PLC Multi Jurisdictional Guide 2012 Finance Canada

PRACTICAL LAW MULTI-JURISDICTIONAL GUIDE 2012 FINANCE

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Canada

Derek Vesey, Jennifer Pankratz, Elias Benhamou, www.practicallaw.com/7-501-3254 Robin Schwill and Steven Martin Davies Ward Phillips & Vineberg LLP

OVERVIEW OF THE LENDING MARKET personal property for secured lending purposes. Leasehold interests are not technically real property at common law but rather 1. What have been the main trends and important developments are considered to be chattels. In many respects commercial in the lending market in your jurisdiction in the last 12 leases are interpreted and enforced primarily as contracts. Leases months? can be registered against the property demised by the lease and the tenant is able to mortgage its leasehold interest, either by means of an assignment of the lease or a sublease of the leased Activity in the secured lending market has resumed in line with premises. other developed countries during 2011. This has been supported by the relatively strong financial position of the major Canadian Québec. In Québec, real property comprises (Civil Code of Québec banks. (Civil Code)):

Land.

FORMS OF SECURITY OVER ASSETS Any constructions and works of a permanent nature located Real estate on the land.

Anything forming an integral part of the land. 2. What is considered real estate in your jurisdiction? What are the most common forms of security granted over it? What Plants and minerals, as long as they are not separated or formalities are required? extracted from the land.

Common forms of security

Real estate Common law jurisdictions. Canadian common law provinces Country Q&A Common law jurisdictions. All Canadian provinces and territories predominantly use Torrens and “lien theory” registration systems, are common law jurisdictions, except for Québec, which is a civil with some of the older jurisdictions in Eastern Canada still based law jurisdiction (see below, Québec). In common law jurisdictions, on marketability of title and “title theory” registration systems. real property generally comprises: In all common law provinces, security over real property can be granted by way of a mortgage or trust deed, with no material Land and buildings. distinction in terms of validity or available remedies between Woods. the two. Security is ordinarily perfected by registration of the mortgage or trust deed against title. Each province maintains its Standing crops. own real property title registration system, with varying degrees of

Non-navigable waters. centralisation and computerisation.

Easements (such as rights of access over adjacent property). The creation requirements also vary by province.

Profits-à-prendre (rights to take minerals, hydrocarbons or other things from another’s property). Real estate security granted in relation to Indian reserve lands and certain lands relating to railway undertakings are registered All minerals and hydrocarbons on or under the land, at special federal registry offices. In addition, the following real together with rights of access to extract them, unless property is subject to special rules: expressly excluded in the title to land. This may include Most federally regulated facilities, for example, Canada’s some mineral and oil and gas royalties that are construed as major shipping ports, prisons and airports. creating interests in land. Certain unpatented lands (that is, Crown lands which have The provinces all have condominium legislation enabling commer- never been held privately, typically in remote parts of the cial and residential units to be owned in multi-unit buildings. Real country). property can also include interests in property-holding partnerships (where the partnership property is real property), but generally not Québec. Security over real estate (and/or rents generated by real shares in property-holding companies. estate as well as insurance indemnities covering such rents) can only be granted by a deed of hypothec, signed by the parties in Real property interests include rents and similar profits from the physical presence of a Québec notary. A deed of hypothec land. However, these interests are also treated in some ways as must be registered in the land register, maintained at the registry

office of the registration division where the immovable property is is situated at the time of attachment. Therefore, registration may be located. Special registers are also maintained for the publication required in multiple jurisdictions, depending on the location and of security over the following: type of collateral.

Timber-cutting rights. Québec. Québec law does not have the concepts of attachment Mining claims. and perfection. Security over tangible movable property is created under a deed of hypothec. Where the hypothec takes the form of a Railway networks. pledge, the pledge is created on the delivery of the pledged property Cable communication networks. to the pledgee by the pledgor. A deed of hypothec charging movable property does not need to be signed in the physical presence of a Power lines or oil or gas pipelines. Québec notary.

Formalities The validity and publicity of security affecting movable property is See above, Common forms of security. governed by the law of the jurisdiction where the movable property is situated. Security on movable property is published either by: Tangible movable property Registration in a central registry called the Register of 3. What is considered tangible movable property in your Personal and Movable Real Rights.

jurisdiction? What are the most common forms of security Physical delivery of the hypothecated property to the granted over it? What formalities are required? hypothecary creditor or to a third party custodian agreed on by the debtor and the creditor.

