



COURT OF APPEAL FOR ONTARIO

CITATION:
    Atlas (Brampton) Limited Partnership v. Canada Grace Park Ltd., 2021 ONCA 221

DATE: 20210409

DOCKET:
    C68360

Lauwers,
    Miller and Nordheimer JJ.A.

BETWEEN

Atlas
    (Brampton) Limited Partnership, Romlex

International
    Ltd. and Peter Grigoras

Applicants
    (Appellants)

and

Canada
    Grace Park Ltd., Xing Ou Yang

and
    Atlas Springbank Developments Ltd.

Respondents
    (Respondents)

Jeffrey A.
    Kaufman and Bradley Adams, for the appellants

Paul H.
    Starkman, for the respondents

Heard: December 3,
    2020 by video conference

On appeal from the judgment of Justice
    David Aston of the Superior Court of Justice, dated April 6, 2020, with reasons
    reported at 2020 ONSC 1861.

Lauwers J.A.:

A.

Overview

[1]

Atlas (Brampton) Limited Partnership borrowed
    $1,800,000 from Canada Grace Park Ltd. The loan was secured by a pledge of
    shares in Atlas Springbank Developments Ltd. given by Romlex International Ltd.
    to Canada Grace Park Ltd. Less than a year after the loan was made, Atlas Brampton
    defaulted and Canada Grace purported to foreclose on the pledged shares and to
    retain them in satisfaction of the
debt
. As the result,
    Canada Grace argues that it now owns Atlas Springbank. Both respondent companies
    are owned by Xing Ou Yang, also known as Jenny O. The appellant Peter Grigoras
    owns the appellants Romlex and Atlas Brampton.

[2]

The appellants applied for a declaration that Canada
    Graces foreclosure on the shares in Atlas Springbank was void for
    noncompliance with the notice requirements of the
Personal Property
    Security Act
, R.S.O. 1990, c. P.10 (
PPSA
) and sought an order
    that the pledged shares be returned to Romlex. The application judge dismissed
    the application and denied equitable relief from forfeiture.

[3]

For the reasons that follow, I would dismiss the
    appeal.

B.

Issues

[4]

The appellants argue that the application judge erred
    in:

1.

Failing to apply Part V of the
PPSA
, which would have given
    the appellants a right to redeem the pledged shares by tendering payment of the
    outstanding debt;

2.

Misinterpreting the text of the security agreement between the
    parties to find that it gave Canada Grace a right of foreclosure;

3.

Misapplying the case of
Harry Shields Ltd. v. Bank of Montreal
(1992), 7 O.R. (3d) 57, [1992] O.J. No. 68 (Gen. Div.), in finding that Canada
    Grace could rely on the freestanding contractual right of foreclosure outside
    of the
PPSA
.

[5]

Before the hearing, the panel requested the
    parties to make submissions on the role, if any, that s. 17.1 of the
PPSA
might play in this case. Section 17.1(2) provides that a secured party having
    control of investment property as collateral may sell, transfer, use or
    otherwise deal with the collateral in the manner and to the extent provided in
    the security agreement. The pledged shares in Atlas Springbank are investment
    property as defined in s. 1 of the
PPSA
. The respondents argue that
    they had control of the pledged shares and were therefore entitled to foreclose
    under s. 17.1(2) without notice to the appellants.

[6]

The analysis is structured under three issues:

1.

What is the nature of Canada Graces security
    interest in the pledged Atlas Springbank shares?

2.

Does s. 17.1(2) of the
PPSA
permit Canada Grace to
    foreclose on the pledged shares?

3.

Does Part V of the
PPSA
permit Canada Grace to foreclose on
    the pledged shares?

I address these issues after setting
    out the factual context and the application judges decision.

C.

Factual Context

[7]

Romlex owned a commercial real estate
    development property located on Springbank Drive in London, Ontario. In 2018,
    Jenny O approached Mr. Grigoras, the owner of Romlex, about the possibility of her
    investing in the Springbank property. Mr. Grigoras agreed.

[8]

The parties incorporated Atlas Springbank
    Developments Ltd. in order to develop the Springbank properties together.
    Romlex transferred the Springbank properties to the new entity, Atlas
    Springbank, in return for $2,400,000 and 55 percent of Atlas Springbanks shares.
    Jenny O acquired 45 percent of Atlas Springbanks shares through Canada Grace.
    Romlex and Canada Grace entered into a shareholder agreement governing the
    affairs of Atlas Springbank on May 1, 2018. This left Mr. Grigoras
    with control of Atlas Springbank.

[9]

On May 10, 2018, Atlas Springbank loaned
    $1,800,000 to Atlas Brampton for a purpose that is not disclosed by the record
    before us. The first interest payment by Atlas Brampton to Atlas Springbank was
    due November 10, 2018 and the loan was to come due on February 28, 2019. There
    was some dispute between the parties as to whether the February 28, 2019 due
    date was agreed but the application judge found that February 28, 2019 was the
    proper due date.

[10]

Atlas Brampton failed to make the first interest
    payment on November 10, 2018 and the loan then fell into default. To
    address Atlas Bramptons default, in December 2018 the parties negotiated and
    signed a Supplementary Agreement to the Loan Agreement with Security and
    Guarantor (the Security Agreement). The Security Agreement contained three key
    provisions. First, Mr. Grigoras agreed to personally guarantee the loan from
    Atlas Springbank to Atlas Brampton. Second, Romlex agreed to pledge all of its
    shares in Atlas Springbank to Canada Grace such that, upon default by Atlas
    Brampton, the shares would be transferred to Canada Grace for the nominal sum
    of $2, paid in advance. Jenny O received an irrevocable Power of Attorney to
    effect the transfer of Atlas Springbanks shares from Romlex to Canada Grace
    upon Atlas Bramptons default. Third, in the event of such default, Mr.
    Grigoras would be deemed as being removed as a director of Atlas Springbank. In
    short, if Atlas Brampton defaulted on the loan, Jenny O could unilaterally take
    ownership and control of Atlas Springbank.

[11]

The parties finalized and signed the Security
    Agreement on or around December 12, 2018. However, almost simultaneously, Atlas
    Brampton was put into receivership by a third party. The precise cause of the
    receivership is not on the record. Mr. Grigoras knew about the receivership
    when he signed the Security Agreement but he did not tell Jenny O, who found
    out about it on December 17, 2018. Falling into receivership was an
    act of default by Atlas Brampton. (The receivership was discharged in April
    2019.)

