Court of Appeal for Ontario

Date: 20210409 Docket: C68360

Judges: Lauwers, Miller and Nordheimer JJ.A.

Between:

Atlas (Brampton) Limited Partnership, Romlex International Ltd. and Peter Grigoras Applicants (Appellants)

And:

Canada Grace Park Ltd., Xing Ou Yang and Atlas Springbank Developments Ltd. Respondents (Respondents)

Counsel: Jeffrey A. Kaufman and Bradley Adams, for the appellants Paul H. Starkman, for the respondents

Heard: December 3, 2020 by video conference

On appeal from the judgment of Justice David Aston of the Superior Court of Justice, dated April 6, 2020, with reasons reported at 2020 ONSC 1861.

Lauwers J.A.:

A. Overview

[1] Atlas (Brampton) Limited Partnership borrowed $1,800,000 from Canada Grace Park Ltd. The loan was secured by a pledge of shares in Atlas Springbank Developments Ltd. given by Romlex International Ltd. to Canada Grace Park Ltd. Less than a year after the loan was made, Atlas Brampton defaulted and Canada Grace purported to foreclose on the pledged shares and to retain them in satisfaction of the debt. As the result, Canada Grace argues that it now owns Atlas Springbank. Both respondent companies are owned by Xing Ou Yang, also known as Jenny O. The appellant Peter Grigoras owns the appellants Romlex and Atlas Brampton.

[2] The appellants applied for a declaration that Canada Grace’s foreclosure on the shares in Atlas Springbank was void for noncompliance with the notice requirements of the Personal Property Security Act, R.S.O. 1990, c. P.10 (“PPSA”) and sought an order that the pledged shares be returned to Romlex. The application judge dismissed the application and denied equitable relief from forfeiture.

[3] For the reasons that follow, I would dismiss the appeal.

B. Issues

[4] The appellants argue that the application judge erred in:

1. Failing to apply Part V of the PPSA, which would have given the appellants a right to redeem the pledged shares by tendering payment of the outstanding debt;
2. Misinterpreting the text of the security agreement between the parties to find that it gave Canada Grace a right of foreclosure;
3. Misapplying the case of Harry Shields Ltd. v. Bank of Montreal (1992), 7 O.R. (3d) 57, [1992] O.J. No. 68 (Gen. Div.), in finding that Canada Grace could rely on the freestanding contractual right of foreclosure outside of the PPSA.

[5] Before the hearing, the panel requested the parties to make submissions on the role, if any, that s. 17.1 of the PPSA might play in this case. Section 17.1(2) provides that “a secured party having control… 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.” The pledged shares in Atlas Springbank are “investment property” as defined in s. 1 of the PPSA. The respondents argue that they had control of the pledged shares and were therefore entitled to foreclose under s. 17.1(2) without notice to the appellants.

[6] The analysis is structured under three issues:

1. What is the nature of Canada Grace’s security interest in the pledged Atlas Springbank shares?
2. Does s. 17.1(2) of the PPSA permit Canada Grace to foreclose on the pledged shares?
3. Does Part V of the PPSA permit Canada Grace to foreclose on the pledged shares?

I address these issues after setting out the factual context and the application judge’s decision.

C. Factual Context

[7] Romlex owned a commercial real estate development property located on Springbank Drive in London, Ontario. In 2018, Jenny O approached Mr. Grigoras, the owner of Romlex, about the possibility of her investing in the Springbank property. Mr. Grigoras agreed.

[8] The parties incorporated Atlas Springbank Developments Ltd. in order to develop the Springbank properties together. Romlex transferred the Springbank properties to the new entity, Atlas Springbank, in return for $2,400,000 and 55 percent of Atlas Springbank’s shares. Jenny O acquired 45 percent of Atlas Springbank’s shares through Canada Grace. Romlex and Canada Grace entered into a shareholder agreement governing the affairs of Atlas Springbank on May 1, 2018. This left Mr. Grigoras with control of Atlas Springbank.

[9] On May 10, 2018, Atlas Springbank loaned $1,800,000 to Atlas Brampton for a purpose that is not disclosed by the record before us. The first interest payment by Atlas Brampton to Atlas Springbank was due November 10, 2018 and the loan was to come due on February 28, 2019. There was some dispute between the parties as to whether the February 28, 2019 due date was agreed but the application judge found that February 28, 2019 was the proper due date.

