Does a vendor’s lien protect me if the purchase price is unpaid?

Being owed part of the price is not, by itself, a security interest that ranks against other creditors. For equipment, inventory and similar personal property, that ranking depends on security that has attached and been perfected, for example by registering a financing statement. This page uses Ontario’s Personal Property Security Act (PPSA) as the example; other provinces have their own Acts, and Quebec uses a different system of hypothecs. Security over land is registered in the land registry, which this page does not cover.

What the Act looks at

Subject to the exclusions in s.4(1), the Ontario PPSA applies to every transaction, without regard to its form, that in substance creates a security interest (s.2). A security interest is not enforceable against a third party unless it has attached (s.11). Under s.11(2), attachment needs value to be given and the debtor to have rights in the collateral (or the power to transfer them), plus one of the further conditions listed there, such as the debtor signing a security agreement that contains a description of the collateral sufficient to enable it to be identified. A vague description is therefore a risk.

Registering decides who ranks first

Under s.20(1), except as provided in s.20(3), until it is perfected a security interest is subordinate to a person who has a perfected security interest in the same collateral. It is also not effective against a person who represents the debtor’s creditors, including a trustee in bankruptcy. Under s.45(1), perfecting by registration requires registering a financing statement. If no other provision of the Act applies, priority between interests perfected by registration follows the order of registration (s.30(1)). A seller who takes back security for the unpaid price may qualify for the special purchase-money priority in s.33, which has conditions you should have a lawyer check. See also the purchase agreement, clause by clause.

Limits even a registered seller faces

A registered interest is not always first. Section 30(7) makes a security interest in an account or inventory and its proceeds subordinate to the interest of a beneficiary of a deemed trust under the Employment Standards Act, 2000, the Pension Benefits Act or the Pooled Registered Pension Plans Act, 2015. The buyer’s lender may have rules of its own: the federal Canada Small Business Financing Program’s guidelines, for example, require a term loan to buy real property or equipment to be secured by a valid and enforceable first charge on the assets financed. If you hope to remain a secured creditor, ask your lawyer whether a postponement of your rank will be requested and what you would receive in return.

What to ask before closing

• Is the security agreement signed, and does it describe the collateral clearly?
• Has a financing statement been registered, and under the buyer’s exact legal name?
• What other registrations already exist against the buyer or the assets?
• Do you need a guarantee from the buyer’s owners as well?