[12]

Atlas Brampton also failed to pay the balance of
    the loan when it came due on February 28, 2019. Consequently, as of March 1,
    2019, there were two defaults: one for Atlas Brampton falling into receivership
    and the other for its failure to pay the loan off.

[13]

On March 1, 2019, Atlas Springbanks solicitor
    wrote to Mr. Grigoras on behalf of Canada Grace to inform him that she had
    transferred Romlexs shares in Atlas Springbank to Canada Grace in accordance
    with the Security Agreement and had removed him as a director of the
    corporation. The letter stated that Canada Grace was now the sole shareholder
    of Atlas Springbank and did not offer any possibility of curing the default or
    redeeming the pledged, now transferred, shares.

[14]

On July 25, 2019, the appellants issued a notice
    of application seeking a declaration that the transfer of Romlexs shares in
    Atlas Springbank to Canada Grace was null and void and that Romlex remained the
    beneficial owner of the shares. They also sought an order that Mr. Grigoras be
    reinstated as a director of Atlas Springbank. The appellants asserted that they
    were entitled to notice under s. 63(4) of the
PPSA
of Canada
    Graces intention to foreclose on the pledged shares and were also entitled to an
    opportunity under s. 66 of the
PPSA
to redeem the pledged shares by
    paying the amount due under the loan.

[15]

In the alternative, the appellants sought a new
    opportunity to redeem the transferred shares by paying the amount due. In the
    further alternative, the appellants sought equitable relief from forfeiture
    under s. 98 of the
Courts of Justice Act
, R.S.O. 1990, c. C.43.

D.

The Application Judges Reasons

[16]

It was not in dispute before the application
    judge that the
PPSA
applied to the Security Agreement. The application
    judge noted that s. 63 of the
PPSA
authorizes a secured party to
    dispose of collateral upon default, subject to the requirement under s. 63(4)
    to give notice to the debtor and any other person having an interest in the
    collateral. He also noted that any person entitled to receive notice is also
    entitled, under s. 66 of the
PPSA
, to redeem the collateral by
    tendering fulfillment of all obligations secured by the collateral.

[17]

The application judge found that Canada Grace
    had not given the requisite notice and therefore had no statutory right to
    dispose of the collateral under the
PPSA
: at para. 19. However, he
    found that their failure to avail themselves of their statutory right under
    the
PPSA
does not matter because they acted within their
contractual
right under the Security Agreement: at
    para. 19 (emphasis in original). The application judge characterized Canada
    Graces contractual right as effectively amount[ing] to foreclosure.

[18]

In so concluding, the application judge pointed
    out that s. 59(5) of the
PPSA
prohibits the waiver or variation of the
    rights of a debtor or the duties of a secured party when the secured party
    pursues the remedies set out in Part V of the
PPSA
: at para. 20. However,
    he noted that the respondents had never invoked their right to any remedy
    authorized under the
PPSA
 and that the applicants only have a right
    of redemption under the
PPSA
if the secured party chooses to pursue a
    remedy under the
PPSA
.

[19]

In stepping outside the
PPSA
, the
    application judge relied on
Harry Shields
. In that case, the plaintiff,
    Harry Shields Ltd., executed a demand debenture in favour of Bank of Montreal
    and then pledged the debenture to the bank. The court held that the bank was
    entitled to enforce the debenture without regard to the duties of a pledgee
    under the
PPSA
. In this case, the application judge found that [l]ike
    the Bank of Montreal in
Harry Shields
, Canada Grace Park and Jenny O
    did not rely on the
PPSA
for a remedy. They did not need to do so: at
    para. 23. He concluded: The applicants cannot rely on the
PPSA
for
    the relief they seek: at para. 24.

[20]

The application judge refused the appellants
    request for equitable relief from forfeiture. He took into account the conduct
    of the appellants and weighed four factors against them:

1.

The appellants had not disclosed the
    receivership order against Atlas Brampton when they signed the Security
    Agreement.

2.

Mr. Grigoras denied agreeing to change the due date of the loan and
    falsely accused Jenny O of fraudulently changing the date on the agreement.

3.

Romlex continued to collect rent from the tenants of the Springbank
    property without accounting to Atlas Springbank, the owner of the property, for
    that rent.

4.

The appellants waited too long before bringing the application for
    relief, without explanation.

[21]

Finally, the application judge observed that
    Canada Grace did not gain a windfall in foreclosing on the pledged shares because
    the principal loan amount of $1.8 million, with interest, was now nearly equal
    to the value of the underlying Springbank property. The application judge
    denied equitable relief from forfeiture, noting that the appellants had not
    established their ability to pay.

E.

ISSUE ONE: What Was the Nature of Canada Graces
    Security interest in the pledged Atlas Springbank Shares?

[22]

The parties principal arguments on appeal focused
    on the application judges finding that Canada Grace had an independent
    contractual right to foreclose on the pledged shares outside of the
PPSA
.
    However, the panel requested the parties submissions on s. 17.1 of the
PPSA
,
    which grants additional rights to a secured party having control of investment
    property, in order to determine whether and how its provisions might apply in
    this case.

[23]

The respondents cited s. 17.1(2), which provides:

a secured party having control
    under subsection 1 (2) of investment property as collateral may sell, transfer,
    use or otherwise deal with the collateral in the manner and to the extent
    provided in the security agreement.

[24]

The respondents argued that Canada Grace, as a
    secured party with control of the pledged shares, was entitled to transfer,
    use, or otherwise deal with the collateral in the manner provided in the
    security agreement, which was to take the shares in satisfaction of the debt.

[25]

The application judge did not specifically
    address whether Canada Grace could be considered a secured party having
    control of investment property as collateral for the purposes of s. 17.1
    because it was not argued before him. However, the question was fully joined in
    the parties written submissions on appeal and it is appropriate for this court
    to make the determination.

[26]

As I will explain, Canada Grace did have control
    of the pledged shares as collateral for the purposes of s. 17.1. I begin by
    setting out the governing principles.