[10] Atlas Brampton failed to make the first interest payment on November 10, 2018 and the loan then fell into default. To address Atlas Brampton’s default, in December 2018 the parties negotiated and signed a “Supplementary Agreement to the Loan Agreement with Security and Guarantor” (the “Security Agreement”). The Security Agreement contained three key provisions. First, Mr. Grigoras agreed to personally guarantee the loan from Atlas Springbank to Atlas Brampton. Second, Romlex agreed to pledge all of its shares in Atlas Springbank to Canada Grace such that, upon default by Atlas Brampton, the shares would be “transferred” to Canada Grace for the nominal sum of $2, paid in advance. Jenny O received an “irrevocable Power of Attorney” to effect the transfer of Atlas Springbank’s shares from Romlex to Canada Grace upon Atlas Brampton’s default. Third, in the event of such default, Mr. Grigoras would be “deemed as being removed” as a director of Atlas Springbank. In short, if Atlas Brampton defaulted on the loan, Jenny O could unilaterally take ownership and control of Atlas Springbank.

[11] The parties finalized and signed the Security Agreement on or around December 12, 2018. However, almost simultaneously, Atlas Brampton was put into receivership by a third party. The precise cause of the receivership is not on the record. Mr. Grigoras knew about the receivership when he signed the Security Agreement but he did not tell Jenny O, who found out about it on December 17, 2018. Falling into receivership was an act of default by Atlas Brampton. (The receivership was discharged in April 2019.)

[12] Atlas Brampton also failed to pay the balance of the loan when it came due on February 28, 2019. Consequently, as of March 1, 2019, there were two defaults: one for Atlas Brampton falling into receivership and the other for its failure to pay the loan off.

[13] On March 1, 2019, Atlas Springbank’s solicitor wrote to Mr. Grigoras on behalf of Canada Grace to inform him that she had transferred Romlex’s shares in Atlas Springbank to Canada Grace in accordance with the Security Agreement and had removed him as a director of the corporation. The letter stated that Canada Grace was now the sole shareholder of Atlas Springbank and did not offer any possibility of curing the default or redeeming the pledged, now transferred, shares.

[14] On July 25, 2019, the appellants issued a notice of application seeking a declaration that the transfer of Romlex’s shares in Atlas Springbank to Canada Grace was null and void and that Romlex remained the beneficial owner of the shares. They also sought an order that Mr. Grigoras be reinstated as a director of Atlas Springbank. The appellants asserted that they were entitled to notice under s. 63(4) of the PPSA of Canada Grace’s intention to foreclose on the pledged shares and were also entitled to an opportunity under s. 66 of the PPSA to redeem the pledged shares by paying the amount due under the loan.

[15] In the alternative, the appellants sought a new opportunity to redeem the transferred shares by paying the amount due. In the further alternative, the appellants sought equitable relief from forfeiture under s. 98 of the Courts of Justice Act, R.S.O. 1990, c. C.43.

D. The Application Judge’s Reasons

[16] It was not in dispute before the application judge that the PPSA applied to the Security Agreement. The application judge noted that s. 63 of the PPSA authorizes a secured party to “dispose” of collateral upon default, subject to the requirement under s. 63(4) to give notice to the debtor and any other person having an interest in the collateral. He also noted that any person entitled to receive notice is also entitled, under s. 66 of the PPSA, to redeem the collateral by “tendering fulfillment of all obligations secured by the collateral.”

[17] The application judge found that Canada Grace had not given the requisite notice and therefore had no “statutory right” to “dispose” of the collateral under the PPSA: at para. 19. However, he found that “their failure to avail themselves of their statutory right under the PPSA does not matter because they acted within their contractual right under the Security Agreement”: at para. 19 (emphasis in original). The application judge characterized Canada Grace’s contractual right as “effectively amount[ing] to foreclosure.”

[18] In so concluding, the application judge pointed out that s. 59(5) of the PPSA prohibits the waiver or variation of the rights of a debtor or the duties of a secured party when the secured party pursues the remedies set out in Part V of the PPSA: at para. 20. However, he noted that the respondents had “never invoked their right to any remedy authorized under the PPSA” and that the “applicants only have a right of redemption under the PPSA if the secured party chooses to pursue a remedy under the PPSA.”

