STOCK IN TRADE FINANCING

Transcription

1 STOCK IN TRADE FINANCING Under The Personal Property Security Act BY PROFESSOR RONALD C. C. CUMING

2 NOTES ON INVENTORY FINANCING AGREEMENT A. Context The form security agreement is designed for use in a financing transaction.between a lender and a small business enterprise under the ~ollowing circumstances: (a financing is being_provided for the acquisition of stock-in-trade (inventory and for other current expenses of the business; (b the contract contemplates the present advance of a specified amount, but clearly permits additional advances; (c the collateral securing the advances is inventory, equipment and proceeds. It should be noted that while the agreement is not designed primarily to provide financing on the security of accounts (book-debts, accounts and other intangibles are specifically claimed as proceeds; (d the draft agreement does not contain clauses which would ordinarily be found in an agreement of this kind but which deal with non-security matters such as warranties of title as to collateral, bookkeeping requirements, inspection of books by a secured party, location of the tangible collateral and insurance on the collateral. B. Comments. on Specific Clauses Note: In the following comments, reference is made to page and line number of the form security agreement. References to sections of the S.P.P.S.A. are to Bill 42, Description of Parties and Collateral Page 1, lines 5 to The Act specifies a writing requirement for security agreements. Section lo.~ote that lack of writing.affects enforceability only as against third parties -- not on an inter Partes basis. See also section 12(1. - The description requirements for section 10 are in some respects different from those required for registration of a financing statement. - The description requirements for the financing statement are set out in regulations to the Act. See section 73(g. See Registration Guide. The following features should be noted: - collateral is to be described by "type or kind in a manner so as to distinguish it from types or kinds of collateral not covered by the security agreement". See lines

3 - 2 - collateral which is not inventory but which is equipment and which is a "vehicle" or "airplane" must be described by serial number. See sections 2(w, 2(n and Registration Guide. ~ee lines collateral which requires special and Regulations. lines is or becomes a fixture registration. See section S4 See also section 36. See scope of the security Interest Page 1, lines 15 to In addition to the security interest in the described collateral. the agreernetjt provides for. a security interest in after-acquired inventory and equipment. See lines and sections 12 and As soon as new collateral is acquired (i.e. the debtor acquires "rights in the collateral" - section 12 the security interest in it automatically attaches and is perfected if registration steps are taken. - While the Bank's security interest in the after-acquired property may be.perfected it may be subordinate to a subsequent purchase-money. security interest. See sections 2(gg, 34(2 or a non-purchase money security interest which was registered prior to that of the Bank. See section 35. Of course if the Bank can establish that it has a purchase-money security interest in the collateral, it will get the protection of section 34(2. - The agreement makes specific provision for a security interest in proceeds. See line 49. The Act specifica+ly recognizes the right of a secured party to assert a sec~ity interest in proceeds of his primary collateral. See section 2(ee, 28. The following features should be noted in connection with security interests in proceeds: - proceeds can be in any form. Section 2 (ee. - in order to have a perfected security interest in cash proceeds (section 2(ee} or in proceeds of the sarne kind as the original collateral ~t is not necessary to include a description of proceeds in the financing statement. - in order to have a perfected security interest in proceeds other than that mentioned in the preceding paragraph, a description. of the proceeds must be included in a financing statement. See. section 28(2.

4 - 3 - Obligations Secured Page.. 2",.lines _1.;"20. P:a9~S' j-s passiili.. - if the original financing statement did not contain' a required collateral description, the security interest in the proceeds nevertheless remains temporarily perfected for 15 days so as to give the secured party an opportunity to comply. See section 28(3. - perfected security interests in proceeds are vulnerable in special circumstances. See sections 31 (4 (e, 34 (4, 34 (5 - The agreement provides for a specific present advance, but in addition, contemplates future advances and obligations. See sections 2(r, 14/ 20(2, 35(4. The most important feature to note about securing future advances is that the secured party is allowed to "tack" future advances (section 35(4 even though he has notice of an intervening perfected security interest in the same-collateral. However, his right to "tack" cannot be used to defeat the interests of unsecured creditors. (section 20(2. Protection and Disposition of the Collateral Page 2, lines The agreement allows the debtor to deal with the inventory collateral in the ordinary course of business. The absence of such a clause would not, however, prevent the debtor from selling the inventory free of the security interest. See section 30(1 - Other restrictions (express or implied on the debtor1s dealing with the collateral must be read subject to: - section 30(2-(3 - buyers of consumer or farming goods. - section 31(1 - holders of money. - section 3l(2} - purchasers.of instruments. - section 31(3 - purchasers of negotiable documents of title. - section 31(4 - purchasers of chattel paper. - section 34(2 - purchase-money lender or seller. A secured party wishing to ensure that his security interest in negotiable property is protected should perfect by possession (Section 24 when possible.

