BDO Dunwoody Limited, Trustee in Bankruptcy of the Estate of 825536 Ontario Inc. o/a Convenience Movie Rentals v. Astral Communications Inc. [Indexed as: 825536 Ontario Inc. (Trustee in Bankruptcy of) v. Astral Communications Inc.]

46 O.R. (3d) 477

[2000] O.J. No. 96

Docket No. C32243

Court of Appeal for Ontario

Labrosse, Weiler and Charron JJ.A.

January 20, 2000

Personal property security -- Attachment -- Perfection -- Curative provisions -- No attachment of security interest where security agreement not signed by debtor -- Absence of signature not cured by s. 9 of Personal Property Security Act -- Personal Property Security Act, R.S.O. 1990, c. P.10, s. 9.

The trustee in bankruptcy disallowed AC Inc.'s claim to be a secured creditor of the bankrupt. AC Inc. claimed to be the holder of a purchase money security interest ("PMSI"), but the trustee disallowed the claim because AC Inc.'s security agreement had not been signed by the debtor as required for attachment to occur and, with no attachment, the security interest had not been perfected. On appeal, Kozak J. held that the omission of the signature was cured by s. 9(2) of the Personal Property Security Act. The trustee in bankruptcy appealed.

Held, the appeal should be allowed.

The general curative provision of s. 9(2) of the Personal Property Security Act cannot override the specific provisions of s. 11 regarding the conditions necessary for a security interest to attach. Where there is a complete absence of some form of signature, the curative provisions do not apply.

APPEAL of a judgment of Kozak J. (1999), 10 C.B.R. (4th) 233 (Ont. S.C.J.), pursuant to s. 193 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B.3.

Cases referred to State Bank of India (Canada) v. Trutzschler GmbH & Co. KG. (1997), 1997 14520 (ON CA), 44 C.B.R. (3d) 299 (C.A.) Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 20(1) (b), 193 Personal Property Security Act, R.S.O. 1990, c. P.10, ss. 9(2), 11(1), (2)

Craig J. Hill, for appellant. D. Johnston, for respondent.

[1] BY THE COURT: -- The appellant appeals pursuant to s. 193 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, from the order of Kozak J. [reported (1999), 10 C.B.R. (4th) 233] setting aside the trustee's disallowance of the appellant's claim that it was a secured creditor because it held a valid purchase money security interest ("PMSI").

[2] The bankrupt is a company that operated a convenience store in Thunder Bay that sold and rented videotapes provided by a subsidiary of the respondent Astral Communications. The relationship between the parties commenced on October 22, 1992 with a document referred to as a credit and dealership application. That document was not signed by the bankrupt company and indeed there was no place on the application for a signature. On the second page of the agreement, there is a guarantee signed by a principal of the company in his personal capacity. Astral registered the document more than five and one-half years later, on May 5, 1998. The bankruptcy took place on March 30, 1999.

[3] After the bankruptcy, Astral submitted a claim as a secured creditor. The trustee issued a disallowance of the secured claim on the basis that the security agreement had not been signed by the debtor. To have a security interest effective against the trustee, Astral was required to have a perfected security interest (s. 20(1)(b)). A perfected security interest must both be registered and attached to the property. Attachment occurs when the debtor signs the security agreement. Section 11(1) and (2) of the Personal Property Security Act, R.S.O. 1990 ("PPSA") read:

11(1) A security interest is not enforceable against a third party unless it has attached.

(2) A security interest, including a security interest in the nature of a floating charge, attaches when,

(a) the secured party or a person on behalf of the secured party other than the debtor or the debtor's agent obtains possession of the collateral or when the debtor signs a security agreement that contains a description of the collateral sufficient to enable it to be identified;

(b) value is given; and

(c) the debtor has rights in the collateral,

unless the parties have agreed to postpone the time for attachment, in which case the security interest attaches at the agreed time.

(Emphasis added)

[4] In as much as the credit application was not signed by the respondent, the trustee held that no attachment had taken place and, hence, the respondent was not a secured creditor. On the appeal from the trustee's decision, Kozak J. held that the trustee had erred. He held that the omission of the signature was cured by s. 9(2) of the PPSA. That section provides:

9(2) A security agreement is not unenforceable against a third party by reason only of a defect, irregularity, omission or error therein or in the execution thereof unless the third party is actually misled by the defect, irregularity, omission or error.

[5] We are of the opinion that Kozak J. erred.

[6] The general curative provision of s. 9(2) cannot override the specific provisions of s. 11 regarding the conditions necessary for a security interest to attach.

[7] The words, "defect, irregularity, omission or error" are all referable to the agreement itself or to the execution of the agreement. The term "execution" implies some form of signature for the curative provisions to apply. Where there is a complete absence of execution, the curative provisions would not apply. Such an interpretation is consistent with the requirement contained in s. 11(2) that the debtor must sign the security agreement for attachment to occur. To interpret s. 9(2) so as to cure the complete absence of a signature would completely undermine the requirement of a signature in s. 11. An interpretation of legislation that is consistent and compatible with other sections of the same legislation is to be preferred to one that is not. This interpretation is also consistent with the decision of this court in State Bank of India (Canada) v. Trutzschler GmbH & Co. KG. (1997), 1997 14520 (ON CA), 44 C.B.R. (3d) 299 (C.A.) which implicitly rejected s. 9(2) as a tool to save a security agreement which had no debtor signature even where the debtor signed a related document to the underlying transaction.

[8] We would therefore allow the appeal from the decision of Kozak J., set aside his order dated May 26, 1999 and declare that the respondent's security interest in the inventory of the bankrupt is not effective against the appellant.

Appeal allowed.