(1)

The Governing Principles

[27]

Contemporary personal property security
    legislation was intended to simplify and rationalize the law of secured
    transactions. Under s. 2(a), the
PPSA
applies to every transaction without
    regard to its form and without regard to the person who has title to the
    collateral that in substance creates a security interest. The
PPSA
adopts a functional approach to determining what security interests are
    covered by its provisions:
Bank of Montreal v. Innovation Credit Union
,
    2010 SCC 47, [2010] 3 S.C.R. 3, at para. 18. Almost anything that serves functionally
    as a security interest is a security interest for the purposes of the Act:
I
    Trade Finance Inc. v. Bank of Montreal
, 2011 SCC 26, [2011] 2 S.C.R. 306,
    at para. 26. Subsection 2(a)(i) of the
PPSA
specifically includes a pledge
    among the forms of transaction that give rise to a security interest.

[28]

The steps required to create a security interest
    in collateral, on the one hand, must not be confused with the steps required to
    make a security agreement enforceable against third parties, on the other hand.
    Under s. 9(1) of the
PPSA
, a consensual security agreement is
    effective according to its terms between the parties to it. By contrast, under
    s. 11, [a] security interest is not enforceable against a third party unless
    it has attached. Attachment can be achieved in different ways, under s. 11(2)
    of the
PPSA
, depending on the nature of the collateral. The question
    of attachment is not strictly at issue in this case since there is no third-party
    claim on the pledged collateral. I use the language of attachment to reflect
    the fact that Canada Graces security interest did attach to the pledged shares.

[29]

If Canada Grace became a secured party having
    control of investment property for the purposes of s. 17.1 of the
PPSA
,
    then Canada Grace could in theory sell, transfer, use or otherwise deal with
    the collateral, subject only to the terms of the security agreement. Each of
    the terms investment property and control requires analysis.

(a)

Investment property

[30]

The term investment property is defined in s.
    1 of the
PPSA
as a security, whether certificated or uncertificated,
    security entitlement, securities account, futures contract or futures account.
    The word security is in turn defined by reference to the
Securities
    Transfer Act, 2006
, S.O. 2006, c. 8 (
STA
). Under ss. 1 and
    10 of the
STA
, the term security includes a share or equity interest
    issued by a corporation. In this case, the pledged shares fit the
STA
definition of security and, by extension, investment property.

(b)

Control

[31]

The concept of control was introduced into
    Ontario law through the
STA
in 2006, accompanied by simultaneous
    amendments to the
PPSA
.

[32]

The 2006 amendments to the
PPSA
responded to a concern that the
PPSA
was ill-equipped to deal with declining
    physical share ownership and the growth of the indirect holding system in
    capital markets. In the indirect holding system, shareholders own shares and
    other securities through securities intermediaries, clearing services, banks,
    or other financial institutions. The development of the indirect holding system
    permitted greater efficiency in securities trading but left the law of secured
    transactions to rely on increasingly unwieldy analogies to physical share
    ownership in order to accommodate use of securities accounts and book entries
    as collateral: see Richard McLaren,
Secured Transactions in Personal
    Property in Canada
, loose-leaf, 3rd ed. (Toronto: Carswell, 2016), at para.
    1.04; Robert Scavone, Stronger than Fictions: Canada Rethinks the Law of
    Securities Transfers in the Indirect Holding System (2007) 45 Can. Bus. L.J.
    67, at p. 77.

[33]

Professor McLaren concisely sets out the concept
    of control, at para. 14.03:

Control is the functional equivalent of the
    prior laws notion of physical possession of a certificated security, but has
    been expanded to conform to current market practices with regard to investment
    property. Under the STA, control is not limited to physical possession, however
    includes it within the concept.

See also Eric Spink, Securities
    Transfer Act  Fitting New Concepts in Canadian Law (2007), 45 Can. Bus. L.J.
    167, at p. 184. Control exists when the secured party is in a position to
    liquidate the property without any further involvement from the owner of the
    property: Scavone, at pp. 23-30; Spink, at p. 185.

[34]

The
STA
defines control by reference
    to the different means of acquiring it, depending on the nature of the
    collateral. Sections 23-26 of the
STA
describe how a purchaser can
    acquire control of certificated securities (s. 23), uncertificated securities
    (s. 24), or security entitlements, which is the broader category encompassing,
    most notably, securities accounts (s. 25). The
PPSA
incorporates each
    manner of obtaining control in s. 1(2), which refers to a secured party
    rather than a purchaser. In each case, control essentially mimics a pledge
    arrangement.

[35]

If the parties employ certificated securities, s.
    23 of the
STA
states that control may be established by simple
    possession of the certificates. This arrangement resembles a traditional pledge
    whereby one party places the physical share certificates in the others
    possession.

[36]

In the case of uncertificated securities such as
    the pledged shares in Atlas Springbank, s. 24 of the
STA
establishes
    that the secured party will have control of an uncertificated security if (a)
    the uncertificated security is delivered to the secured party (i.e. registered
    in the secured partys name on the books of the issuer); or (b) the issuer has
    agreed that the issuer will comply with instructions that are originated by the
    secured party without the further consent of the registered owner. This latter
    arrangement is referred to as a control agreement.

[37]

While the
STA
enumerates a fixed set of
    methods for obtaining control based on the nature of the investment property,
    the notion of control must be applied functionally rather than formalistically.
    For instance, a control agreement governing uncertificated securities need not take
    a particular form so long as it grants the secured party rights to give
    instructions to the issuer and to deal with the securities without the further
    consent of the registered owner.

[38]

Control, as defined in the
STA
, plays a
    number of roles in the
PPSA
scheme. Under s. 11(2)(d) of the
PPSA
,
    a secured partys security interest in investment property attaches when the
    secured party has control of it. Similarly, a secured party may perfect a
    security interest in investment property by control under s. 22.1 in order to establish
    priority in a dispute between secured parties. For the purposes of this appeal,
    control is a pre-requisite to the application of certain remedies, including
    the remedies set out in s. 17.1 on which Canada Grace relies.

(2)

The Principles Applied

(a)

Canada Grace acquired control of the pledged
    shares

[39]

Neither party disputes that the
PPSA
applies to the Security Agreement in this case. The Security Agreement was plainly
    designed to secure Atlas Bramptons debt. Instead, the disagreement turns on whether
    and when Canada Grace obtained control of the pledged shares.

[40]

The respondents argue that Canada Graces
    security interest in the pledged shares attached on or around December 12, 2018,
    when the Security Agreement was signed. In their submission, the Security
    Agreement also functioned as a control agreement within the meaning of the
STA
because Romlex (which the respondents mistakenly identify as the issuer of
    the pledged shares) agreed to comply with Canada Graces future instructions.
    Canada Grace therefore acquired control of the shares simultaneously with the
    signing of the Security Agreement.