5 The agreement contains a "trust proceeds" clause. See lines The Act does not recognize "trusts" as a method of protecting interests' in~oceed61 although it adopts equitable rules of tracing (often associated with_breaches of trust as a method. of establishing an -interest in proceeds. _See section 2 (ee. However, it is the practice in Ontario to use trust clauses since they are recognized in bankruptcy law. (See Flinteff v.'. ROyal Bank.L1964, S.C.R. 631} Ford Tractor & Equipment Sales of canada Ltd. v. Trustee of Estate of Otto GrundInan Implements Ltd I.. 72 W~W.R. 1 (Man. C.A.». Presumably these 'clauses are used ex abundanti cautela.to provide protection against the trustee in bankruptcy in a case where a security interest has not been perfected under provincial law. Default Page 2 - lines Page 3 - lines The parties are free to specify in the agreement what constitutes default. However, insecurity clauses, page 3, lines must be read subject to section 16. Further, the debtor is given a statutory right to reinstate the agreement by remedying a default. See sections 62(1, 62(2. Exercise of default rights and remedies is subject to discretionary judicial control. See section 63. Remedies Upon Default Page 3 - lines Page 4 - lines Generally, a security agreement need not specify default remedies since available remedies are prescribed in the Act. see page 3, lines and Part V of the Act. - The Act does leave the parties considerable freedom to deal with_default rights and remedies, but only within clearly prescribed limits. See sections 56(5-(8. - If a receiver or receiver-manager is to be used, the security agreement should specifically so provide, (see page 2, lines otherwise the secured party must invoke the equitable jurisdiction of the Court of Queen's Bench to appoint a receiver. See section 56. The Act is much less restrictive with respect to realizations on security-interests through a receiver than through other methods. See sections 56(1-(3,63. - The default rights of the secured party can be summarized as follows: - collection of money payable on chattel paper or intangibles. accounts, Section seizure of collateral. Sections 58, 36, 37.

6 sale of collateral after appropriate notice (where required. Section 59. action for deficiency. Section 60(3. - foreclosure by agreement. section 61. NOTE: To the extent applicable other chattel security legislation must be complied with. See Bill 25 The EXemPtions Amendment Act, Bill 37 The Distress lunendment Act, Bill, 38 The Limi tatio_n of Civil Rights Amendment Act. C. Related Factors - Failure to perfect a security interest renders it subordinate to certain unsecured creditors (section 20(1 (b - (e» the trustee in bankruptcy (section 20(1 (d» abd subsequent transferees (section 20(1(e. - A perfected security interest may be subordinate to prior execution creditors. See Bill 41 - The Executions Amendment Act.

7 SECURITY AGREEMENT (Inventory, Equipment and Proceeds I THE PARTIES SASKATOON ELECTRIC SALES LIMITED, having its principal place of business at 123 Third Avenue South, saskatoon, Saskatchewan is hereinafter ca~led the Debtor. THE BANK OF WESTERN CANADA, 321 Fourth Avenue North, Saskatoon, Saskatchewan is hereinafter called the Secured Party.. IN CONSIDERATION OF FINANCIAL ACCOMMODATIONS heretofore and hereafter rendered by the Secured Party to the Debtor the Debtor agrees with the Secured Party as follows: II. SECURITY INTEREST AND COLLATERAL THE DEBTOR GRANTS to Secured Party a security interest in the following property, hereinafter called collateral, and does hereby 46619n, transfer to the Secured Party all of -its right, title and interest in the collateral: (a ALL INVENTORY and without limiting the generality of the foregoing including: refrigerators, dishwashers, washing machines, electric stoves, microwave ovens and other gas and electrical appliances; repair parts used in the repair of electrical and gas appliances; (b ALL EQUIPMENT AND FIXTURES and without limiting the generality of the foregoing including: one 1980 Ford delivery truck, model XL, colour-blue, serial number ; one Showmaster showcase which is or is to become a fixture attached to the following land: Lot 12, Block 25, Plan S4550, saskatoon, Saskatchewan. (c" (d ALL PROPERTY of the type or kind described in this agreement now owned by the debtor or in which the debtor has an interest or which at any time hereafter is acquired by the debtor whether or not it comes into the debtor's possession; ALL PROCEEDS of the collateral described in this agreement and without limiting the generality of the foregoing including: all accounts, money, chattel paper, instruments, intangibles and as well, any choses in action, claim or right to payment.

