How to Use the PPSA and Protect a Business Loan in Ontario
PPSA Ontario Simplified
If you make a business loan to a small company in Ontario, you run the risk of the loss of your capital should the company default on the loan payments. For this reason, should you wish to lend cash (or other assets) to a company, you should protect your loan. In Ontario, there is a legal framework called the ‘PPSA Ontario’ to accomplish protection of your business loan.
In this article, you’ll learn how to use the PPSA Ontario to protect a business loan that you make, and the main restrictions upon your level of protection.
What Is the PPSA Ontario?
The Personal Property Security Act (PPSA) Ontario is the law that regulates the creation and registration of ‘security interest’ in ‘personal property’ in Ontario. Each province has its own version, and though broadly the same there are differences in the detail.
What Is a Security Interest?
A security interest is a legal right of the creditor to collateral provided by the debtor. This legal right is created by a promissory note issued by the debtor to the creditor.
This collateral will be in the form of personal property of the debtor, and can be in the following classifications:
- Goods (e.g. consumer goods, equipment, inventory)
- Documents of title
- Chattel paper (such as conditional sales contracts and leases)
- Accounts receivable
- Intangibles such as licenses
What Is a Promissory Note?
A promissory note is like an I.O.U. and is described in Section 176 of the Canadian Federal Bills of Exchange Act as “an unconditional promise in writing made by one person to another person, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person or to bearer.”
For a promissory note to have legal standing as a bill of exchange, it must:
- Have no conditions attached
- Be signed by the company
- State that payment is to be made at either a certain time or on demand
- Provide a certain amount of payment (called a ‘sum certain’)
Together with evidence of disbursement of the business loan, the promissory note provides evidence that the loan was made and is to be repaid. However, you still have some way to go before your business loan is protected.
Next Steps to Protect Your Business Loan
Let’s take a step back and consider the collateral that the company puts up to protect the loan.
Prepare a General Security Agreement (GSA)
You must prepare a GSA and register it online with ServiceOntario under the PPSA. The GSA will:
- Identify the amount of the loan or that it is a line of credit
- The collateral against which the loan is secured
- Indicate the location of the collateral
- Identify the obligations of the debtor (for example, to ensure that the collateral is insured and unencumbered)
- Identify any reporting obligations of the company in respect of the loan
There may also be other positive or negative covenants attached to the GSA – these are things that the company must do and things that the company must refrain from doing.
Stipulate Remedies for Default
The GSA should also state any remedies for default, which may be either monetary (for example, not making payment) or non-monetary (for example, acting in contradiction to the covenants of the GSA).
Remedies might include commencing legal action against the company or seizing the collateral to satisfy the debt.
Is Your Business Loan Fully Protected?
To this point, you have fully evidenced that the business loan has been made, identified the collateral that it is secured upon, stated the obligations of the company with regard to the loan, and stipulated the remedies available to you should the company default.
While this may sound comprehensive protection, you should understand that your business loan may rank behind other loans that are secured ahead of yours.
Run a PPSA Search
A PPSA search allows you to see if other parties have registered the company’s personal property as security. If it has been registered, then you will rank below them should the company default – increasing the risk to your loan.
The Government Always Comes First
It is possible that the company is a debtor to the government. For example, it may owe unpaid taxes. If this is the case, the government becomes a creditor with first claim to all collateral of the company.
If you are making a business loan, our advice is that you secure it against collateral of the company. The PPSA Ontario is the framework under which this is done, and provides the legal basis for creating evidence that the loan has been made and the means to protect that loan. By conducting a PPSA search, you can identify where you rank against other creditors, but you should remember that regardless of this you will rank behind the government.
If you don’t take security for a business loan, you become an unsecured creditor and will rank behind all secured creditors (and, of course, the government).
If you are considering making a loan to a business in Ontario, make sure you do so with all the facts and the maximum protection possible. Contact us today.