Credit Laws
Securing Goods Across Provincial Borders
by Michael N. Bergman
Inadequately recognized by many managers, the effect of the inter-provincial transportation of securitized goods on the legal validity of the security is significant.
The objective of taking security over goods, manufactured for sale and delivery, or for finishing and delivery or simply to secure an account, is to assure payment collateralized by the assets of the debtor. Where the securitized goods are transported only within the bounds of the province in which the security was created, the effects of transportation are not an issue. Moving securitized goods across provincial borders is a whole different issue. There are complex issues that impact on the continuing effect of security over goods when moved from province to province.
In Canada the various types of security over personal property or movable items is a provincial jurisdiction. Each province has different laws. One province does not necessarily recognize the security granted over goods by another province, although that security may continue to be valid in the province of origin. The province of the ultimate destination of the goods, through its Courts, may not enforce the original security of the province of origin. A simple illustration will demonstrate this. A $100,000 piece of industrial equipment is manufactured in Ontario. The purchase price is on instalment terms to be secured by a security interest registered in Ontario under the Ontario Personal Property Security Act. The term of payment is by instalments over 90 days. The equipment is to be delivered to the end user in Quebec within 30 days of manufacture, meaning that payment on the purchase price will not be complete at the time of delivery. The security interest registered in Ontario, while valid in Ontario, is not valid in Quebec because the law of security on personal property is determined by the law of the place where personal property is found.
To deal with this problem and to facilitate commercial transactions and the transportation of goods, Canadian provincial laws have generally recognized an ongoing security interest in goods securitized in another province, provided that they are only temporarily transported to another province for no more than 30 days. Generally speaking the security must be re-registered in the province of destination after 30 days. In our example the securitized goods will be permanently located in another province for more than 30 days. Consequently to preserve the Ontario security interest a movable hypothec will have to be registered in Quebec with the Registre des droits personnels et réels mobiliers, failing which after 30 days the original Ontario security interest will be lost.
This illustration demonstrates the challenge for managers to coordinate the registration of security interests with the terms of payment and the ultimate destination of the goods. Prudent managers will develop adequate internal, corporate credit mechanisms for the taking of inter-provincial purchase orders and attending to the registration of security interests both in the province of origin and the province of destination. Inter-provincial securitized deliveries should be prepared with an appropriate letter agreement or formal contract dealing with localization of the goods and the security process. It is appropriate that the attendant costs be borne by the debtor.
The same problem arises when securitized goods leave their province of origin to be warehoused for more than 30 days in a second province and then in turn to be shipped from the warehouse to a third province. The ongoing validity of the security in this second example would require proper registration in the province of origin, in the province of warehousing and the province of ultimate destination.
The many nuances of the timing of registration of security interests as goods travel from province to province requires close consultation with legal counsel.
Mr. Bergman is a Quebec and Ontario lawyer with offices in Montreal and an affiliate office in New York City, working in all manner of business law and business litigation. He has contributed to the Credit Institute's bulletin in the past and developed its French language credit course.
