At the outset of a secured financing transaction, lender's counsel will search for court orders permitting judgment creditors to seize and sell a credit party's property to satisfy unpaid money judgments. Our lender clients will often ask about a judgment creditor's position vis-à-vis a credit party's assets. Does a judgment creditor rank ahead of or behind a secured lender? Ahead of or equal with unsecured creditors?
The Court Order Enforcement Act ("COEA") currently regulates the enforcement of court orders in British Columbia. On May 1, 2023, however, Bill 27 – Money Judgment Enforcement Act (the "Act") was introduced by the Honourable Niki Sharma, Attorney General of British Columbia, with the goal of simplifying and clarifying enforcement procedures and reducing court involvement, minimizing technicalities that judgment debtors can use to shield non-exempt property from seizure and ensuring continued protection for judgment debtors' rights. The Act received Royal Assent on October 26, 2023. The market expects the Act to come into force by regulation of the Lieutenant Governor in Council in 2025, replacing the COEA and changing the enforcement process in British Columbia.
The Act treats money judgments much the same way as the Personal Property Security Act (British Columbia) ("PPSA") treats security interests—notably, it determines priority primarily by the date and time of registration of an enforcement charge in a "money judgment registry" (the "Registry"). Once the Act comes into force, it will align British Columbia's legislation with similar legislation in Alberta, Saskatchewan and Newfoundland and Labrador.
Secured lenders should be aware of these expected changes when structuring loans involving credit parties governed under the laws of British Columbia or credit parties outside of British Columbia holding assets within that province.
Secured Lender vs. Judgment Creditor in British Columbia
Secured lenders should be aware of the following impacts of the Act on priority of enforcement charges over perfected security interests in personal property:
- an enforcement charge on personal property will have the same priority as any security interest (other than a purchase money security interest and a security interest in inventory) in the same property under the PPSA, provided the security interest was perfected under the PPSA at the time the enforcement charge is created;
- if a secured lender perfects its security interest under the PPSA before an enforcement charge is created over the same collateral, and that secured lender is (1) unaware of the enforcement charge when an advance is made and/or (2) has a legal obligation to make an advance to someone other than the judgment debtor, the secured lender's interest will take priority with respect to any such advance made after the enforcement charge is created, but only to the extent of reasonable costs and expenses incurred by the secured lender for the preservation, protection or repair of the collateral and the amount of taxes paid by the secured lender in accordance with the Manufactured Home Act (British Columbia); and
- if a civil enforcement officer seizes an interest in a security, security entitlement or futures contract under the Act, an enforcement charge on any such security, security entitlement or futures contract has the same priority as a security interest that is perfected by "control" within the meaning of Part 2 of the Securities Transfer Act (British Columbia).
Secured Lender vs. Judgment Creditor in Ontario
In contrast, under Ontario law, a judgment creditor seeking to enforce a money judgment against the personal property of a judgment debtor may file a writ of execution pursuant to the Execution Act (Ontario) (the "Execution Act"). Once issued by the court, the judgment creditor may file the writ of execution in the electronic database maintained by any one or more sheriff's offices in Ontario, binding any personal property owned by the judgment debtor in the filing jurisdiction.
Under the Personal Property Security Act (Ontario), an unperfected security interest in personal property of a debtor will be subordinate to the interest of a person who causes such collateral to be seized through execution, attachment, garnishment, charging order, equitable execution or other legal process. However, a secured lender who has a perfected security interest has a priority interest in personal property of a debtor over any subsequent judgment creditor, subject to certain exceptions.
One exception is that the secured lender's interest in collateral, to the extent of the amount of a future advance, is subordinate if, before making such advance, they receive written notification of the rights of a person who causes such collateral to be seized through execution, attachment, garnishment, charging order, equitable execution or other legal process.
In that situation, however, the secured lender nevertheless maintains priority if it:
- makes the advance for the purpose of paying reasonable expenses, including the cost of insurance and payment of taxes or other charges incurred in obtaining and maintaining possession of the collateral and its preservation; or
- is bound to make the advance (whether or not a subsequent event of default, or other event not within its control, has relieved or may relieve it from the obligation to advance).
Practical Implications for Secured Lenders
In light of the expected changes in British Columbia, secured lenders should work with their counsel to:
- search the Registry, which will form part of the British Columbia Personal Property Registry, for money judgments in favour of judgment creditors;
- request further information if that search discloses an enforcement charge naming a credit party, taking care that any such enforcement charge is satisfied and discharged, or the associated credit risks mitigated, prior to closing;
- prior to each advance, search the Registry to ensure that a judgment creditor has not registered an enforcement charge against a credit party subsequent to closing; otherwise, if a secured party advances funds to any such credit party while an enforcement charge remains outstanding, the secured party's priority will be limited to the extent of its reasonable costs and expenses incurred by the secured lender for the preservation, protection or repair of the collateral and the amount of taxes paid by the secured lender in accordance with the Manufactured Home Act (British Columbia); and
- continue to obtain court bailiff execution searches pursuant to the existing regime in order to capture any unexpired writs of execution continued under the COEA following the coming into force of the Act. Secured lenders should be aware that under the transitional provisions related to the Act set forth in the Money Judgment Enforcement Consequential Amendments and Transitional Provisions Act (British Columbia) (the "Transitional Provisions"), a judgment creditor may continue a proceeding in relation to an unexpired writ of execution that, before the coming into force date of the Transitional Provisions, was commenced but not concluded under the COEA in accordance with the COEA.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