[41]

The appellants argue, by contrast, that Canada
    Graces security interest in the pledged shares only attached on March 1, 2019,
    when the solicitor for Atlas Springbank transferred ownership of the shares to
    Canada Grace on the books of the corporation. The appellants rely on s.
    17.1(1)(c) of the
PPSA
, which states that a secured party having
    control  of investment property as collateral  (c) may create a security
    interest in the collateral. They argue that March 1, 2019 was the first time
    Canada Grace could create a security interest in the collateral because it
    was the first time Canada Grace had control of the shares as their owner.
    Following the appellants logic, the March 1 transfer should be seen as the
    true creation of the pledge and not as the moment of foreclosure on previously
    pledged property.

[42]

I generally agree with the respondents. However,
    I note that Romlex is not the issuer of the pledged shares. Atlas Springbank
    issued the shares to Romlex, which in turned pledged them to Canada Grace.
    However, this error in terminology does not affect the validity of the
    respondents underlying argument.

[43]

In my view, the Security Agreement gave Canada
    Grace control over the pledged shares. Because the shares in issue are
    uncertificated, the control analysis is governed by s. 24(1)(b) of the
STA
,
    which I repeat for convenience:

A [secured party] has control of an
    uncertificated security if:



(b) the issuer has agreed that
    the issuer will comply with instructions that are originated by the [secured
    party] without the further consent of the registered owner.

[44]

The relevant text of the Security Agreement provides:

3. Considering the risks to Canada Grace, as
    the shareholder of the Lender, caused by the Borrowers performance under the
    Loan Agreement, Romlex agrees to pledge all Romlexs Share of Lender and any
    further shares issued, rights and interest entitled (collectively the Pledged
    Shares) to the Canada Grace [sic]. If the Borrower becomes default [sic] for
    any reason, the Pledged Shares shall be transferred to Canada Grace at $2
    nominal costs (the Share Transfer), the receipt of payment of such $2 nominal
    costs is hereby confirmed by Romlex.

To effect such Shares Transfer, all parties
    agrees that:



(3) Romlex shall provide its cooperation to
    facilitate such Shares Transfer and removal of the Guarantor as director and
    officers;
Romlex hereby provides
    its irrevocable power of attorney to Jenny to sign relevant documents for
    Romlex to effect such Shares Transfer and removal, although signing such
    documents is not required under this agreement
.

[45]

Taking the functional approach to control, I
    find that this clause creates a control agreement between the parties.

The parties to the Security Agreement
    included all the parties necessary to a control agreement, including the issuer
    of the shares (Atlas Springbank), the registered owner (Romlex), the debtor
    (Atlas Brampton), and the secured party (Canada Grace). The effect of subclause
    (3) is to grant Jenny O authority to cause the shares to be transferred on
    instructions to Atlas Springbank (the issuer) without the further consent of
    Romlex (the registered owner), and that is what occurred on March 1, 2019, the
    date of default. Canada Grace had control over the pledged shares for all
    practical purposes on December 12, 2018.

[46]

The appellants position is based on a mistaken
    interpretation of s. 17.1(1)(c). It is incorrect to say that Canada Grace
    created a security interest in the pledged shares at any time. Canada Grace acquired
    a security interest in the pledged shares from Romlex, the owner of the shares,
    by virtue of the Security Agreement. Canada Grace could only be described as
    creating a security interest in the pledged shares if it were to grant a
    security interest to a third party. Moreover, as discussed above, Canada Grace
    did not need to transfer the pledged shares to itself in order to acquire a
    security interest in them. Canada Graces security interest attached at the
    moment it obtained control.

F.

ISSUE TWO: Does s. 17.1(2) of the
PPSA
permit Canada Grace to foreclose on the pledged shares?

[47]

The appellants point out that secured parties
    are generally not permitted to foreclose on collateral without following the
    procedures set out in Part V of the
PPSA
, including the mandatory
    notice period and objection process. The respondents argue to the contrary, that,
    as secured parties with control over investment property, they were entitled
    under s. 17.1(2) of the
PPSA
to deal with the pledged shares in the
    manner provided in the Security Agreement, which imposes no notice requirement,
    and without regard to the formalities of the
PPSA
.

[48]

In my view, s. 17.1(2) does not entitle the respondents
    to foreclose on the pledged shares without notice, as I will explain.

(1)

The Governing Principles

(a)

The rights and remedies of secured parties

[49]

The rights, remedies, and duties of a secured
    party under the
PPSA
are set out in Part V of the
PPSA
.
    Section 59(1) identifies three sources or categories of remedies:

Where the debtor is in default under
    a security agreement, the secured party has the [1]
rights
    and remedies provided in the security agreement
and [2]
the rights and remedies provided in this Part [V]
and,
    when in possession or control of the collateral, [3]
the
    rights, remedies and duties provided in section 17 or 17.1
, as the case
    may be. [Numbers and emphasis added.]

[50]

The principal remedies available under Part V
    include the sale of the collateral or the acceptance of the collateral in
    satisfaction of the debt, commonly known as foreclosure. Like the rest of the
PPSA
,
    Part V was intended to harmonize a previously unstructured area of the law in
    which parties were required to select an appropriate remedy from among a
    patchwork of common law rights: see McLaren, at para. 15.01; Ronald Cuming,
    Catherine Walsh & Roderick Wood,
Personal Property Security Law
(Toronto:
    Irwin Law, 2012), at p. 616.

[51]

In order to ensure greater certainty and
    predictability in commercial matters, the remedies set out in Part V are only
    to a limited extent subject to modification by contract in advance.
Section
59(5) provides that the remedies
    contained in ss. 63-66, including the rules governing sale and foreclosure
    remedies, cannot be waived or varied by contract to the extent that they give
    rights to the debtor and impose duties on the secured party. Contractual
    modifications are only permissible if they benefit the debtor. Ronald Cuming
et
    al.
describe Part V in the following terms, at pp. 618-619:

For the most part, this scheme of enforcement
    remedies is mandatory and a secured party has only a limited ability to vary it
    by contract. The PPSA provides that to the extent that the enforcement
    provisions give rights to the debtor or impose obligations on the secured
    party, they cannot be waived or varied except as provided by the Act.



