Securities - Personal Property Security Act (PPSA). Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd.
In Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd. (Ont CA, 2021) the Court of Appeal considered an interesting (and uncommon) PPSA case of attaching corporate shares as security against a loan. In this extract the court covers the issue generally:
(1) The Governing Principles. Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd.
 Contemporary personal property security legislation was intended to simplify and rationalize the law of secured transactions. Under s. 2(a), the PPSA applies to “every transaction without regard to its form and without regard to the person who has title to the collateral that in substance creates a security interest.” The PPSA adopts a “functional approach to determining what security interests are covered by its provisions”: Bank of Montreal v. Innovation Credit Union, 2010 SCC 47,  3 S.C.R. 3, at para. 18. Almost anything that serves functionally as a security interest is a security interest for the purposes of the Act: I Trade Finance Inc. v. Bank of Montreal, 2011 SCC 26,  2 S.C.R. 306, at para. 26. Subsection 2(a)(i) of the PPSA specifically includes a pledge among the forms of transaction that give rise to a security interest.
 The steps required to create a security interest in collateral, on the one hand, must not be confused with the steps required to make a security agreement enforceable against third parties, on the other hand. Under s. 9(1) of the PPSA, a consensual security agreement is “effective according to its terms between the parties to it.” By contrast, under s. 11, “[a] security interest is not enforceable against a third party unless it has attached”. Attachment can be achieved in different ways, under s. 11(2) of the PPSA, depending on the nature of the collateral. The question of attachment is not strictly at issue in this case since there is no third-party claim on the pledged collateral. I use the language of attachment to reflect the fact that Canada Grace’s security interest did attach to the pledged shares.
 If Canada Grace became a “secured party having control of investment property” for the purposes of s. 17.1 of the PPSA, then Canada Grace could in theory “sell, transfer, use or otherwise deal with the collateral”, subject only to the terms of the security agreement. Each of the terms “investment property” and “control” requires analysis.
(a) “Investment property”
 The term “investment property” is defined in s. 1 of the PPSA as “a security, whether certificated or uncertificated, security entitlement, securities account, futures contract or futures account”. The word “security” is in turn defined by reference to the Securities Transfer Act, 2006, S.O. 2006, c. 8 (“STA”). Under ss. 1 and 10 of the STA, the term security includes a share or equity interest issued by a corporation. In this case, the pledged shares fit the STA definition of “security” and, by extension, “investment property”.
 The concept of “control” was introduced into Ontario law through the STA in 2006, accompanied by simultaneous amendments to the PPSA.
 The 2006 amendments to the PPSA responded to a concern that the PPSA was ill-equipped to deal with declining physical share ownership and the growth of the “indirect holding system” in capital markets. In the indirect holding system, shareholders own shares and other securities through securities intermediaries, clearing services, banks, or other financial institutions. The development of the indirect holding system permitted greater efficiency in securities trading but left the law of secured transactions to rely on increasingly unwieldy analogies to physical share ownership in order to accommodate use of securities accounts and book entries as collateral: see Richard McLaren, Secured Transactions in Personal Property in Canada, loose-leaf, 3rd ed. (Toronto: Carswell, 2016), at para. 1.04; Robert Scavone, “Stronger than Fictions: Canada Rethinks the Law of Securities Transfers in the Indirect Holding System” (2007) 45 Can. Bus. L.J. 67, at p. 77.
 Professor McLaren concisely sets out the concept of control, at para. 14.03:
Control is the functional equivalent of the prior law’s notion of physical possession of a certificated security, but has been expanded to conform to current market practices with regard to investment property. Under the STA, control is not limited to physical possession, however includes it within the concept.See also Eric Spink, “Securities Transfer Act – Fitting New Concepts in Canadian Law” (2007), 45 Can. Bus. L.J. 167, at p. 184. Control exists when the secured party is in a position to liquidate the property without any further involvement from the owner of the property: Scavone, at pp. 23-30; Spink, at p. 185.
 The STA defines “control” by reference to the different means of acquiring it, depending on the nature of the collateral. Sections 23-26 of the STA describe how a purchaser can acquire control of certificated securities (s. 23), uncertificated securities (s. 24), or “security entitlements”, which is the broader category encompassing, most notably, securities accounts (s. 25). The PPSA incorporates each manner of obtaining control in s. 1(2), which refers to a “secured party” rather than a “purchaser”. In each case, “control” essentially mimics a pledge arrangement.
