The issue of whether an unsecured party can purchase a secured
party's debt to shelter its own unsecured debt under the newly
acquired security is often debated. To date, there has been little
Canadian jurisprudence addressing this practice. The recent case of
CPC Networks Corp. v. Eagle Eye Investments
Inc.1 confirms that the practice does not work.
Security agreements often contain "all obligations"
clauses which secure all of a debtor's present and future
obligations owed to a secured creditor. Occasionally, all
obligations clauses have been used in an attempt to convert
unsecured debt to secured debt by either (a) assigning the security
agreement to an unsecured creditor or (b) assigning unsecured
claims to a secured creditor. These situations have been considered
by courts in England, Australia, New Zealand and the United States,
but Canadian case law on this issue has been very limited.