[19] In stepping outside the PPSA, the application judge relied on Harry Shields Ltd. v. Bank of Montreal (1992), 7 O.R. (3d) 57, [1992] O.J. No. 68 (Gen. Div.). In that case, the plaintiff, Harry Shields Ltd., executed a demand debenture in favour of Bank of Montreal and then pledged the debenture to the bank. The court held that the bank was entitled to enforce the debenture without regard to the duties of a pledgee under the PPSA. In this case, the application judge found that “[l]ike the Bank of Montreal in Harry Shields, Canada Grace Park and Jenny O did not rely on the PPSA for a remedy. They did not need to do so”: at para. 23. He concluded: “The applicants cannot rely on the PPSA for the relief they seek”: at para. 24.

[20] The application judge refused the appellants’ request for equitable relief from forfeiture. He took into account the conduct of the appellants and weighed four factors against them:

1. The appellants had not disclosed the receivership order against Atlas Brampton when they signed the Security Agreement.
2. Mr. Grigoras denied agreeing to change the due date of the loan and falsely accused Jenny O of fraudulently changing the date on the agreement.
3. Romlex continued to collect rent from the tenants of the Springbank property without accounting to Atlas Springbank, the owner of the property, for that rent.
4. The appellants waited too long before bringing the application for relief, without explanation.

[21] Finally, the application judge observed that Canada Grace did not gain a windfall in foreclosing on the pledged shares because the principal loan amount of $1.8 million, with interest, was now nearly equal to the value of the underlying Springbank property. The application judge denied equitable relief from forfeiture, noting that the appellants had not established their ability to pay.

E. ISSUE ONE: What Was the Nature of Canada Grace’s Security interest in the pledged Atlas Springbank Shares?

[22] The parties’ principal arguments on appeal focused on the application judge’s finding that Canada Grace had an independent contractual right to foreclose on the pledged shares outside of the PPSA. However, the panel requested the parties’ submissions on s. 17.1 of the PPSA, which grants additional rights to a “secured party having control of investment property”, in order to determine whether and how its provisions might apply in this case.

[23] The respondents cited s. 17.1(2), which provides:

… 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.

[24] The respondents argued that Canada Grace, as a secured party with control of the pledged shares, was entitled to “transfer, use, or otherwise deal with the collateral” in the manner provided in the security agreement, which was to take the shares in satisfaction of the debt.

[25] The application judge did not specifically address whether Canada Grace could be considered a “secured party having control of investment property as collateral” for the purposes of s. 17.1 because it was not argued before him. However, the question was fully joined in the parties’ written submissions on appeal and it is appropriate for this court to make the determination.

[26] As I will explain, Canada Grace did have control of the pledged shares as collateral for the purposes of s. 17.1. I begin by setting out the governing principles.

(1) The Governing Principles

[27] 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, [2010] 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, [2011] 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.

[28] 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.

[29] 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”

[30] 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”.

(b) “Control”

[31] The concept of “control” was introduced into Ontario law through the STA in 2006, accompanied by simultaneous amendments to the PPSA.

[32] 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.

[33] 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.

[34] 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.

[35] 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.

[36] 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”.

[37] 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.

[38] 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.

(2) The Principles Applied

(a) Canada Grace acquired control of the pledged shares

[39] Neither party disputes that the PPSA applies to the Security Agreement in this case. The Security Agreement was plainly designed to secure Atlas Brampton’s debt. Instead, the disagreement turns on whether and when Canada Grace obtained control of the pledged shares.

[40] The respondents argue that Canada Grace’s security interest in the pledged shares attached on or around December 12, 2018, when the Security Agreement was signed. In their submission, the Security Agreement also functioned as a control agreement within the meaning of the STA because Romlex (which the respondents mistakenly identify as the “issuer” of the pledged shares) agreed to comply with Canada Grace’s future instructions. Canada Grace therefore acquired control of the shares simultaneously with the signing of the Security Agreement.

[41] The appellants argue, by contrast, that Canada Grace’s security interest in the pledged shares only attached on March 1, 2019, when the solicitor for Atlas Springbank transferred ownership of the shares to Canada Grace on the books of the corporation. The appellants rely on s. 17.1(1)(c) of the PPSA, which states that “a secured party having control … of investment property as collateral … (c) may create a security interest in the collateral.” They argue that March 1, 2019 was the first time Canada Grace could “create a security interest in the collateral” because it was the first time Canada Grace had “control” of the shares as their owner. Following the appellants’ logic, the March 1 transfer should be seen as the true creation of the pledge and not as the moment of foreclosure on previously pledged property.