 If the parties employ certificated securities, s. 23 of the STA states that control may be established by simple possession of the certificates. This arrangement resembles a traditional pledge whereby one party places the physical share certificates in the other’s possession.
 In the case of uncertificated securities such as the pledged shares in Atlas Springbank, s. 24 of the STA establishes that the secured party will have control of an uncertificated security if (a) the uncertificated security is delivered to the secured party (i.e. registered in the secured party’s name on the books of the issuer); or (b) the issuer has agreed that the issuer will comply with instructions that are originated by the secured party without the further consent of the registered owner. This latter arrangement is referred to as a “control agreement”.
 While the STA enumerates a fixed set of methods for obtaining control based on the nature of the investment property, the notion of control must be applied functionally rather than formalistically. For instance, a control agreement governing uncertificated securities need not take a particular form so long as it grants the secured party rights to give instructions to the issuer and to deal with the securities without the further consent of the registered owner.
 Control, as defined in the STA, plays a number of roles in the PPSA scheme. Under s. 11(2)(d) of the PPSA, a secured party’s security interest in investment property attaches when the secured party has control of it. Similarly, a secured party may perfect a security interest in investment property by control under s. 22.1 in order to establish priority in a dispute between secured parties. For the purposes of this appeal, control is a pre-requisite to the application of certain remedies, including the remedies set out in s. 17.1 on which Canada Grace relies.
In Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd. (Ont CA, 2021) the Court of Appeal considered an interesting (and uncommon) PPSA case of attaching corporate shares as security against a loan. In this extract the court reviews PPSA remedies under Part V of the Act:
(1) The Governing Principles. Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd.
(a) The rights and remedies of secured parties
 The rights, remedies, and duties of a secured party under the PPSA are set out in Part V of the PPSA. Section 59(1) identifies three sources or categories of remedies:
Where the debtor is in default under a security agreement, the secured party has the  rights and remedies provided in the security agreement and  the rights and remedies provided in this Part [V] and, when in possession or control of the collateral,  the rights, remedies and duties provided in section 17 or 17.1, as the case may be. [Numbers and emphasis added.] The principal remedies available under Part V include the sale of the collateral or the acceptance of the collateral in satisfaction of the debt, commonly known as foreclosure. Like the rest of the PPSA, Part V was intended to harmonize a previously unstructured area of the law in which parties were required to select an appropriate remedy from among a patchwork of common law rights: see McLaren, at para. 15.01; Ronald Cuming, Catherine Walsh & Roderick Wood, Personal Property Security Law (Toronto: Irwin Law, 2012), at p. 616.
 In order to ensure greater certainty and predictability in commercial matters, the remedies set out in Part V are only to a limited extent subject to modification by contract in advance. Section 59(5) provides that the remedies contained in ss. 63-66, including the rules governing sale and foreclosure remedies, cannot be waived or varied by contract to the extent that they give rights to the debtor and impose duties on the secured party. Contractual modifications are only permissible if they benefit the debtor. Ronald Cuming et al. describe Part V in the following terms, at pp. 618-619:
For the most part, this scheme of enforcement remedies is mandatory and a secured party has only a limited ability to vary it by contract. The PPSA provides that to the extent that the enforcement provisions give rights to the debtor or impose obligations on the secured party, they cannot be waived or varied except as provided by the Act. It is noteworthy that s. 59 identifies ss. 17 and 17.1 as potential sources of “rights, remedies and duties”. Section 17.1 is the relevant provision when dealing with investment property:
Although the PPSA provides that a secured party also has the rights and remedies provided in the security agreement, these cannot detract from the rights conferred upon the debtor by Part V and by section 17. The PPSA permits contractual variation of the remedial scheme if the variation expands the rights available to the debtor on default. [Emphasis added.]
(1) Unless otherwise agreed by the parties and despite section 17, a secured party having control under subsection 1 (2) of investment property as collateral, Section 17.1 creates an exception to the enforcement regime in Part V of the PPSA. It exempts certain forms of investment property held as collateral by removing some of the formal and procedural requirements that could impede a secured party’s ability to deal with the collateral expeditiously. Like other 2006 amendments to the PPSA and STA, the exception in s. 17.1 is aimed at improving efficiency in capital markets. It does this in two ways.
(a) may hold as additional security any proceeds received from the collateral;
(b) shall either apply money or funds received from the collateral to reduce the secured obligation or remit such money or funds to the debtor; and
(c) may create a security interest in the collateral.
