This article provides a brief introduction to secured transactions and attachment.
Knowledge of secured transactions is integral to lawyers in Vancouver, B.C. practicing in the area of business disputes, and attachment is a concept central to secured transactions.
A secured transaction relates to creditor’s remedies, and is an arrangement whereby a creditor obtains an interest in property owned by a debtor that the creditor may use to satisfy the debtor’s obligation upon default.
This interest is called a security interest, and the creation of such an interest is called attachment, which is “the most crucial aspect of a security interest” (Personal Property Security Law in British Columbia, by Bruce MacDougall, 2009, pg. 169) (“MacDougall”). Absent attachment, creditors will have no security interest to enforce upon debtor default.
The statute governing secured transactions in B.C. is the Personal Property Security Act, RSBC 1996, c 359 (“PPSA”).
With respect to attachment, the PPSA specifies that, absent an agreement between the parties postponing attachment (s.12(1), PPSA), attachment occurs when (1) value is given and (2) the debtor has rights in the collateral or power to transfer rights in the collateral to a secured party (s.12(1)(a) and (b), PPSA). If there is an agreement postponing attachment, then attachment will be postponed accordingly (s.12(1), PPSA).
Note, also, that in order for attachment to be effective against third parties, the secured party must have taken possession of the collateral or met the writing requirements in s.10 PPSA (s.12(1)(c), PPSA; MacDougall, pg. 169).
But what does it mean for value to be given, and for a debtor to have rights in, or power to transfer, collateral?
With respect to value being given, the PPSA defines value as “any consideration sufficient to support a simple contract, and includes an antecedent debt or liability” (s.1(1), PPSA).
The inclusion of “an antecedent debt or liability” means that “value” may be comprised of money lent to the debtor by the secured party in the past (MacDougall, pg. 174).
Typically, the consideration in a security agreement (creating a security interest) is a promise to lend money or extend credit even if such promise is not subsequently honoured (MacDougall, pg. 174).
With respect to the debtor having “rights” in, or power to transfer, the collateral, it will be noted that there is no definition of “rights” in the PPSA.
There are, however, indications of what it means to have “rights” in particular cases. For example, a debtor will have “rights in goods leased to the debtor or consigned to the debtor when the debtor obtains possession of them in accordance with the lease or consignment” (s.12(2), PPSA). Similarly, a debtor is incapable of having rights in “crops until they become growing crops” (s.12(3)(a), PPSA), “the young of animals until they are conceived” (s.12(3)(b), PPSA), “minerals or hydrocarbons until they are extracted” (s.12(3)(c), PPSA), and “trees, other than crops, until they are severed” (s.12(3)(d), PPSA).
The nemo dat rule (“nemo dat quod non habet”) is the “underlying common law principle that regulates what a debtor can give a secured party” (MacDougall, pg. 171). The nemo dat rule essentially states that one cannot give what one does not have, or, to put it in positive terms, one can only give what one has. Thus, if a debtor has, for example, a leasehold interest to be used as collateral, then the creditor cannot have a security interest comprised of a fee simple since this is not something, not being owned by the debtor, capable of transfer to the creditor.
The debtor need not have title to the collateral in order to create a security interest in favour of a creditor. This is evident from s.2(1) PPSA (MacDougall, pg. 172), which says that “Subject to section 4, this Act applies (a) to every transaction that in substance creates a security interest, without regard to its form and without regard to the person who has title to the collateral” (s.2(1), PPSA).
However, it would be unwise to assume that a debtor has sufficient “rights” (sufficient to satisfy s.12(1)(b), PPSA) without having some common law or equitable property in the collateral (MacDougall, pg. 172).