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

3. The Evolution of Canadian Secured Transactions Law

To understand the evolution of Canadian secured transactions law, both provincially/territorially and federally, one must know something about the federal character of Canada.

Under section 92(16) of the Constitution Act, 1867, each province has exclusive power to legislate property matters and civil rights in its jurisdiction. As a result, secured transactions law is primarily a provincial matter. Notwithstanding this, the federal Parliament may legislate secured transactions pursuant to several powers that are enumerated in section 91 of the Constitution Act, 1867, including the power over banks and banking. This permits Parliament to create, through legislation, a statutory regime for the creation of a special secured transactions regime that governs security interest granted to banks by their borrowers. When valid provincial or territorial law conflicts with federal law, the federal law has precedence through the doctrine of federal paramountcy. [1] It is within this constitutional framework that the present form of Canadian secured transaction law emerged.

Canadian banking legislation originally restricted banks from taking provincial or territorial security interests in personal property to secure their loans. This was consistent with the then prevalent notion that the credit-granting practices of banks should be limited to short-term extensions of credit. However, because of Canada's emerging economy there was a nearly insatiable need for long-term loans. Parliament responded in 1890 by including statutory provisions in the federal Bank Actthat permitted banks to secure their loans to a limited class of borrowers by taking a security in specific classes of goods. At first, the security was available only for wholesale manufacturers of goods and wholesale purchasers of primary products. The scope of the legislation was subsequently expanded to include farmers, fishers, aquaculturists and retail sellers. This expansion was largely the result of the lobbying efforts of members of those sectors who wished to use their assets as collateral to secure bank loans. [2]

In 1923, the Bank Act provided for the creation of a registry system to alert third parties that a bank had taken a security interest in the borrower's property. Failure by a bank to register rendered the security void against certain subsequent third parties, such as buyers and other secured parties. [3] The Bank Act also provided rules that set out the enforcement rights of the secured party upon default, as well as rules governing other aspects of the security. [4]

In 1967, banks were released from the prohibition against taking provincial or territorial security interests in personal property. However, in many respects the Bank Act security was a better security device. Provincial and territorial secured transactions law had not been modernized and reformed, leaving a number of difficulties to confront the secured lender. For example, the provincial and territorial registry systems required registration of the actual security document, whereas the Bank Act provisions provided a more flexible system under which it was sufficient to register a brief notice in the federal Bank Act registry system. At that time, the co-existence of two competing security regimes was not perceived as posing a significant problem. Although people had to undertake multiple registry searches before acquiring an interest in personal property, they simply accepted this inconvenience. Since provincial and territorial secured transactions law had not yet embraced the idea of a single registry system for all security interests, multiple registry searches were considered the norm. Although the situation was more complex in the civil law jurisdiction of Quebec, the resolution of priority competitions in the common law jurisdictions was relatively uncontroversial since basic law principles for common law property were used to determine priorities. The Bank Act security introduced a number of innovative features into the law of secured financing, and it was widely acknowledged that these advantages far outweighed the disadvantages of having both provincial/territorial and federal secured transactions regimes. [5]

However, as provinces and territories enacted modern secured transactions regimes, difficulties arose. To a large degree, the modernized provincial and territorial secured transactions regimes were self-contained codes in which the legislation set forth most of the important rules concerning the creation, priority and enforcement of security interests in personal property. Unfortunately, the co-existence of the Bank Act security regime and the modernized provincial and territorial secured transactions regimes has produced problems of extraordinary complexity.

1  Multiple Access Ltd. v. McCutcheon, [1982] 2 S.C.R. 161; Tennantv. Union Bank of Canada [1894] A.C. 31; Bank of Montreal v. Hal, [1990] 1 S.C.R. 121.

2  R.H. Anstie, “The Historical Development of Pledge Lending in Canada” (1967) 74 Canadian BankerII, 81.

3  Bank Act, s. 427(4)(a).

4  For a more detailed review of these and other aspects of the Bank Act security interest, see B. Crawford and J.D. Falconbridge, Banking and Bils of Exchange, 8th ed., (Toronto: Canada Law Book, 1986) at 403–62; W.D. Moull, “Security Under Sections 177 and 178 of the Bank Act” (1986) 65 Canadian Bar Review 242.

5  See R.J. Wood, “The Nature and Definition of Federal Security Interests” (2000) 34 Canadian Business Law Journal 65 at 71–3.