[42] I generally agree with the respondents. However, I note that Romlex is not the “issuer” of the pledged shares. Atlas Springbank issued the shares to Romlex, which in turned pledged them to Canada Grace. However, this error in terminology does not affect the validity of the respondent’s underlying argument.

[43] In my view, the Security Agreement gave Canada Grace control over the pledged shares. Because the shares in issue are uncertificated, the control analysis is governed by s. 24(1)(b) of the STA, which I repeat for convenience:

A [secured party] has control of an uncertificated security if:

(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.

[44] The relevant text of the Security Agreement provides:

3. Considering the risks to Canada Grace, as the shareholder of the Lender, caused by the Borrower’s performance under the Loan Agreement, Romlex agrees to pledge all Romlex’s Share of Lender and any further shares issued, rights and interest entitled (collectively the “Pledged Shares”) to the Canada Grace [sic]. If the Borrower becomes default [sic] for any reason, the Pledged Shares shall be transferred to Canada Grace at $2 nominal costs (the “Share Transfer”), the receipt of payment of such $2 nominal costs is hereby confirmed by Romlex.

To effect such Shares Transfer, all parties agrees that:

(3) Romlex shall provide its cooperation to facilitate such Shares Transfer and removal of the Guarantor as director and officers; Romlex hereby provides its irrevocable power of attorney to Jenny to sign relevant documents for Romlex to effect such Shares Transfer and removal, although signing such documents is not required under this agreement. (Emphasis added.)

[45] Taking the functional approach to control, I find that this clause creates a control agreement between the parties. The parties to the Security Agreement included all the parties necessary to a control agreement, including the issuer of the shares (Atlas Springbank), the registered owner (Romlex), the debtor (Atlas Brampton), and the secured party (Canada Grace). The effect of subclause (3) is to grant Jenny O authority to cause the shares to be transferred on instructions to Atlas Springbank (the issuer) without the further consent of Romlex (the registered owner), and that is what occurred on March 1, 2019, the date of default. Canada Grace had control over the pledged shares for all practical purposes on December 12, 2018.

[46] The appellants’ position is based on a mistaken interpretation of s. 17.1(1)(c). It is incorrect to say that Canada Grace “created” a security interest in the pledged shares at any time. Canada Grace acquired a security interest in the pledged shares from Romlex, the owner of the shares, by virtue of the Security Agreement. Canada Grace could only be described as “creating” a security interest in the pledged shares if it were to grant a security interest to a third party. Moreover, as discussed above, Canada Grace did not need to transfer the pledged shares to itself in order to acquire a security interest in them. Canada Grace’s security interest attached at the moment it obtained control.

F. ISSUE TWO: Does s. 17.1(2) of the PPSA permit Canada Grace to foreclose on the pledged shares?

[47] The appellants point out that secured parties are generally not permitted to foreclose on collateral without following the procedures set out in Part V of the PPSA, including the mandatory notice period and objection process. The respondents argue to the contrary, that, as secured parties with control over investment property, they were entitled under s. 17.1(2) of the PPSA to deal with the pledged shares in the manner provided in the Security Agreement, which imposes no notice requirement, and without regard to the formalities of the PPSA.

[48] In my view, s. 17.1(2) does not entitle the respondents to foreclose on the pledged shares without notice, as I will explain.

(1) The Governing Principles

(a) The rights and remedies of secured parties

[49] 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 [1] rights and remedies provided in the security agreement and [2] the rights and remedies provided in this Part [V] and, when in possession or control of the collateral, [3] the rights, remedies and duties provided in section 17 or 17.1, as the case may be. [Numbers and emphasis added.]

[50] 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.

[51] 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.

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.]

[52] 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:

(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,

(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.]

[53] 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.

[54] 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.

[55] 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.

[56] 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?

(2) The Principles Applied

[57] As noted, Canada Grace had control of the pledged shares from December 12, 2018. Was Canada Grace, as a secured party with control of investment property, permitted to foreclose on the pledged shares without notice under the Security Agreement?

[58] The analysis has two parts. The first construes the Security Agreement. The second construes s. 17.1(2) of the PPSA.

(a) The parties intended to create a contractual right of foreclosure

[59] The appellants argue that even if s. 17.1(2) could be used to foreclose on the shares, the terms of the Security Agreement itself were not sufficiently precise to give rise to a right of foreclosure. A right of foreclosure could only be created using clear and unequivocal language.