Although the PPSA provides that a secured
    party also has the rights and remedies provided in the security agreement,
    these cannot detract from the rights conferred upon the debtor by Part V and by
    section 17.
The PPSA permits contractual variation of the
    remedial scheme if the variation expands the rights available to the debtor on
    default
. [Emphasis added.]

[52]

It is noteworthy that s. 59 identifies ss. 17
    and 17.1 as potential sources of rights, remedies and duties. Section 17.1 is
    the relevant provision when dealing with investment property:

(1) Unless otherwise agreed by the
    parties and despite section 17, a secured party having control under subsection
    1 (2) of investment property as collateral,

(a) may hold as additional
    security any proceeds received from the collateral;

(b) shall either apply money or
    funds received from the collateral to reduce the secured obligation or remit
    such money or funds to the debtor; and

(c) may create a security
    interest in the collateral.

(2) Despite subsection (1) and
    section 17, a secured party having control under subsection 1 (2) of investment
    property as collateral may
sell, transfer, use or
    otherwise deal
with the collateral in the manner and to the extent
    provided in the security agreement. [Emphasis added.]

[53]

Section 17.1 creates an exception to the
    enforcement regime in Part V of the
PPSA
. It exempts certain forms of
    investment property held as collateral by removing some of the formal and
    procedural requirements that could impede a secured partys ability to deal
    with the collateral expeditiously. Like other 2006 amendments to the
PPSA
and
STA
, the exception in s. 17.1 is aimed at improving efficiency in
    capital markets. It does this in two ways.

[54]

First, s. 17.1(1)(c) permits a secured party
    with control of investment property to create a new security interest in the
    collateral. This provision permits secured parties with control of investment
    property to reuse shares and other securities held in connection with structured
    transactions, derivatives, or brokerage accounts. For example, a secured party
    may re-pledge the collateral to a third party or grant a new security interest
    in it, subject to the security agreement: Scavone, at p. 86; see also McLaren, at
    para. 1.04; Jacob Ziegel, David Denomme & Anthony Duggan,
Ontario
    Personal Property Security Act: Commentary and Analysis
, 3rd ed. (Toronto:
    LexisNexis, 2020), at p. 184.

[55]

Second, s. 17.1(2) removes restrictions on the
    secured partys right to dispose of the investment property it holds as
    collateral, subject only to the terms of the security agreement. Borrowing
    again from Professor McLaren, s. 17.1(2) dispels any ambiguities as to whether
    the secured party can be allowed to sell collateral and prompts the parties to
    use the security agreement to establish the rights of the secured party to
    transfer the collateral: at para. 14.09. I agree, and I would add that s. 17.1(2)
    presupposes, or at least acknowledges, that parties giving security in
    investment property are sophisticated actors capable of drafting contracts to
    suit their mutual need for expeditiousness in fast-moving capital markets. It could
    be used, for example, to permit contracting parties to define in advance the
    conditions under which a securities broker would be entitled to liquidate a
    clients rapidly depreciating margin account.

[56]

Section 17.1(2) does not state that a secured
    party is permitted to accept collateral in satisfaction of the debt under the
    security agreement. Do the words sell, transfer, use or otherwise deal
    include a right of foreclosure?

(2)

The Principles Applied

[57]

As noted, Canada Grace had control of the pledged
    shares from December 12, 2018. Was Canada Grace, as a secured party with
    control of investment property, permitted to foreclose on the pledged shares
    without notice under the Security Agreement?

[58]

The analysis has two parts. The first construes
    the Security Agreement. The second construes s. 17.1(2) of the
PPSA
.

(a)

The parties intended to create a contractual
    right of foreclosure

[59]

The appellants argue that even if s. 17.1(2)
    could be used to foreclose on the shares, the terms of the Security Agreement
    itself were not sufficiently precise to give rise to a right of foreclosure. A
    right of foreclosure could only be created using clear and unequivocal
    language.

[60]

I reproduce the terms of the Security Agreement
    for convenience:

3. Considering the risks to Canada Grace, as
    the shareholder of the Lender, caused by the Borrowers performance under the
    Loan Agreement,
Romlex agrees to
    pledge all Romlexs Share
of Lender and any
    further shares issued, rights and interest entitled (collectively the Pledged
    Shares) to the Canada Grace [sic]. If the Borrower becomes default [sic] for
    any reason,
the Pledged Shares
    shall be transferred to Canada Grace at $2 nominal costs (the Share Transfer)
, the receipt of payment of such $2 nominal costs is hereby
    confirmed by Romlex.

To effect such Shares Transfer, all parties
    agrees that:



(3) Romlex shall provide its cooperation to
    facilitate such Shares Transfer and removal of the Guarantor as director and
    officers; Romlex hereby provides its irrevocable power of attorney to Jenny to
    sign relevant documents for Romlex to effect such Shares Transfer and removal,
    although signing such documents is not required under this agreement. (Emphasis
    added.)

[61]

The appellants argue that the Share Transfer
    in question was not intended to enable foreclosure but only to permit the
    transfer of possession required to create the pledge. I disagree.

[62]

The Security Agreement is not ambiguous. The
    application judge correctly found, at para. 22 of his reasons, that the parties
    had contemplated a contractual right that effectively amounts to foreclosure.
    I come to this conclusion for two reasons. First, as the respondent argues, the
    words pledge and transfer must be given different meanings within the
    Security Agreement. The Security Agreement refers to two distinct operations on
    the shares: first, that Romlex agrees to pledge the shares and, second, that
    upon default the Pledged Shares shall be transferred to Canada Grace. Read in
    context, the word transfer clearly refers to a further conveyance or
    disposition of the shares after the initial pledge. Canada Grace would
    already be in possession of the shares at the time of the transfer, and the
    Security Agreement explicitly states that the pledged shares would be
    transferred
to Canada Grace
 as opposed to a
    third party.

[63]

Second, the appellants argument that the word
    transfer refers to the creation of the pledge upon default does not make
    sense in the context of the negotiations between the parties. The Security
    Agreement came about because Atlas Brampton defaulted under the Loan Agreement by
    failing to make the first interest payment. Romlex offered a pledge of shares
    with immediate effect to provide additional security for the loan and to cure
    Atlas Bramptons existing default. It cannot plausibly be argued Canada Grace
    was agreeing that it was only upon the
next
default
    that it could take and hold the shares as a pledge. The pledges immediate
    effect is also confirmed by the email exchanges between the parties: Once the
    fund is returned the pledged shares will be released in full
and returned
 (emphasis added). There could be no return
    of shares that had not already been given.

