SECURED TRANSACTIONS

Question 1

Secured transaction

Answer 1

when a borrower gives the lender a right to take specific property (called collateral) if the borrower doesn’t repay the loan

Question 2

Collateral security

Answer 2

if the borrower doesn’t repay, the lender can take and sell that item to get their money back

Question 3

Secured vs Judgement vs Unsecured creditor

Answer 3

Secured creditor – has the right to take possession of and sell specified assets in satisfaction of a debt

Judgement creditor – has obtained a judgement and may obtain an execution order or writ authorizing seizure and sale of certain assets

Unsecured or general creditor – has no security, or right to seize, any of the debtor’s assets

Question 4

Real Property vs Personal Property

Answer 4

Real Property – land and anything permanently affixed to it (fixtures)

Personal Property - anything that is not “real property”

Question 5

Why Should a Creditor Take a Security Interest?

Answer 5

Encourages Repayment

Expands Lending Opportunities: It enables sales or loans to higher-risk borrowers

Protects Against Depreciation Risks: If the collateral maintains its value over time

Ideal for Long-Term Debts

Question 6

When Should a Creditor not Take a Security Interest?

Answer 6

When the administrative and legal costs of enforcing security interests may outweigh the benefits for small or low-value transactions. In such cases, creditors might prefer unsecured credit with efficient risk management strategies.

Question 7

Types of Security Interests

Answer 7

• Conditional Sales Contracts
• Chattel Mortgages
• Pledges
• Assignment of book Debts
• Floating Charges

Question 8

Conditional Sales Contracts

Answer 8

Debtor in Possession, Creditor Retains Ownership

Repossession Upon Default: If the debtor stops paying, the creditor can repossess the goods.

Suing for Balance After Resale:
If the repossessed goods sell for less than what’s owed, the creditor can sue the debtor for the remaining balance.

Contracts Can Be Assigned:
Creditors often sell or transfer the contract to a third party, like a financing company, which then collects the payments.

Example: A customer purchases furniture on a “pay over time” plan. The seller can reclaim the furniture if payments are not made.

Question 9

Chattel Mortgages

Answer 9

A mortgage on personal property (not land or real estate).

The borrower retains possession of the property but grants the creditor a legal interest in it.
If the borrower defaults, the creditor can seize and sell the property to recover the loan.

Example: A business owner uses their equipment as collateral for a loan.

Question 10

After-acquired property

Answer 10

assets that the debtor does not yet own at the time of creating the security interest (e.g., a mortgage or loan agreement) but will acquire later.

Question 11

Pledges

Answer 11

The debtor transfers possession of an asset to the creditor as security for the loan.

The creditor holds the pledged asset until the debt is repaid.
If the debtor defaults, the creditor can sell the asset.

Example: A pawn shop loan where jewelry is pledged as security.

Question 12

Assignment of book Debts

Answer 12

A security interest in accounts receivable (money owed to the debtor by customers).

The debtor (e.g., a business) assigns its right to collect customer payments to the creditor.
The creditor uses the accounts receivable as collateral for the loan.

Example: A business borrows money and uses its outstanding invoices as security.

Question 13

Floating Charges

Answer 13

A mortgage or security interest over all of a corporation’s current and future assets that are not already pledged to another creditor.

Unlike fixed charges, a floating charge allows the company to continue using the assets (e.g., inventory, equipment) in its operations until default occurs.

Upon default, the charge “crystallizes,” and the creditor gains the right to seize the assets.

Question 14

Personal Property Security Act (PPSA)

Answer 14

• provincial, database
• a law in Ontario (and other provinces) that governs how security interests in personal property (movable goods, not land) are created, perfected, and enforced

Question 15

Fundamentals of PPSA

Answer 15

• Define and standardize the remedies a secured party has against a defaulting debtor
• Create a system of registration records and give notice of all secured interests, and
• Set priorities between secured parties and general creditors

Question 16

Steps of PPSA

Answer 16

(1) Creation of security Interest: Agreement between the parties;
(2) Attachment of a Security Interest: The moment in time when a debtor’s property becomes subject to a security interest;
(3) Perfection of the security interest: The moment in time when a creditor’s security interest becomes protected.

Question 17

PPSA – Perfection 2 ways

Answer 17

(1) Where the secured party takes possession of the assets (e.g. bailment; pledge); or
(2) Once registration under the PPSA is complete.

Question 18

Who registers a PPSA in Practice?

Answer 18

Manufacturers or wholesalers to other businesses: likely to register since high-risk business and likely to be other creditors with priority;

• Must maintain perfection if there are any changes / it expires.

Question 19

Intangible property

Answer 19

• Personal Items of value that cannot be touched or physically held.
• Can be owned by either an individual or a corporation
• Examples: book debts, copyright, digital assets

Question 20

What if two people have security over the same assets?

Answer 20

The law determines the priority (who gets paid first) based on specific rules under the Personal Property Security Act (PPSA) - Timing of Perfection

Question 21

Timing of Perfection

Answer 21

The general rule is “first in time, first in right.”
Priority depends on when a security interest is perfected (usually by registration)

Question 22

Special Priority for Purchase Money Security Interest (PMSI)

Answer 22

• gives a creditor priority for specific assets purchased with their loan, even if another creditor already has a general security interest.

A PMSI arises when a loan is used specifically to buy an asset (e.g., a car or equipment), and that asset becomes collateral for the loan.
The creditor providing the PMSI must register it within strict timelines (e.g., 15 days after the debtor receives possession of the asset).

Question 23

Investment Property

Answer 23

• stocks/bonds, securities accounts, futures contracts or futures accounts.
• creditor can perfect by having “control” of the investment property, does not need to have physical possession (since they are often held in banks)

Question 24

Bailment

Answer 24

refers to a legal relationship where the owner of personal property (the bailor) delivers it to another party (the bailee) without transferring ownership, with the understanding that the property will be returned or otherwise dealt with according to the owner’s instructions.

Question 25

Types of Bailment

Answer 25

Gratuitous Bailment: No payment involved; typically, a lower standard of care is expected.

Bailment for Hire: Payment is involved, and a higher standard of care is required.

Question 26

Liability of bailee

Answer 26

The bailee is liable for damages resulting from negligence but not for unavoidable accidents unless due care was not exercised.