[60] I reproduce the terms of the Security Agreement for convenience:

3. Considering the risks to Canada Grace, as the shareholder of the Lender, caused by the Borrower’s performance under the Loan Agreement, Romlex agrees to pledge all Romlex’s Share of Lender and any further shares issued, rights and interest entitled (collectively the “Pledged Shares”) to the Canada Grace [sic]. If the Borrower becomes default [sic] for any reason, the Pledged Shares shall be transferred to Canada Grace at $2 nominal costs (the “Share Transfer”), the receipt of payment of such $2 nominal costs is hereby confirmed by Romlex.

To effect such Shares Transfer, all parties agrees that:

(3) Romlex shall provide its cooperation to facilitate such Shares Transfer and removal of the Guarantor as director and officers; Romlex hereby provides its irrevocable power of attorney to Jenny to sign relevant documents for Romlex to effect such Shares Transfer and removal, although signing such documents is not required under this agreement. (Emphasis added.)

[61] The appellants argue that the “Share Transfer” in question was not intended to enable foreclosure but only to permit the transfer of possession required to create the pledge. I disagree.

[62] The Security Agreement is not ambiguous. The application judge correctly found, at para. 22 of his reasons, that the parties had contemplated a contractual right that “effectively amounts to foreclosure”. I come to this conclusion for two reasons. First, as the respondent argues, the words “pledge” and “transfer” must be given different meanings within the Security Agreement. The Security Agreement refers to two distinct operations on the shares: first, that “Romlex agrees to pledge” the shares and, second, that upon default the “Pledged Shares shall be transferred to Canada Grace”. Read in context, the word “transfer” clearly refers to a further conveyance or disposition of the shares after the initial “pledge”. Canada Grace would already be in possession of the shares at the time of the “transfer”, and the Security Agreement explicitly states that the pledged shares would be “transferred to Canada Grace” as opposed to a third party.

[63] Second, the appellants’ argument that the word “transfer” refers to the creation of the pledge upon default does not make sense in the context of the negotiations between the parties. The Security Agreement came about because Atlas Brampton defaulted under the Loan Agreement by failing to make the first interest payment. Romlex offered a pledge of shares with immediate effect to provide additional security for the loan and to cure Atlas Brampton’s existing default. It cannot plausibly be argued Canada Grace was agreeing that it was only upon the next default that it could take and hold the shares as a pledge. The pledge’s immediate effect is also confirmed by the email exchanges between the parties: “Once the fund is returned the pledged shares will be released in full and returned” (emphasis added). There could be no return of shares that had not already been given.

[64] In my view, the parties intended cl. 3 of the Security Agreement to function as a foreclosure provision. I turn now to the question of whether the clause is effective under s. 17.1(2) of the PPSA and entitles Canada Grace to foreclose without notice to the debtor.

(b) May Canada Grace rely on s. 17.1(2) to foreclose without notice?

[65] To repeat for convenience, the language in s. 17.1(2) provides:

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.]

[66] This court’s task is to interpret this language, “sell, transfer, use or otherwise deal with the collateral”, especially “otherwise deal”. In this task the court must interpret the words of the PPSA “in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of parliament”: Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27, at para. 21.

[67] In my view, s. 17.1(2) does not permit Canada Grace to foreclose on the pledged shares under the Security Agreement without notice. I say this for four reasons.

[68] First, s. 17.1(2) creates an exception to the general enforcement scheme set out in Part V of the PPSA. The exception reduces the statutory protections available to the debtor in favour of greater contractual freedom between the parties. This is not, in itself, contrary to the overall scheme of the PPSA, but it does run contrary to the debtor-protective elements of Part V governing remedies, including the prohibition on contractual modifications to the enforcement scheme that would reduce protections for the debtor. It follows that the exception must be construed narrowly.

[69] Second, a plain reading of the words “sell, transfer, use or otherwise deal” would exclude a power of foreclosure because it is not one of the enumerated rights. I would bring the principle of implied exclusion to bear on this point. In University Health Network v. Ontario (Minister of Finance) (2001), 208 D.L.R. (4th) 459, [2001] O.J. No. 4485, Laskin J.A. explained the principle at paras. 30-31. He quoted Professor Ruth Sullivan: “An implied exclusion argument lies whenever there is reason to believe that if the legislature had meant to include a particular thing within the ambit of its legislation, it would have referred to that thing expressly.” Laskin J.A. added: “In other words, legislative exclusion can be implied when an express reference is expected but absent.”

