We live in the century of borrowing and debt, and thus terms like debtor and creditor have become prevalent in our day-to-day lexicon. But where is debt, there is risks associated with it, and both personal and institutional risks exist. While personal risks involve inability of an individual debtor to pay off his/her debts according to a borrowing contract, institutional risks involve inability by the lending institution to collect the debt that the debtor owes it and thus lose a big chunk of funds (which could potentially be invested otherwise) due to phenomenon like insolvency and bankruptcy.
Lending institutions and individual lenders ought to protect themselves from potential situations when the debtors become insolvent or otherwise unable to pay off the whole or a part of a debt. A statutory vehicle exists in Ontario that has been specifically designed to protect creditors from situations where they would lose the money lent is called the Personal Property Security Act (PPSA). PPSA is a statute (or law) that provides the means for creditors to become secured.
What does it mean?
Secured creditors register their security interest over certain asset(s) of the debtor. As a result, the secured creditor holds a lien (meaning that he can claim) against those assets against which the security has been registered. These assets may include property such as real estate, equipment, vehicles or even accounts payable and accounts receivable.
To become a secured creditor, one must obtain a financing statement which is issued once a new PPSA registration has been filed with the Ministry. ESC provides online platform for PPSA registrations which is accessible by ESC account holders. Refer to this PPSA Guide for information on the rules and best practices that apply to PPSA registrations and contact ESC for the information on how to obtain an ESC account and obtain your PPSA financing statement.
Generally, any PPSA registration must include the following information:
- Number of years that the PPSA registration will be valid for (this number can be prolonged by renewing your registration in the future);
- Principal amount being secured (this is usually the amount of debt itself);
- Name and Address of Secured Party (this is the lender);
- Name and Address of Debtor (this is the borrower). If the debtor is an individual, date of birth is to be provided;
- Motor vehicle descriptions need to be provided if the PPSA is registered against an automobile or other vehicle type;
- Collateral classification needs to be included and can be selected from a list of available classification type which consist of consumer goods, equipment, accounts, etc.;
- Collateral classification, which is the description of the collateral classification, expressed in free text.
What are the benefits of becoming secured?
In cases of default, creditors have an option to ask the court to rule in their favour, in which case the debtor will probably be made to somehow, either through his wages garnishment or other means, pay his debt off. In cases of bankruptcy, however, unsecured creditors claims are rarely, if ever, satisfied.
Secured creditor benefits in the way that being secured allows him to seize the debtor’ assets in order to satisfy the debt. In the event of a bankruptcy, secured creditors’ claims have priority over unsecured creditors claims, which means that if there are proceeds that become available to creditors after liquidating the debtors’ assets, they are first rewarded to the secured creditors, and only after that to all the others. Often the case is that there are just not enough proceeds to satisfy the unsecured creditors. Moreover, and to some secured creditor’ dismay, it may happen that the debtor’s assets are just not enough to reward the proceeds to all of the secured creditors, and the sequence in which the secured creditors are awarded is decided by the priority which is determined by the sequence in which they registered their securities. Therefore, it is of utmost importance to register your security as soon as possible after becoming a creditor in the first place.