A regional equipment manufacturer in southwestern Ontario had operated profitably for 12 years before a sharp downturn in orders left it unable to service its debts. When the company missed 2 consecutive monthly payments on its operating line of credit, the bank that had financed its operations since inception moved to assess its position. What the bank discovered complicated matters considerably: at least 3 other creditors asserted security interests in the same pool of assets the bank had long considered its primary collateral.
The manufacturer had obtained its original operating facility through a 10-year equipment financing arrangement with the bank, granting security over all present and after-acquired equipment, inventory, and accounts receivable. The bank registered its financing statement in the provincial personal property registry within days of advancing the first funds. Over the following years, as the business grew, additional financing relationships developed. A specialty supplier of raw materials had extended trade credit on terms that included a security agreement covering inventory derived from its materials. An equipment dealer had sold the manufacturer a computerized milling system valued at $340,000 under a conditional sales contract, retaining a purchase-money security interest in the machine. More recently, a private lender had advanced $175,000 to the company's principal shareholder, who in turn injected the funds into the business; that lender held a general security agreement covering all of the company's assets, registered 8 months after the bank's original financing statement.
The manufacturer's default triggered simultaneous demands from multiple creditors, each claiming entitlement to seize or realize upon overlapping categories of collateral. The bank pointed to its comprehensive security agreement and longstanding registration. The equipment dealer asserted that its purchase-money interest in the milling system took priority regardless of when the bank had registered. The raw materials supplier argued that its security interest attached specifically to identifiable inventory and its proceeds. The private lender maintained that its general security agreement, though registered later, covered assets acquired after the bank's original registration.
The company's remaining assets consisted of approximately $520,000 in equipment, $180,000 in finished inventory, $95,000 in raw materials, and $210,000 in outstanding accounts receivable. The combined claims of all secured creditors exceeded $1.4 million. How these competing interests would be ranked, which creditor could enforce against which assets, and what procedural requirements governed any seizure or disposition of collateral all turned on the application of personal property security legislation to the specific facts of when and how each security interest had been created, whether and when each had been perfected, and how the statutory priority rules resolved the competing claims.