[70] In my view, s. 17.1(2) is such a provision. I draw the inference that the legislature did not intend the words “or otherwise deal” in s 17.1(2) to include foreclosure. The PPSA’s elaborate treatment of foreclosure in Part V leads to the conclusion that if the legislature meant to make foreclosure available as a remedy related to investment property, it would have done so. Recall that the word “foreclose” is used in the marginal notes to ss. 65(6) and (6.1) of the PPSA, and the coordinate expressions “accept the collateral in satisfaction of the obligation secured” and “accept the collateral in full satisfaction of the obligation” are used in ss. 65(2) and 65(6) respectively, along with an elaborate procedure leading to foreclosure.

[71] Similarly, the words “or otherwise deal” do not open the door to any imaginable transaction. Rather, the words “otherwise deal” are constrained by the earlier words, “sell”, “transfer”, and “use”, which tend toward disposition rather than foreclosure.

[72] Third, reading the words “or otherwise deal” with the pledged shares to permit foreclosure does not fit well into the elaborate debtor-protective statutory scheme governing foreclosure that is set out in Part V of the PPSA.

[73] Foreclosure entails different legal and practical consequences than sale, transfer, or use. Foreclosure extinguishes the debt, but it may cause the debtor to object that a better result could be obtained through sale. That is the reason for the notice and objection procedure in Part V, which I sketch out briefly.

[74] Section 65(2) requires a foreclosing creditor to give notice that it “propose[s] to accept collateral in satisfaction of the obligation secured” – in other words - to foreclose as the marginal note to s. 65(6) states. The secured party “shall serve notice of the proposal [to foreclose] on the persons mentioned in clauses 63(4)(a) to (d),” which includes the debtor, the owner of the collateral, and every person who has a security interest in the collateral.

[75] Under s. 65(6), “the secured party shall be deemed to have irrevocably elected to accept the collateral in full satisfaction of the obligation secured at the earlier of” the 15-day notice period or any extension of it.

[76] Under s. 66, any person entitled to notice has a right of redemption. If the foreclosure comes into effect without redemption, then under s. 65(6.1) “the secured party is entitled to the collateral free from all rights and interests in it of any person entitled to notification” who is in a position subordinate to the secured party. The words “otherwise deal” in s. 17.1(2) are not sufficiently precise to displace this important mechanism.

[77] Fourth, an interpretation permitting foreclosure in this case would not be consistent with the purpose for which s 17.1(2) was enacted. The types of “otherwise dealing” must also be understood in light of the purposes for which s. 17.1(2) was introduced: to ease capital markets transactions, derivatives, and margin trading. As noted, the pledged shares in question are “investment property” and Canada Grace, as pledgee, had control within the definitions of the PPSA and STA. However, the Security Agreement between the appellants and respondents does not engage any of the complexities of the indirect holding system or the fast-moving dynamic of modern capital markets. Canada Grace is not in the same position as a broker or securities intermediary, for example, who must act quickly to liquidate rapidly depreciating accounts. The Security Agreement in this case more closely resembles a traditional pledge of physical collateral. This dispute between real estate investors for control of a development property is not the typical situation that s. 17.1(2) was designed to address.

[78] Put simply, this is not a s. 17.1(2) case. Section 17.1(2) was intended to provide a special accommodation for certain capital markets participants. It should not be understood as a general exception to the foreclosure procedure in Part V of the PPSA.

[79] I conclude that the words “or otherwise deal” in s. 17.1(2) do not contemplate foreclosure on investment property free of compliance with the foreclosure provisions of Part V of the PPSA.

G. Was Canada Grace permitted to foreclose under Part V of the PPSA?

[80] The appellants point out that the application judge found Canada Grace had “failed to give the requisite notice” to foreclose under Part V of the PPSA: at para. 22. However, it is not clear from the application judge’s reasons whether he found, as a matter of fact, that no notice was given or whether, as a matter of law, that the notice given was inadequate.

[81] In my view, Canada Grace followed the PPSA procedure for accepting the shares in satisfaction of Atlas Brampton’s debt. Further, Atlas Brampton has not demonstrated its ability to redeem the shares by paying its debt.

