 filing.
At the date of the assignment the note stood at $412,000. The bank's registered facility stood at $780,000. Realisations from the equipment, vehicles, inventory and receivables came to $690,000. The bank was paid in full from its perfected charge; after trustee's fees and the preferred claims, the unsecured pool distributed at approximately 4.1 cents on the dollar. The vendor, ranking with the trade creditors, received $16,900 on $412,000.
Had the security been perfected, the vendor would still have ranked behind the bank by agreement, and $690,000 of realisations against $780,000 of bank debt would have left it with nothing anyway — which is the point at which most retellings stop. The fifteen-day rule below is why they should not.
Section 20(1) of Ontario's Personal Property Security Act does two different things in two adjacent clauses, and the difference decided this file. Clause (a) subordinates: until perfected, a security interest in collateral “is subordinate to the interest of” a person with a perfected security interest, a lienholder, or an execution creditor. Clause (b) does not subordinate. It provides that until perfected, a security interest “in collateral is not effective against a person who represents the creditors of the debtor, including an assignee for the benefit of creditors and a trustee in bankruptcy”. Not effective, not merely postponed. Subsection 20(2)(b) fixes the moment for testing it: the trustee's rights “are to be determined as of the date from which the person’s representative status takes effect”.
The fifteen days nobody used. A vendor who takes security over the very assets it has just sold holds a purchase-money security interest. The Act's definition in s.1(1) covers “a security interest taken or reserved in collateral, other than investment property, to secure payment of all or part of its price”. Subsection 33(2) then gives a purchase-money security interest in non-inventory collateral priority “over any other security interest in the same collateral given by the same debtor” if it was perfected “before or within 15 days after” the debtor obtained possession. Registered inside that window, this vendor's charge over the equipment and vehicles it had sold would have outranked the bank's pre-existing all-assets charge on those assets — without negotiating anything, and notwithstanding the postponement it had already signed, which addressed the bank's facility rather than the statutory priority. The vendor gave up a first-ranking claim over the sold assets and an effective claim against the trustee, in the same act of not filing. See the PPSA registration and search glossary entry and collateral a seller can register against the buyer.
Perfection and priority are two separate questions answered by the same act. Section 20(1)(b) is what makes the interest good against the trustee; s.33(2) is what makes it rank ahead of the bank. Registering achieves both; not registering loses both.
Quebec is a different instrument, not a translated one. There is no provincial personal property security act. The equivalent is a hypothec: article 2660 of the Civil Code of Québec defines it as “a real right on movable or immovable property made liable for the performance of an obligation”. Article 2696 provides that “A movable hypothec without delivery shall, on pain of absolute nullity, be granted in writing.” Article 2663 supplies the publication requirement — a hypothec “must be published in accordance with this Book or the Book on Publication of Rights so that the hypothecary rights it confers may be set up against third persons” — and publication is made in the register of personal and movable real rights described in article 2980. Enforcement is on a statutory timetable rather than at will: article 2757 requires a prior notice filed at the registry office and served on the debtor, and article 2758 sets the surrender period at “20 days after registration of the notice in the case of movable property, 60 days in the case of immovable property, or 10 days if the creditor intends to take possession”. A vendor securing a Quebec business is drafting and enforcing a different instrument on a different clock.
The vendor recovered $16,900 and sued his own counsel; that claim settled confidentially. The practical change both firms made is the same one: registration is now a closing deliverable with a named owner on the closing agenda, verified by a search printed the morning after closing rather than a promise made the afternoon before. On a vendor take-back the search is run twice — once before funding, to see what is already registered, and once inside the fifteen-day window, to confirm the vendor's own filing is there.
The registration fee is trivial and the timing is not. Filed on the day of closing, the vendor holds a purchase-money interest ranking ahead of the bank on the sold equipment and vehicles, worth roughly $340,000 of the $690,000 realised, and an interest fully effective against the trustee. Filed on day sixteen, it is effective against the trustee but ranks behind the bank. Filed never, it is worth $16,900. Three outcomes separated by a fortnight and a form.
The tell is a closing agenda where the security agreement has a signatory but the registration has no owner. Ask one question at the pre-closing call: who is filing the vendor's financing statement, and on what date? If the answer is a name, the file is fine. If it is we assumed you were, it is this file.
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