Tangible movable property Formalities Common law jurisdictions. In common law jurisdictions, security See above, Common forms of security. over all types of personal (that is, movable) property can be given under the Personal Property Security Act (PPSA) (which is very Federal jurisdiction similar to Article 9 of the Uniform Commercial Code (UCC) in The Canadian federal government has legislative jurisdiction the US). Under the PPSA, tangible movable property primarily over aircraft, ships and most railways. Although security can be comprises goods that are either equipment or inventory. granted under the PPSA or Civil Code over these assets, additional steps under the applicable federal legislation can be advisable to Québec. There is no separate definition of tangible movable obtain a first priority security interest. The federal government property in the Civil Code. and several provinces have passed legislation to implement the Common forms of security Convention on International Interests in Mobile Equipment (Cape Town, 2001) and the related protocol on matters specific to Common law jurisdictions. Security over tangible movable property aircraft equipment, but that legislation is not yet in force. is granted by a security agreement between the creditor and debtor. It is common practice for a security agreement to grant a security Financial instruments interest in all of the debtor’s present and after-acquired personal property. 4. What are the most common types of financial instrument over which security is granted in your jurisdiction? What Country Q&A A security interest is not enforceable against third parties unless are the most common forms of security granted over those it has attached. Attachment occurs only when the following instruments? What formalities are required? conditions are satisfied (PPSA):

Value is given (that is, there is a debt or obligation, for which the security is being granted). Financial instruments Financial instruments, such as shares and other securities (both The debtor has rights in the collateral. in certificated and dematerialised form) are governed by provin- The security agreement contains a description of the cial legislation. In most provinces, the relevant law is called the collateral, sufficient for its identification. Securities Transfer Act (STA), and based on Revised Article 8 of the UCC. Following attachment, the creditor must perfect its security interest in the collateral to ensure its priority over other creditors’ The relevant law in Québec is substantially the same. rights. Under the PPSA, perfection is most commonly achieved by registration. The creditor (or its legal counsel) registers a Under the PPSA, security can be granted over investment property, financing statement against the debtor in accordance with the which comprises the following:

PPSA. A security interest in tangible personal property can also Securities, whether certificated or uncertificated. be perfected by possession. This is unusual for goods, although a security interest in chattel paper, documents of title, instruments Security entitlements. or money might more often be perfected by possession. Securities accounts.

Under the PPSA, the validity, perfection, effect of perfection and Futures contracts or futures accounts. priority of a security interest over tangible movable property is generally governed by the law of the jurisdiction where the collateral A creditor must attach and perfect its security interest (see below).

FOR MORE about this publication, please visit www.practicallaw.com/finance-mjg INFORMATION about Practical Law Company, please visit www.practicallaw.com/about/practicallaw Country Q&A - - Security is taken over claims and Claims and receivables (such as debts or or debts as (such receivables and Claims ). see Question 3, Common forms of security: see see Question 3, Tangible movable property: www.practicallaw.com/about/practicallaw

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Claims and receivables are considered intangible move deposits? over which security is granted in your jurisdiction? What are the most common forms of security granted over claims and receivables? What formalities are required? What What The jurisdiction where the debtor’s place of business (or chief chief (or business of place debtor’s the where jurisdiction The business) of place one than more is there if office executive or certificated (including property investment for located is registration. by perfected securities) uncertificated within Canada. Between jurisdictions perfection by any other jurisdiction that recognises To securities. possession of certificated