8 - 2 - III. ADVANCEMENTS THIS AGREEMENT provides for and secures an advance of the principle sum of Fifty Thousand ($50, Dollars to be repaid to the Secured Party ~ogether with interest from the date hereof at the rate 5 of eighteen (18% percent per annum on the unpaid principle as follows: and further secures all future advances made by the Secured Party to the Debtor and all other obligations of the Debtor to the Secured Party, direct or indirect, absolute or contingent, joint or several, due or to become due whether now existing or hereafter arising and whether arisil'\9 5 under this agreement or any extension or modification thereof or under any other agreement between the parties and without limiting the generality of the foregoing secures any money spent by the Secured Party in a~quiring, perfecting, defending or 'enforcing the security interests, liens or charges provided for herein and in ensuring or otherwise perfecting the Secured Party's interest in the collateral described herein. o IV. PROTECTION AND DISPOSITION OF COLLATERAL SO LONG AS the Debtor is' not in default under any of his obligations to the Secured Party hereunder or otherwise, the Debtor shall have the right to sell all inventory in the ordinary course of its business and to use any other collateral herein described in any lawful manner not inconsistent with this agreement. o 5 THE DEBTOR shall not sell or otherwise dispose of the equipment or fixtures described above without first obtaining the written permission of the Secured Party. ALL MONEY collected or received by the Debtor as proceeds or in resp~ct of accounts, chattel paper, instruments, intangibles. chases in action or rights to payment whether collected or received before or after default shall be received by the debtor as trustee for the secured party and shall be accounted to and paid over to the secured party upon demand. THE DEBTOR shall not grant a security interest in any of its inventory, equipment, fixtures_.or proceeds to any person without first obtaining the written permission of the Secured Party. 5 v. DEFAULT THE DEBTOR shall be in default hereunder if: (a (b the Debtor fails to pay when due any amount payable on any advances made by the Secured Party or on any other indebtedness of the Debtor to the Secured party; or the Debtor fails to observe or perform any of the provisions of this or any other related agreement between the Debtor and the Secured Party; or

9 - 3 - (e (d (e the Debtor fails to pay its debts as they become due, ceases to do business as a going concern or makes an assignment for the benefit of creditors1 or a petition under the Bankruptcy Act is filed against the Debtor1 or the property of the Debtor becomes ene.umbered by a tax lien or it attached or levied or a receiver is appointed; or ; (f- VI REMEDIES UPON DEl1'AULT the Secured Party deems itself insecure or decides that the collateral is in jeopardye UPON SUCH Dm~AULT: (a (b (c all indebtedness secured hereby shall become immediately-due and payable at the Secured Party's option without notice to the Debtor and the Secured Party may proceed to enforce payment of the sarne and to exercise any and all of the remedies afforded by ~ Personal Property Security Act or otherwise possessed by the Secured Party; the Debtor agrees to pay all reasonable costs incurred by the Secured Party in enforcing the Secured Party's rights and remedies after default under this agreement; the Secured Party rnay appoint in writing any person to be a receiver (which term shall include a receiver and a rnanag~r of the collateral, including any rents or profits therefrom, and may remove any receiver and appoint another in his stead. Such receiver 80 appointed shall be entitled to exercise all powers conferred on a reciever by The Personal Property Security Act and The Business COrporations Act and shall have the power to take possession of the collateral and carry on or concur in the carrying on of business of the Debtor, and to sell or concur in selling the collateral or any part thereof. Any such receiver shall for all purposes be deemed to be the agent of the Debtor. The Secured Party may from time to time fix the remuneration of such receiver. All monies from

