Does a security interest survive if the corporation is sold?

A security interest is a lender’s claim on specific property to secure a debt. In Ontario it can be registered in the personal property security registration system, and the Personal Property Security Act (PPSA) sets the rules for what happens to it in a sale. The answer differs depending on whether the shares of the corporation are sold or its assets. Other provinces have their own versions, such as British Columbia’s, so check your province’s statute.

When the shares are sold

In a share sale the corporation does not change. Under both the Canada Business Corporations Act (subject to that Act) and Ontario’s Business Corporations Act the corporation itself has the capacity and the rights, powers and privileges of a natural person, so it remains the debtor and keeps the property it owned. Two things can still matter: the loan agreement, which may restrict a change of ownership, and the Ontario PPSA rule in section 48(3) that a security interest perfected by registration becomes unperfected thirty days after the secured party learns of the change of name and the new name of the debtor, unless the secured party registers a financing change statement or takes possession of the collateral within those thirty days, subject to section 48(5) to (8). A buyer who renames the corporation brings that rule into play.

When assets are sold

In an asset sale the lender’s claim follows the collateral. Ontario’s PPSA says that where collateral gives rise to proceeds, the security interest continues as to the collateral unless the secured party expressly or impliedly authorized the dealing with the collateral free of the security interest, and extends to the proceeds. A buyer can therefore take assets that are still subject to the lender’s claim, so a payout or a written release belongs on the closing agenda. There are exceptions, including for a buyer of goods sold in the seller’s ordinary course of business, subject to the Act’s conditions.

How a buyer finds out

Ontario’s Access Now service lets users register a notice of security interest or search for a lien on personal property, and British Columbia’s Personal Property Registry records security interests and liens against property belonging to businesses and individuals. Quebec keeps a separate register of personal and movable real rights under its Civil Code. How to check for liens on business assets walks through a search.