[82] The respondents produced at least five communications with the appellants, which they submit constituted adequate notice for the purpose of foreclosure under Part V of the PPSA:

1. On December 24, 2018, citing Romlex’s receivership, the respondents’ solicitor demanded that Romlex transfer its shares to Canada Grace no later than January 5, 2019;
2. On January 4, 2019, Mr. Grigoras signed a note confirming that Romlex would transfer its shares to Canada Grace on or before January 15, 2019;
3. On January 14, 2019, the respondents’ solicitor made email and letter demands for the transfer for the shares before January 25, 2019;
4. On February 12, 2019, in response to Romlex’s offer to repay the loan in installments, the respondents’ solicitor demanded either repayment of the full amount of the loan or transfer of the pledged shares by February 28, 2019;
5. On March 1, 2019, the solicitor for Atlas Springbank, Diana Young, sent a “Notice of Default” to Romlex, Mr. Grigoras and Atlas Brampton stating that the share transfer had been completed.

[83] Faced with these communications, the application judge seems to have accepted that notice was given but was inadequate. This was an error stemming from a lack of clarity in the law in this area. In my view, the notice was adequate.

[84] As I describe below, courts have taken inconsistent approaches to the notice requirement for foreclosure under the PPSA. Part V of the PPSA requires a foreclosing creditor to give notice of its “proposal” to accept collateral in satisfaction of a secured debt – in other words – to foreclose. The notice requirement set out in s. 65(2) of the PPSA states that the secured party “shall serve a notice of the proposal [to foreclose] on the persons mentioned in clauses 63(4)(a) to (d),” including the debtor, the owner of the collateral, and every person who has a security interest in the collateral.

[85] However, it is important to note that while s. 65(2) incorporates by reference the list of recipients of notice mandated by s. 63(4), it does not import from s. 63(5) the detailed rules that set out the required contents of a notice of disposition of collateral (for example, by sale). The task of establishing the appropriate contents of a notice of foreclosure and, by extension, the adequacy of the notice, has fallen to the courts in the absence of express requirements in the PPSA.

[86] Creditors should give adequate notice. A notice of intention to foreclose on collateral should ordinarily expressly cite the PPSA and include a) the amount of the secured obligation, b) a description of the collateral, c) expression of the clear intention to retain the collateral in satisfaction of the debt (and not as continuing security), and d) an indication that the parties receiving notice have 15 days to object. Such a notice would be difficult to attack on the ground of sufficiency. However, in line with the functional approach courts have been instructed to take, there will be cases in which the secured party’s intention to foreclose on the collateral is clear in the circumstances, even when one or more of these elements is absent, and the debtor is under no illusion about the consequences of failing to pay. In that context, it not unfair to expect the debtor to attempt to redeem the collateral within 15 days.

[87] The law in Ontario was well-described by Lax J. in Casse v. Credifinance Securities Ltd (1999), 14 P.P.S.A.C. (2d) 352, [1999] O.J. No. 1908 (S.C.). In Casse, Lax J. reviewed the case law and held that the notice of intention to retain collateral must be expressed in clear and precise terms: at para. 7. However, she also held that “[t]he court must be able to conclude on all the evidence that the debtor knew that the purpose of the secured party in retaining the collateral was to satisfy the obligation secured” (emphasis added). She added: “If the Legislature had wished to specify the contents of the notice, it could have prescribed this as it did in s 63(5) in regard to disposal of collateral. In my opinion, the Legislature did not do so as it intended that the contents of the notice be flexible so as to accommodate a variety of commercial circumstances”: at para. 7. I agree.

[88] In my view, Lax J.’s approach in Casse strikes the appropriate balance. There will be circumstances in which, on the basis of all the evidence, it is obvious that the debtor knows its creditor is foreclosing on the collateral in satisfaction of the secured obligation, even if the formal notice might be deficient in some sense.

[89] I would agree that Canada Grace’s first four notices were individually inadequate. These notices generally provided minor extensions of time for Atlas Brampton to repay the loan in the face of what Canada Grace viewed as state of continuing default, but, taken together, they adequately signal Canada Grace’s intent to take ownership of the Atlas Springbank shares in accordance with the Security Agreement if the default is not remedied.