If a certificated security is subsequently moved to another juris diction, the creditor must ensure that its security interest remains interest security its that ensure must creditor the diction, change will priority and perfection governing law the as perfected, retains agent) its (or creditor the as long as However, above). (see possession of the certificate in anotherjurisdiction, such a move provided it is either: will not affect perfection, able property in Québec. Common forms of security accounts) bank as (such deposits Cash jurisdictions. law Common The PPSA. the under property personal intangible considered are perfection requirements are the same as for tangible property movable (see Question 3, Common forms of security: Common law jurisdictions). There is a proposal to amend the Ontario rights under contracts) are considered intangible personal property property personal intangible considered are contracts) under rights under the PPSA ( jurisdictions law Common Québec. Common forms of security Common law jurisdictions. receivables through the use of a security agreement. only can receivables and claims over security Québec, In Québec. be granted by deed of hypothec. Formalities Common law jurisdictions. The validity, perfection and perfection, priority of a effect security interest is of governed by the law of the jurisdiction where the debtor is located at the time of attachment. Security over claims and receivables is perfected by registration under the PPSA. Québec. The applicable procedure is the same as for movable tangible property ( Québec). Cash 6. are the most common forms of security over cash Claims and receivables 5. are the most common types of claims and receivables Claims and receivables jurisdictions. law Common - about this publication, please visit about Practical please Law visit Company, ). However, the third condition third the However, ). see Question 3, Common forms of FOR MORE FOR INFORMATION arranging for someone else to have control for the benefit of the creditor. arranging the registration by the issuer of the securities arranging the registration by the issuer of in its name; (in obtaining a control agreement from the issuer the direct holding system) or from the securities account in intermediary who maintains the securities holding which the securities are held (in the indirect system); The future intermediary’s jurisdiction, if the collateral is a jurisdiction, if the The future intermediary’s futures contract or account. The securities intermediary’s jurisdiction, if the collateral is jurisdiction, if The securities intermediary’s a security entitlement or a securities account. The jurisdiction where the certificate is located, if the collateral is a certificated security. an uncertificated jurisdiction, if the collateral is The issuer’s security. This By obtaining possession of the investment property. only applies to certificated securities. By obtaining control of the investment property. If securities By obtaining control of the investment property. name, a are certificated and registered in the debtor’s creditor obtains control by delivery of the certificates, uncertificated, evidencing the securities. If securities are a creditor can or are held through the book-entry system, obtain control by (as applicable): By registering a financing statement in accordance with the By registering a financing statement in accordance PPSA. A security interest perfected by registration is subordinate to a security interest in the same investment property perfected by control or possession. The validity, perfection, effect of perfection and priority of a security security a of priority and perfection of effect perfection, validity, The the of one of law the by governed is property investment in interest following: Applicable jurisdiction Security is taken over other investment pledge property by agreement/security way agreement of or a combi- a through perfected a is security The Québec). (in hypothec deed of moveable and/or the use of control agreements. nation of registration Perfection can be achieved in one of three ways under the STA and related provisions of the PPSA: able hypothec (in Québec). The security is a perfected combination through of registration securities. and/or possession of relevant Formalities Attachment requires the same conditions to be satisfied as for tangible movable property ( jurisdictions law Common security: can identification) its for sufficient collateral the of description (a the of possession or control obtaining by satisfied be alternatively investment property. Common forms of security Common forms Most commonly security is taken over certificated securities by way of a pledge agreement/security agreement or deed of move FINANCE MULTI-JURISDICTIONAL GUIDE 2012 MULTI-JURISDICTIONAL GUIDE 2012 FINANCE

PPSA, to permit perfection by control of cash collateral accounts, agreement provides that a creditor acquires security in the debtor’s similar to Article 9 of the UCC. after-acquired personal property (which is the common name for future assets) as soon as the debtor acquires an interest in that Québec. In Québec, security over cash deposits can only be personal property. granted by deed of hypothec. Fungible assets Formalities The PPSA does not expressly prohibit granting security over Common law jurisdictions. Security over cash collateral accounts fungible assets. If the security interest in the goods is perfected is perfected by registration under the PPSA. before the goods become part of a product or mass and the goods are manufactured, processed, assembled or commingled so that Québec. The applicable procedure is the same as for tangible mov- their identity is lost in the product or mass, the security interest able property (see Question 3, Common forms of security: Québec). will continue in that product or mass. If more than one security interest attaches to the product or mass, the security interests Intellectual property rank equally according to the ratio that the cost of the goods to 7. What are the most common types of intellectual property which each interest originally attached bears to the cost of the over which security is granted in your jurisdiction? What are total product or mass. the most common forms of security granted over intellectual In Québec, a hypothec can be granted over fungible assets. property? What formalities are required? Hypothecs granted over movable property will similarly continue to subsist in the property resulting from the transformation and/or Intellectual property combination of such fungible assets. However, it is unlikely that a hypothec on money will continue to exist once the hypothecated The most common types of intellectual property over which security money is commingled with other funds. is granted in Canada include patents, trade marks, copyright and designs. Other assets Common forms of security Certain receivables owed by some Canadian governmental authorities cannot validly be assigned or granted as security. Special Although most intellectual property is regulated by federal legisla- notification and other formalities may apply to security over other tion, it is possible to grant security over intellectual property under receivables owed by these governmental authorities. For exam- the PPSA or Civil Code. Under the PPSA, intellectual property, ple, if a lender takes an assignment of rents as security and a whether registered or unregistered, is considered intangible property and perfection requirements are the same as for other intangibles Canadian federal government department is one of the tenants, (see Question 5, Formalities: Common law jurisdictions). the assignment cannot be enforced in respect of the rents, owing by such department, unless notice of the assignment has been Québec law characterises intellectual property as incorporeal given to and accepted by the government. movable property. A deed of hypothec is the most common form of granting security over intellectual property (for formalities, see RELEASE OF SECURITY OVER ASSETS Question 3, Common forms of security: Québec). 9. How are common forms of security released? Are any In practice, a creditor wishing to protect its security in registered formalities required?