10 - 4 - ; ; ; ; ; time to time received by such receiver shall be paid by him first to the discharge of all the rents, taxes, rates, insurance premiums or outgoings affecting the collateral, secondly in payment of his remuneration as receiver, thirdly in keeping in good standing any liens or charges on the collateral prior to the security constituted by this agreement, and fourthly in or toward payment of such part of the indebtedness and liability of the Debtor to the Secured Party as to the Secured Party seems best and any residue of such monies so received shall be paid to the Debtor or disbursed according to law. Except as otherwise provided by law, the Secured Party in appointing or refraining from appointing such a receiver shall not incur any liabili~y to the receiver, the Debtor or otherwise. (d the Seoured Party ~y o~lleot, realize, sell or oth~rwise deal with accounts, chattel paper, instruments, choses in action and rights to payment or any part thereof in such manner, and on such terms and conditions and at such time or times as may seem to it advisable and without notice to the Debtor.' The Secured Party shall not be liable or accountable for failure to collect, realize, sell or obtain payment of accounts,. chattel paper, instruments, intangibles, choses in action or rights to payment or any part thereof and shall not be bound to institute proceedings for the purposes of collecting, realizing or obtaining payment of the same or for the purposes of preserving any right to payment of the Secured Party, the Debtor or any other person in respect of the same. All money collected or received by the Secured Party in respect of accounts, chattel paper, instruments, intangibles, choses in action or right to payment may be applied on account of such part of the indebtedness and liability of the ~ebtor to the Secured Party as the secured Party seems best, or in the discretion of the Secured Party may be released to the Debtor, all without prejudice to the liability of the Debtor or to the Secured Party1s right to hold and realize the security. VII FURTHER ASSURANCES THE DEBTOR SHALL from time to time forthwith on the Secured -Party's request do, make and execute all such financing statements, further assurances, documents, acts and matters and things as may be required by the Secured Party of and with respect to the collateral or any part thereof or as may be required to give effect to this agreement

11 - 5 - and the Debtor hereby constitutes and "appoints the manager or acting manager for the time being of the above-mentioned branch of the Secured Party bank the true and lawful attorney of the undersigned irrevocable with full power or substitution to do, make and execute all such 5 statements, assignments, documents, acts, matters or things with the right to use the name of the Debtor whenever and wherever it may be deemed necessary of expedient. LO ls VIII. FURTHER DEALINGS BE'lWEEN THE PARTIES THE SECURED PARTY MAY GRANT extensions of time or other indulgences, take and give up security, accept compositions, grant releases and discharges and otherwise deal with the Debtor, debtors of the undersigned, sureties or others and with the collateral as the Secured Party may see fit without prejudice to the liability of the Debtor or the Secured Party's right to hold and realize on its security. IX. GENERAL 20 THIS AGREEMENT: 30 (a (h (c shall he a continuing agreement in every respect; shall he governed by the law of the Province ox Saskatchewani may be terminated by the Debtor by written notice to the secured Party at the above-noted address at any time when the Debtor is not indebted or liable to the Secured Party. FAILURE OR DELAY by the Secured Party in exercising and enforcing 15 any right, power, privilege, lien, option or remedy hereunder shall not operate as a waiver thereof, all of which shall continue in full force and effect until all indebtedness of the Debtor to the Secured Party has been fully paid and satisfied and the waiver by the Secured Party of any breach of this agreement shall not be oonstrued or act as a waiver of any subsequent 10 breach or any continuing breach after demand for strict performance, nor affect nor impair any right or power resulting from any breach. THE DEBTOR SHALL GIVE NOTICE in writing to the Secured Party of any change of its name or change in location of collateral which is or is 15 likely to become a fixture. X. DEFINITIONS IN THIS AGREEMENT the terms "chattel paper", "fixtures", "future

12 - 6 - advances", "instruments", "intangibles", "inventory", "proceeds" have the meaning respectively ascribed to them in The Personal Property Security Act and in this agreement expressly or by inplication. 5 THE PARTIES HERETO HAVE executed this A~eement the, day of " A.D. 19 o SASKATOON ELECTRIC SALES LIMITED Per: 5 (SEAL o THE BANK OF WESTERN CANADA Per:. (SEAL