[64]

In my view, the parties intended cl. 3 of the
    Security Agreement to function as a foreclosure provision. I turn now to the
    question of whether the clause is effective under s. 17.1(2) of the
PPSA
and entitles Canada Grace to foreclose without notice to the debtor.

(b)

May Canada Grace rely on s. 17.1(2) to foreclose
    without notice?

[65]

To repeat for convenience, the language in s.
    17.1(2) provides:

Despite subsection (1) and section 17, a
    secured party having control under subsection 1 (2) of investment property as
    collateral may
sell, transfer, use or otherwise deal
with the collateral in the manner and to the extent provided in the security
    agreement. [Emphasis added.]

[66]

This courts task is to interpret this language,
    
sell, transfer, use or otherwise deal
with the
    collateral, especially 
otherwise deal
.  In this
    task the court must interpret the words of the
PPSA
in their entire
    context and in their grammatical and ordinary sense harmoniously with the
    scheme of the Act, the object of the Act, and the intention of parliament:
Rizzo
    & Rizzo Shoes Ltd. (Re)
, [1998] 1 S.C.R. 27, at para. 21.

[67]

In my view, s. 17.1(2) does not permit Canada
    Grace to foreclose on the pledged shares under the Security Agreement without
    notice. I say this for four reasons.

[68]

First, s. 17.1(2) creates an exception to the
    general enforcement scheme set out in Part V of the
PPSA
. The
    exception reduces the statutory protections available to the debtor in favour
    of greater contractual freedom between the parties. This is not, in itself,
    contrary to the overall scheme of the
PPSA
, but it does run contrary
    to the debtor-protective elements of Part V governing remedies, including the prohibition
    on contractual modifications to the enforcement scheme that would reduce
    protections for the debtor. It follows that the exception must be construed
    narrowly.

[69]

Second, a plain reading of the words sell,
    transfer, use or otherwise deal would exclude a power of foreclosure because
    it is not one of the enumerated rights.
I would bring the principle of
    implied exclusion to bear on this point. I
n
University
    Health Network v. Ontario (Minister of Finance)
(2001), 208 D.L.R. (4th)
    459, [2001] O.J. No. 4485, Laskin J.A. explained the principle at paras. 30-31.
    He quoted Professor Ruth Sullivan: An implied exclusion argument lies whenever
    there is reason to believe that if the legislature had meant to include a particular
    thing within the ambit of its legislation, it would have referred to that thing
    expressly. Laskin J.A. added: In other words, legislative exclusion can be
    implied when an express reference is expected but absent.

[70]

In my view, s. 17.1(2) is such a provision. I draw the inference
    that
the legislature did not intend the words or otherwise
    deal in s 17.1(2) to include foreclosure. The
PPSA
s elaborate
    treatment of foreclosure in Part V leads to the conclusion that if the
    legislature meant to make foreclosure available as a remedy related to
    investment property, it would have done so. Recall that
the word foreclose
    is used in the marginal notes to ss. 65(6) and (6.1) of the
PPSA
, and the coordinate expressions 
accept
    the collateral in satisfaction of the obligation secured and

accept the collateral in full satisfaction of the obligation are
    used in ss. 65(2) and 65(6) respectively, along with an elaborate procedure
    leading to foreclosure.

[71]

Similarly, the words or otherwise deal do not
    open the door to any imaginable transaction. Rather, the words otherwise deal
    are constrained by the earlier words, sell, transfer, and use, which tend
    toward disposition rather than foreclosure.

[72]

Third, reading the words or otherwise deal
    with the pledged shares to permit foreclosure does not fit well into the elaborate
    debtor-protective statutory scheme governing foreclosure that is set out in
    Part V of the
PPSA
.

[73]

Foreclosure entails different legal and
    practical consequences than sale, transfer, or use. Foreclosure extinguishes
    the debt, but it may cause the debtor to object that a better result could be
    obtained through sale. That is the reason for the notice and objection
    procedure in Part V, which I sketch out briefly.

[74]

Section 65(2) requires a foreclosing creditor to
    give notice that it propose[s] to accept collateral in satisfaction of the
    obligation secured  in other words - to foreclose as the marginal note to s.
    65(6) states. The secured party shall serve notice of the proposal [to
    foreclose] on the persons mentioned in clauses 63(4)(a) to (d), which includes
    the debtor, the owner of the collateral, and every person who has a security
    interest in the collateral.

[75]

Under s. 65(6), the secured party shall be
    deemed to have irrevocably elected to accept the collateral in full
    satisfaction of the obligation secured at the earlier of the 15-day notice
    period or any extension of it.

[76]

Under s. 66, any person entitled to notice has a
    right of redemption. If the foreclosure comes into effect without redemption, then
    under s. 65(6.1) the secured party is entitled to the collateral free from all
    rights and interests in it of any person entitled to notification who is in a
    position subordinate to the secured party. The words otherwise deal in s.
    17.1(2) are not sufficiently precise to displace this important mechanism.

[77]

Fourth, an interpretation permitting foreclosure
    in this case would not be consistent with the purpose for which s 17.1(2) was enacted.
    The types of otherwise dealing must also be understood in light of the
    purposes for which s. 17.1(2) was introduced: to ease capital markets
    transactions, derivatives, and margin trading. As noted, the pledged shares in
    question are investment property and Canada Grace, as pledgee, had control
    within the definitions of the
PPSA
and
STA
. However, the Security
    Agreement between the appellants and respondents does not engage any of the
    complexities of the indirect holding system or the fast-moving dynamic of
    modern capital markets. Canada Grace is not in the same position as a broker or
    securities intermediary, for example, who must act quickly to liquidate rapidly
    depreciating accounts. The Security Agreement in this case more closely
    resembles a traditional pledge of physical collateral. This dispute between
    real estate investors for control of a development property is not the typical
    situation that s. 17.1(2) was designed to address.

[78]

Put simply, this is not a s. 17.1(2) case.
    Section 17.1(2) was intended to provide a special accommodation for certain
    capital markets participants. It should not be understood as a general
    exception to the foreclosure procedure in Part V of the
PPSA
.

