Practically Perfect - Errors in Financing Statements

On September 14, 2017, Bill 154, Cutting Unnecessary Red Tape Act, 2017 (the “Bill”), passed its first reading in the provincial legislature.

Among other things, the Bill proposes to amend the Personal Property Security Act (“PPSA”) and the Repair and Storage Liens Act (“RSLA”), aligning them with current Ontario case law regarding errors and omissions in financing statements or financing change statements.

If the Bill becomes law, this would be good news for enterprises that finance, lease or store motor vehicles. The proposed changes will increase certainty as to whether clerical errors in their registrations will invalidate their security interests.

Registering an interest in a motor vehicle under either of these statutes requires a secured creditor to provide, among other things, the vehicle identification number (“VIN”), the debtor’s name and, if the debtor is an individual, their birthdate. Under the current versions of the PPSA and RSLA, an error in any of this information that is “likely to materially mislead” a reasonable person results in the security interest remaining unperfected.¹ Since an unperfected interest is subordinate to perfected secured creditors and trustees in bankruptcy, these seemingly-minor clerical errors can lead to large, unexpected losses.

This concept of “materially misleading” appears subjective and ambiguous. Happily for lenders, Ontario courts have clarified the concept, providing that a reasonable person would do two searches: one against the VIN and another against the debtor, such that the secured party’s interest would be discovered even if the debtor’s name or date of birth was erroneously registered. As such, an incorrect name would not “materially mislead” the reasonable searcher if the VIN is accurate, and the security interest would remain perfected notwithstanding the error.²

The Bill proposes to align both statutes with the existing common law treatment of erroneous registrations. If the VIN is accurate and listed in the designated place, and the statement includes the name of at least one debtor and has all other required fields filled in, the Bill provides that an error in the debtor’s name or birthdate will not invalidate the registration.

Secured creditors must continue to be cautious when listing a vehicle’s VIN. Where the VIN is (i) not included (if the vehicle is classified as a consumer good); (ii) included in the wrong place; or (iii) incorrect, the error will leave the security interest unperfected.

The Financial Services Group has extensive experience protecting the rights of secured creditors, and represents many leading companies in the vehicle and equipment financing industries. For more information, please contact any member of the Financial Services Group. Details can be found on our Financial Services web page.

* Sean Green is a 2017-2018 articling student at Aird & Berlis LLP

¹ PPSA, s. 46(4); RSLA, s. 9(2).

² The leading case is Re Lambert (1994), 20 OR (3d) 108, 119 DLR (4th) 93 (Ont. C.A.); leave to S.C.C. refused. 123 DLR (4th) vii.