The Importance of Accurate PPSA Financing Statements

The Ontario Court of Appeal has recently underlined the importance of avoiding errors in Personal Property Security Act financing statements that are registered by a secured party.

Fairbanx Corp. v. Royal Bank of Canada involved two competing PPSA registrations:  one by Fairbanx to perfect its purchase of accounts receivable from the bankrupt debtor; and one by the Royal Bank in connection with security for a loan to the debtor.   Fairbanx had filed first, and would normally have ranked ahead of the Bank, except that it made a slight error in the debtor’s name on the PPSA financing statement. This error was understandable:  the debtor’s correct legal name employed an unusual spelling – “Tecnology” (without the “h”) rather than “Technology”.   Moreover, the debtor itself carried on business and used the legally-incorrect “Friction Technology Consultants Inc.” on its letterhead and invoices.  Fairbanx had erroneously filed its PPSA registration using that properly-spelled, but legally-incorrect, name.

In contrast, the Bank – which knew of Fairbanx’s filing in advance – had registered using the correct legal name. When a dispute as to priority arose, it argued that Fairbanx’s error served to invalidate that previous filing, and that the Bank had been launched into priority position instead. Fairbanx countered by relying on curative provisions in s. 46(4) of the Ontario Personal Property Security Act (PPSA) which states that a financing statement is not invalidated by reason only that it contains an error or omission, “unless a reasonable person is likely to be misled materially” by that error.

The parties brought the dispute before Court of Appeal, which held that the s. 46(4) curative provision did not apply to this type of error as Fairbanx had claimed. This is because – despite the debtor’s own use of the legally-incorrect spelling on its letterhead and other documents – a reasonable person would always search against the debtor’s legal name – in this case, the irregularly-spelled “Tecnology” – and accordingly would not find Fairbanx’s registration containing the “Technology” spelling.  Such a person would accordingly be misled within the meaning of s. 46(4).  Therefore, the Court held that the Bank’s security interest had priority over Fairbanx’s unperfected interest in the accounts.  

In arriving at this conclusion, the Court pointed out that under s. 46(4) of the PPSA, a registered financing statement is prima facie effective; it loses validity only if someone is likely to be “materially misled”. The Court also relied on its own earlier decision in a case called Re Lambert, which established that in considering that threshold test, it is an objective test which governs.  A searcher’s subjective knowledge of a prior PPSA filing is irrelevant.

This makes sense, the Court said, in view of the broader goal of the PPSA registration system and the purpose of the financing statement itself, which is to provide information about the debtor, the security, and the lender.  Any of that information may contain mistakes.   

When the mistake pertains to a person’s name, however, certain important considerations apply. The Court of Appeal wrote:

“However, where the error in the registered financing statement is in the debtor’s name, no registration will be disclosed by a search of the correct name. Therefore, the error in the debtor’s name will not come to the attention of the person searching. In those circumstances, s. 46(4) cannot properly apply because the issue of whether the error would materially mislead a reasonable person never arises where the person searching does not find the registration that contains the error.”

Applying this reasoning, the Court concluded that a reasonable person such as the Bank was likely to be misled, and that Fairbanx’s security accordingly ranked behind that of the Bank here.

This case illustrates that even slight mistakes in financing statements can have drastic repercussions.  Lenders must therefore take particular care to ensure that details such as the debtor’s name are correct, and should review existing internal procedures to ensure that the necessary due diligence is performed to establish the debtor’s correct legal name each time.   See: Fairbanx Corp. v. Royal Bank of Canada, 2010 (ONCA)