[79]

I conclude that the words or otherwise deal in
    s. 17.1(2) do not contemplate foreclosure on investment property free of
    compliance with the foreclosure provisions of Part V of the
PPSA
.

G.

Was Canada Grace permitted to foreclose under
    Part V of the
PPSA
?

[80]

The appellants point out that the application
    judge found Canada Grace had failed to give the requisite notice to foreclose
    under Part V of the
PPSA
: at para. 22. However, i
t is not clear from the application judges reasons whether he
    found, as a matter of fact, that no notice was given or whether, as a matter of
    law, that the notice given was inadequate.

[81]

In my view, Canada Grace followed the
PPSA
procedure for accepting the shares in satisfaction of Atlas Bramptons debt.
    Further, Atlas Brampton has not demonstrated its ability to redeem the shares
    by paying its debt.

[82]

The respondents produced at least five
    communications with the appellants, which they submit constituted adequate
    notice for the purpose of foreclosure under Part V of the
PPSA
:

1.

On December 24, 2018, citing Romlexs
    receivership, the respondents solicitor demanded that Romlex transfer its
    shares to Canada Grace no later than January 5, 2019;

2.

On January 4, 2019, Mr. Grigoras signed a note confirming that
    Romlex would transfer its shares to Canada Grace on or before January 15, 2019;

3.

On January 14, 2019, the respondents solicitor made email and
    letter demands for the transfer for the shares before January 25, 2019;

4.

On February 12, 2019, in response to Romlexs offer to repay the
    loan in installments, the respondents solicitor demanded either repayment of
    the full amount of the loan or transfer of the pledged shares by February 28,
    2019;

5.

On March 1, 2019, the solicitor for Atlas Springbank, Diana Young,
    sent a Notice of Default to Romlex, Mr. Grigoras and Atlas Brampton stating
    that the share transfer had been completed.

[83]

Faced with these communications, the application
    judge seems to have accepted that notice was given but was inadequate. This was
    an error stemming from a lack of clarity in the law in this area. In my view,
    the notice was adequate.

[84]

As I describe below, courts have taken
    inconsistent approaches to the notice requirement for foreclosure under the
PPSA
.
    Part V of the
PPSA
requires a foreclosing creditor to give notice of
    its proposal to accept collateral in satisfaction of a secured debt  in
    other words  to foreclose. The notice requirement set out in s. 65(2) of the
PPSA
states that the secured party shall serve a notice of the proposal [to
    foreclose] on the persons mentioned in clauses 63(4)(a) to (d), including the
    debtor, the owner of the collateral, and every person who has a security
    interest in the collateral.

[85]

However, it is important to note that while s.
    65(2) incorporates by reference the list of
recipients

of notice mandated by s. 63(4), it does not import from s. 63(5) the detailed
    rules that set out the required
contents
of a
    notice of disposition of collateral (for example, by sale). The task of
    establishing the appropriate contents of a notice of foreclosure and, by
    extension, the adequacy of the notice, has fallen to the courts in the absence
    of express requirements in the
PPSA
.

[86]

Creditors should give adequate notice. A notice
    of intention to foreclose on collateral should ordinarily expressly cite the
PPSA
and include a) the amount of the secured obligation, b) a description of the
    collateral, c) expression of the clear intention to retain the collateral
in satisfaction of the debt
(and not as continuing
    security), and d) an indication that the parties receiving notice have 15 days
    to object. Such a notice would be difficult to attack on the ground of
    sufficiency. However, in line with the functional approach courts have been
    instructed to take, there will be cases in which the secured partys intention
    to foreclose on the collateral is clear in the circumstances, even when one or
    more of these elements is absent, and the debtor is under no illusion about the
    consequences of failing to pay. In that context, it not unfair to expect the
    debtor to attempt to redeem the collateral within 15 days.

[87]

The law in Ontario was well-described by Lax J.
    in
Casse v. Credifinance Securities Ltd
(1999), 14 P.P.S.A.C. (2d)
    352, [1999] O.J. No. 1908 (S.C.). In
Casse
, Lax J. reviewed the case
    law and held that the notice of intention to retain collateral must be
    expressed in clear and precise terms: at para. 7. However, she also held
    that [t]he court must be able to conclude
on all the
    evidence
that the debtor knew that the purpose of the secured party in
    retaining the collateral was to satisfy the obligation secured (emphasis
    added). She added: If the Legislature had wished to specify the contents of
    the notice, it could have prescribed this as it did in s 63(5) in regard to
    disposal of collateral. In my opinion, the Legislature did not do so as it
    intended that the contents of the notice be flexible so as to accommodate a
    variety of commercial circumstances: at para. 7. I agree.

[88]

In my view, Lax J.s approach in
Casse
strikes the appropriate balance. There will be circumstances in which, on the
    basis of all the evidence, it is obvious that the debtor knows its creditor is
    foreclosing on the collateral in satisfaction of the secured obligation, even
    if the formal notice might be deficient in some sense.

[89]

I would agree that Canada Graces first four
    notices were individually inadequate. These notices generally provided minor
    extensions of time for Atlas Brampton to repay the loan in the face of what
    Canada Grace viewed as state of continuing default, but, taken together, they
    adequately signal Canada Graces intent to take ownership of the Atlas
    Springbank shares in accordance with the Security Agreement if the default is not
    remedied.

[90]

The March 1 Notice of Default would not have
    come as a surprise to the appellants. It was addressed to Romlex, Atlas
    Brampton, and Mr. Grigoras. It had as its subject: Re: Notice of Default under
    Loan Agreement and Supplementary Agreement; Share Transfer Deemed upon Default;
    removal of the positions as Director and Officer. The notice specifically
    referred to the Security Agreement (using the term Supplementary Agreement
    and Loan Documents) dated December 12, 2018 and reproduced the terms of the
    share pledge.

[91]

The March 1 Notice then identified Atlas
    Bramptons failure to pay the loan as the operative event of default and
    culminated with an assertion that the pledged shares had been transferred so
    that Canada Grace was now the sole shareholder of Atlas Springbank:

Pursuant to the Loan Documents, please be
    advised that
the Pledged Shares
    have been transferred to Canada Grace who is now the sole shareholder of the
    Lender
, and the Guarantor has been removed from
    the positions of director and officer(s) of the Lender.