[90] The March 1 Notice of Default would not have come as a surprise to the appellants. It was addressed to Romlex, Atlas Brampton, and Mr. Grigoras. It had as its subject: “Re: Notice of Default under Loan Agreement and Supplementary Agreement; Share Transfer Deemed upon Default; removal of the positions as Director and Officer.” The notice specifically referred to the Security Agreement (using the term “Supplementary Agreement” and “Loan Documents”) dated December 12, 2018 and reproduced the terms of the share pledge.

[91] The March 1 Notice then identified Atlas Brampton’s failure to pay the loan as the operative event of default and culminated with an assertion that the pledged shares had been transferred so that Canada Grace was now the sole shareholder of Atlas Springbank:

Pursuant to the Loan Documents, please be advised that the Pledged Shares have been transferred to Canada Grace who is now the sole shareholder of the Lender, and the Guarantor has been removed from the positions of director and officer(s) of the Lender.

[92] The appellants rely on three cases, all of which I would distinguish. First, in Klein v. Lemore Investments Ltd. (1983), 2 P.P.S.A.C. 252, [1983] O.J. No. 204 (H.C.), White J. held that a notice of intention to retain collateral must express a “proposal” to retain the collateral, that is, it must express an intention “as to the future” instead of a “fait accompli”. In that case, a plaintiff real estate investor, Klein, pledged his shares in a real estate holding company to a fellow investor to secure a loan for roughly $60,000. Shortly after the plaintiff’s default, the secured party notified him that “our said client, [the secured party], is now the legal owner of twenty common shares in the above noted company.” White J. held that this was an improper notice of fait accompli and therefore “even to [the date of the judgment], having regard to the provisions of the Personal Property Security Act, Klein has a right to redeem his shares”: at para. 46.

[93] I acknowledge that the situation in this case resembles somewhat the “fait accompli” that was fatal to the foreclosure notice in Lemore. Canada Grace did not expressly state its intention to retain the shares or offer Romlex an opportunity to redeem them; it simply asserted its sole ownership of Atlas Springbank. However, taking into account the context and the words of the communications from Canada Grace’s counsel as the default persisted, there is no doubt that the appellants were aware of the respondents’ intention to foreclose if the default was not remedied. Moreover, as the application judge noted, neither Romlex nor any of the Grigoras’ companies tendered fulfillment of the loan within 15 days after any of the notices, or at any time since. He noted that they did not put forward any reliable evidence of Atlas Brampton’s ability to pay. That failure persisted in this court.

[94] The appellants also invoke Angelkovski v. Trans-Canada Foods Ltd., [1986] 3 W.W.R. 723, [1986] M.J. No. 148 (Q.B.). In that case, the court held that notice must be given “in clear and precise terms” not only that the creditor intends to retain the collateral but that it intends to retain the collateral in satisfaction of the obligation secured: at para. 21. The defendants had taken possession of a restaurant under a chattel mortgage. Wright J. found that they had manifested an intention to retain it in satisfaction of the debt and operate it as a going concern. However, Wright J. rejected an argument that the plaintiff’s awareness of the defendant’s intention constituted constructive notice and held that the plaintiffs retained a right to redeem the property until there had been compliance with the notice requirements of the PPSA. Wright J. found that the debtor had not received the required notice and held open the right to redeem. I would simply respond as Lax J. did in Casse, at para. 13, in words that apply equally to Mr. Grigoras:

He was given an opportunity to redeem the shares when the debt fell due…. He was under no misapprehension as to the legal effect of the pledge, nor of the consequences of failing to redeem.

[95] Finally, the respondents cite Tureck et al. v. Hanston Investments Ltd. et al. (1986), 56 O.R. (2d) 393 (H.C.). As the application judge noted at para. 22, in that case the pledge of shares reserved to the pledgor all the incidents of ownership and title in the pledged shares. The security agreement did not confer a right to foreclose. The court held that the only remedy available to the security holder was the statutory right under the PPSA but because the security holder had not given notice of an intention to retain the collateral in satisfaction of the secured obligation, the remedy was denied. By contrast, in this case the notice was adequate, as I have explained.

H. A note on Harry Shields

[96] 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.

[97] 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.

[98] 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.

[99] 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.”

[100] 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.

I. Disposition

[101] Canada Grace complied adequately with the notice requirements under Part V of the PPSA. I would dismiss the appeal.

Released: April 9, 2021 “P.L.”

“P. Lauwers J.A.”

“I agree. B.W. Miller J.A.”

“I agree. I.V.B. Nordheimer J.A.”