What security registered against the assets does a buyer take subject to?

A lender to a business can register a security interest against its equipment, inventory and other personal property. Ontario’s Personal Property Security Act decides how far that security interest follows the assets, and under section 46(5) registering a financing statement does not itself constitute constructive notice or knowledge of the statement or its contents to third parties. Other provinces run their own registries and rules, so confirm the law where the assets sit.

The general rule: the claim follows the assets

The Act says that where collateral gives rise to proceeds, the security interest continues in the collateral unless the secured party expressly or impliedly authorized the dealing free of the interest. In plain terms, a buyer of assets still subject to a lender’s security takes them with that security attached unless the lender expressly or impliedly authorized the dealing free of it, or an exception in the Act, such as those below, applies. So a buyer who wants the assets free of the claim should get the lender’s authorization or a discharge.

Exceptions that can help

• Ordinary course: a buyer of goods from a seller who sells them in the ordinary course of business takes them free of the seller’s security interest, even if perfected and known to the buyer, unless the buyer knew the sale breached the security agreement. Whether a one-off sale of a business’s assets fits that wording is a legal question.
• Unperfected interests: an interest that has not been perfected is not effective against a transferee of goods who gives value, receives delivery and has no knowledge of it, in a transaction that does not itself secure an obligation, except as section 20(3) provides for purchase-money security interests. Knowledge defeats that protection.
• Vehicles used as equipment: a motor vehicle, as defined in the regulations, sold outside the ordinary course as the seller’s equipment passes free of the seller’s security interest, even if perfected by registration, unless its vehicle identification number is in the designated place on the registered financing statement, or the buyer knew the sale breached the agreement.

Finding and clearing the claims

Alberta’s registry advises searching before buying property to check whether liens are registered against it, and British Columbia’s explains that registrations can be changed, renewed or discharged. Some claims rank ahead of a registered interest: section 31 gives a lien for materials or services furnished in the ordinary course with respect to the goods priority over a perfected security interest, unless the Act that gives the lien provides that it does not have such priority. See liens a registry search can miss.