[92]

The appellants rely on three cases, all of which
    I would distinguish. First, in
Klein v. Lemore Investments Ltd.
(1983), 2 P.P.S.A.C. 252, [1983] O.J. No. 204 (H.C.), White J. held that a
    notice of intention to retain collateral must express a proposal to retain
    the collateral, that is, it must express an intention as to the future
    instead of a fait accompli. In that case, a plaintiff real estate investor,
    Klein, pledged his shares in a real estate holding company to a fellow investor
    to secure a loan for roughly $60,000. Shortly after the plaintiffs default,
    the secured party notified him that our said client, [the secured party], is
    now the legal owner of twenty common shares in the above noted company. White
    J. held that this was an improper notice of fait accompli and therefore even
    to [the date of the judgment], having regard to the provisions of the
Personal
    Property Security Act
, Klein has a right to redeem his shares: at para.
    46.

[93]

I acknowledge that the situation in this case
    resembles somewhat the fait accompli that was fatal to the foreclosure notice
    in
Lemore
. Canada
    Grace did not expressly state its intention to retain the shares or offer
    Romlex an opportunity to redeem them; it simply asserted its sole ownership of
    Atlas Springbank. However, taking into account the context and the words of the
    communications from Canada Graces counsel as the default persisted, there is
    no doubt that the appellants were aware of the respondents intention to
    foreclose if the default was not remedied. Moreover, as the application judge
    noted, neither Romlex nor any of the Grigoras companies tendered fulfillment
    of the loan within 15 days after any of the notices, or at any time since. He
    noted that they did not put forward any reliable evidence of Atlas Bramptons
    ability to pay. That failure persisted in this court.

[94]

The appellants also invoke
Angelkovski v.
    Trans-Canada Foods Ltd.
, [1986] 3 W.W.R. 723, [1986] M.J. No. 148 (Q.B.).
    In that case, the court held that notice must be given in clear and precise
    terms not only that the creditor intends to retain the collateral but that it
    intends to retain the collateral
in satisfaction of the
    obligation secured
: at para. 21. The defendants had taken possession of
    a restaurant under a chattel mortgage. Wright J. found that they had manifested
    an intention to retain it in satisfaction of the debt and operate it as a going
    concern. However, Wright J. rejected an argument that the plaintiffs awareness
    of the defendants intention constituted constructive notice and held that the
    plaintiffs retained a right to redeem the property until there had been
    compliance with the notice requirements of the
PPSA
. Wright J. found
    that the debtor had not received the required notice and held open the right to
    redeem. I would simply respond as Lax J. did in
Casse
, at para. 13, in
    words that apply equally to Mr. Grigoras:

He was given an opportunity to redeem the
    shares when the debt fell due. He was under no misapprehension as to the legal
    effect of the pledge, nor of the consequences of failing to redeem.

[95]

Finally, the respondents cite
Tureck et al.
    v. Hanston Investments Ltd.

et al.
(1986), 56 O.R. (2d) 393
    (H.C.). As the application judge noted at para. 22, i
n
    that case the pledge of shares reserved to the pledgor all the incidents of
    ownership and title in the pledged shares. The security agreement did not
    confer a right to foreclose. The court held that the only remedy available to
    the security holder was the statutory right under the
PPSA
but because the security holder
    had not given notice of an intention to retain the collateral in satisfaction
    of the secured obligation, the remedy was denied. By contrast, in this case the
    notice was adequate, as I have explained.

H.

A note on
Harry
    Shields

[96]

As noted earlier, the appellants assert that the
    application judge misapplied the ruling in
Harry Shields
in finding
    that Canada Grace could rely entirely on the freestanding contractual right of
    foreclosure outside of the
PPSA
. Because I have found that the
    respondents notices were
PPSA
compliant, I need not address this
    issue but I will do so in light of the argument.

[97]

In my view, the ruling in
Harry Shields
has
    been superseded by later cases interpreting the
PPSA
such as
Bank
    of Montreal v. Innovation Credit Union
and
i Trade Finance Inc.
    v. Bank of Montreal
, and especially by the 2006 amendments to the
PPSA
and
STA
, all of which were discussed earlier.

[98]

The proper understanding and application of the
    ruling in
Harry Shields
was the focus of argument before the
    application judge and in the parties submissions on appeal. The plaintiff,
    Harry Shields Ltd., executed a demand debenture in favour of the Bank of
    Montreal. The debenture agreement gave the bank the right to appoint a receiver
    in the event of default. The bank also required Shields to pledge the debenture
    back to the bank under a separate pledge agreement. This was to ensure that the
    bank had possession of the debenture upon default. When Shields began to
    experience financial difficulties, the bank demanded payment and appointed a
    receiver under the debenture. Shields argued that the bank was not entitled to
    enforce the debenture directly because it held the debenture as a pledgee and
    was therefore required to resort to its remedies as a pledgee under the
PPSA
.
    Shields submitted that the bank might be required to sell the debenture,
    potentially to itself, before it could enforce it.

[99]

Lane J. defined the issue before him as whether,
    where the parties have expressly agreed that the security holder has received
    the debenture both as a continuing collateral security enforceable directly and
    as a pledge, the security holder is confined to the remedies of a pledgee. He
    reasoned: I see nothing in the
PPSA
that compels this conclusion,
    adding, This view leads to the commercially sensible result intended by the
    parties: that the bank may enforce the debenture as owner without any ritual
    need to sell it to itself.

[100]

Section 17.1, which was introduced after
Harry Shields
,
    simplifies the analysis. To the extent that most share pledges will give the
    secured party control over investment property (securities), secured parties
    can now rely on s. 17.1 instead of
Harry Shields
to sell, transfer,
    use or otherwise deal with collateral. The issue, in most cases, will be to
    determine whether the pledged instrument is investment property within the
    meaning of the
PPSA
. Whether a debenture of the kind used in
Harry
    Shields
could be considered investment property under the
PPSA
is a matter for another day. If it is not,
Harry Shields
may still
    provide some guidance. However, in most cases dealing with a pledge of shares
    or other securities, s. 17.1 sets out the framework.

I.

Disposition

[101]

Canada Grace complied adequately with the notice requirements under
    Part V of the
PPSA
. I would dismiss the appeal.

Released: April 9, 2021 P.L.

P.
    Lauwers J.A.

I
    agree. B.W. Miller J.A.

I
    agree. I.V.B. Nordheimer J.A.


