Can a seller take security over just my receivables?

When a seller accepts part of the price over time, it usually wants security for the unpaid balance. Nothing requires that security to cover everything you own. It can be limited to a defined category of property, and receivables, the money customers owe the business, are one such category. What the seller can reach, and how it ranks, then follows from how the collateral is described and registered. Our page on seller financing covers the loan itself.

What counts as a receivable

Ontario’s Personal Property Security Act defines an account as a monetary obligation not evidenced by chattel paper or an instrument, whether or not it has been earned by performance. The security agreement must describe the collateral well enough to identify it, so a narrow description gives narrow security and a broad one does not. Agree the wording before you sign.

Registration sets the ranking

A seller protects its security by registering a financing statement in the personal property registry. Where interests perfected by registration compete and no other provision applies, Ontario’s Act says priority follows the order of registration. Receivables are the cash the business collects every week, so a bank considering the same business will search the registry and want to know who has a claim on them. The Act also ranks a security interest in an account behind certain statutory deemed trusts, including some arising under the Employment Standards Act, 2000.

If the business later fails

An unperfected security interest is not effective against a trustee in bankruptcy under Ontario’s Act. The Bankruptcy and Insolvency Act goes further for receivables: an assignment of book debts by a person in business, which it says includes security, is void against the trustee for debts unpaid at bankruptcy unless it is registered under a provincial statute that provides for registering such assignments and is valid under provincial law. The section has other exceptions as well, such as for assignments from specified debtors or under specified contracts. Proper registration is not a formality.

Outside Ontario

Other provinces keep their own registries, such as Alberta’s and British Columbia’s, and Quebec maintains a separate register of personal and movable real rights. The principle is similar but the rules, forms and priorities are not identical, so check the law of the province where the business operates.