Home About Us Reports Final Report 2004 - Modernizing Canada's Secured Transactions Law: The Bank Act Security Provisions Introduction

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Modernizing Canada's Secured Transactions Law: The Bank Act Security Provisions

1. Introduction

The availability of credit is critically important to our economy. If businesses had to rely on their own cash flow to fund their current and future projects, they would need to drastically cut back on their activities. This would have a seriously detrimental effect on their business activities as well as on the national economy. Countries with legal systems that restrict the ability of businesses to obtain loans operate under a competitive disadvantage. [1]

Every Canadian province and territory has enacted a modern secured transactions regime to govern secured credit. These legal regimes are highly regarded around the world, and countries that have not reformed their secured transactions law often look to the Canadian systems as a model. Despite these successes, some aspects of Canadian secured transactions law are woefully inadequate. Most legal experts identify the relationship between the provincial and territorial secured transactions regimes and the federal Bank Act security provisions as the most pressing problem. Banks in Canada may take provincial or territorial security interests in collateral to secure their loans. However, they also have the option of taking a special security device available only to banks. This security device is currently referred to as section 427, Bank Act security, although this designation has changed over time with the renumbering of the Bank Act. [2] The co-existence of these two secured transactions regimes has produced considerable uncertainty; uncertainty that seriously undermines the efficiency of Canada's secured transactions law.

This Report briefly examines the economic importance of an effective secured transactions regime and traces the evolution of the Canadian secured transactions law. It then examines the particular problems caused by the co-existence of provincial/territorial and federal secured transactions regimes in both the common law jurisdictions, as well as the civil law jurisdiction in Quebec. The Report then identifies fundamental principles to use in assessing the available reform options and, using these principles, critically assesses the strengths and weaknesses of each reform proposal. The Commission concludes that the Bank Act security provisions should be repealed. The Commission believes that repeal is the best way to produce an efficient and less complex legal environment for extending secured credit. It also has the advantage of creating a fairer system; one in which bank and non-bank lenders are treated alike.

1  See H. Fleisig, “The Power of Collateral” (1996) 33 Finance and Development 44.

2  It has previously been designated as section 74, section 88 and section 178 Bank Actsecurity. It is presently governed by sections 427 to 429 of the Bank Act, S.C. 1991, c. 46.