(2) Despite subsection (1) and section 17, a secured party having control under subsection 1 (2) of investment property as collateral may sell, transfer, use or otherwise deal with the collateral in the manner and to the extent provided in the security agreement. [Emphasis added.]
 First, s. 17.1(1)(c) permits a secured party with control of investment property to create a new security interest in the collateral. This provision permits secured parties with control of investment property to “reuse” shares and other securities held in connection with structured transactions, derivatives, or brokerage accounts. For example, a secured party may re-pledge the collateral to a third party or grant a new security interest in it, subject to the security agreement: Scavone, at p. 86; see also McLaren, at para. 1.04; Jacob Ziegel, David Denomme & Anthony Duggan, Ontario Personal Property Security Act: Commentary and Analysis, 3rd ed. (Toronto: LexisNexis, 2020), at p. 184.
 Second, s. 17.1(2) removes restrictions on the secured party’s right to dispose of the investment property it holds as collateral, subject only to the terms of the security agreement. Borrowing again from Professor McLaren, s. 17.1(2) “dispels any ambiguities as to whether the secured party can be allowed to sell collateral and prompts the parties to use the security agreement to establish the rights of the secured party to transfer the collateral”: at para. 14.09. I agree, and I would add that s. 17.1(2) presupposes, or at least acknowledges, that parties giving security in investment property are sophisticated actors capable of drafting contracts to suit their mutual need for expeditiousness in fast-moving capital markets. It could be used, for example, to permit contracting parties to define in advance the conditions under which a securities broker would be entitled to liquidate a client’s rapidly depreciating margin account.
 Section 17.1(2) does not state that a secured party is permitted to accept collateral in satisfaction of the debt under the security agreement. Do the words “sell, transfer, use or otherwise deal” include a right of foreclosure?
In Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd. (Ont CA, 2021) the Court of Appeal considers whether a contractual right of security survived over statutory rights under the PPSA:
H. A note on Harry Shields
 As noted earlier, the appellants assert that the application judge misapplied the ruling in Harry Shields in finding that Canada Grace could rely entirely on the freestanding contractual right of foreclosure outside of the PPSA. Because I have found that the respondents’ notices were PPSA compliant, I need not address this issue but I will do so in light of the argument.
 In my view, the ruling in Harry Shields has been superseded by later cases interpreting the PPSA such as Bank of Montreal v. Innovation Credit Union and i Trade Finance Inc. v. Bank of Montreal, and especially by the 2006 amendments to the PPSA and STA, all of which were discussed earlier.
 The proper understanding and application of the ruling in Harry Shields was the focus of argument before the application judge and in the parties’ submissions on appeal. The plaintiff, Harry Shields Ltd., executed a demand debenture in favour of the Bank of Montreal. The debenture agreement gave the bank the right to appoint a receiver in the event of default. The bank also required Shields to pledge the debenture back to the bank under a separate pledge agreement. This was to ensure that the bank had possession of the debenture upon default. When Shields began to experience financial difficulties, the bank demanded payment and appointed a receiver under the debenture. Shields argued that the bank was not entitled to enforce the debenture directly because it held the debenture as a pledgee and was therefore required to resort to its remedies as a pledgee under the PPSA. Shields submitted that the bank might be required to sell the debenture, potentially to itself, before it could enforce it.
 Lane J. defined the issue before him as whether, “where the parties have expressly agreed that the security holder has received the debenture both as a continuing collateral security enforceable directly and as a pledge, the security holder is confined to the remedies of a pledgee.” He reasoned: “I see nothing in the PPSA that compels this conclusion,” adding, “This view leads to the commercially sensible result intended by the parties: that the bank may enforce the debenture as owner without any ritual need to sell it to itself.”
 Section 17.1, which was introduced after Harry Shields, simplifies the analysis. To the extent that most share pledges will give the secured party control over investment property (securities), secured parties can now rely on s. 17.1 instead of Harry Shields to “sell, transfer, use or otherwise deal with collateral”. The issue, in most cases, will be to determine whether the pledged instrument is “investment property” within the meaning of the PPSA. Whether a debenture of the kind used in Harry Shields could be considered “investment property” under the PPSA is a matter for another day. If it is not, Harry Shields may still provide some guidance. However, in most cases dealing with a pledge of shares or other securities, s. 17.1 sets out the framework.