The Status of Unperfected Security Interests in Insolvency Proceedings

The Canadian provincial Personal Property Security Acts (PPSAs) all clearly state that an unperfected security interest is ineffective against the debtor's trustee in bankruptcy. However, they are less clear about the status of an unperfected security interest in Companies Creditors' Arrangement Act (CCAA) proceedings, Bankruptcy and Insolvency Act (BIA) commercial and consumer proposal proceedings and receiverships and in a number of recent cases, courts have held that the rule only applies in straight bankruptcy proceedings. By contrast, Revised Article 9 explicitly says that an unperfected security interest is ineffective in all proceedings under the United States Bankruptcy Code, and the strong-arm clause in s.544(a) of the Bankruptcy Code is to the same effect. This paper critically analyzes the Canadian cases from both a doctrinal and a policy perspective, identifies the policy arguments in support of a wider application of the rule and makes a proposal for amendment of the PPSAs, the BIA and the CCAA to bring Canadian law more closely into line with the United States position