Country Q&A Canadian trade marks, copyrights or patents generally files a copy of the security agreement with the federal Canadian Intellectual Property Office (CIPO), in addition to registration under the PPSA. In both common law jurisdictions and Québec, security is typically While filing with CIPO may not improve the creditor’s priority against released by the secured party executing a formal release and tak- other secured creditors, it will serve as notice of the creditor’s ing any further steps necessary to ensure the financing statements, security interest to any purchaser of the intellectual property. mortgages or hypothecs are discharged from the public registries. Formalities See above, Common forms of security. SPECIAL PURPOSE VEHICLES (SPVs) IN SECURED LENDING Problem assets 10. Is it common in your jurisdiction to take security over the 8. Are there types of assets over which security cannot be shares of an SPV set up to hold certain of the borrower’s granted or can only be granted with difficulty? Which assets assets, rather than to take direct security over those assets? are difficult or problematic when security is granted over them? It is common in Canada to take security both over the shares of an SPV set up to hold the borrower’s assets and directly over Future assets these assets. A security interest can be granted over debtor’s future assets under both the PPSA and the Civil Code. Typically, a security

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(or the terms on which they are made or agreed)? on which they are (or the terms Do Potential disclosure obligations. a director Corporate conflict of interest rules (preventing from voting to approve a loan to the director). Enters into an agreement or arrangement to receive interest at a criminal rate (currently 60%). Receives a payment or partial payment of interest at a criminal rate.

347, Criminal Code (Canada)). If a loan violates section 347 of the Criminal Code, a court may defined (as interest pay to borrower the of obligations all that hold above) are illegal and unenforceable. In addition, no fine, penalty or rate of interest can be stipulated for, taken, reserved or exacted on interest any secured by arrears a mortgage on of real property principal or hypothec on or immovables, that has the effect of increasing the charge on the not money principal on payable interest of rate the beyond arrears in arrears (Interest Act (Canada)). The directors may be subject to increased income tax liabilities, depending on the nature of the transaction. Interest is defined very broadly to include commission penalty, the aggregatefine, fee, a including expenses, and charges of all payable or paid form, other any in or expense, or charge similar or ( arrangement or agreement an under credit advancing for Loans to directors loans guaranteeing or to loans making on restrictions no are There of directors other than: Usury A person is guilty of an indictable offence if he either ( 347, Criminal Code (Canada)): RISK AREAS FOR LENDERS 14. guarantee or security loan, a of validity the affect laws any Financial assistance Most Canadian corporate statutes have repealed financialassist finan provide to corporations allow to them amended or rules ance certain to subject purpose”, any for person “any to assistance cial statutes corporate Canadian few a However, obligations. disclosure prevent companies the by from governed company providing a addition, financial In shares. assistance their of for acquisition the to Act Québec assistance Companies its cannot financial provide (However, of corporation. its or parent a shareholder shareholders will legislature Québec the before currently is that legislation draft enacted.) is it if prohibition, assistance financial this remove Corporate benefit regarding provisions contain not do has statutes law that corporate transaction Canadian a into entering However, rules. benefit corporate no forbenefit may the fiduciary breachthe corporation directors’ or shareholders by minority as oppressive or be challenged duties, of benefit corpora related indebtedness not supporting Guarantees does creditors. guarantor the if even the legal, to be generally beneficial is would tions financing the because financing, the from directly whole. a as group corporate about this publication, please visit about Practical please Law visit Company, FOR MORE FOR INFORMATION they created? jurisdiction? your jurisdiction? Is there a risk of interest? recharacterised as a security such structures being Are Are What The transaction appears to be different, in substance, from The transaction appears to be different, in what it purports to be. The characterisation in the agreement is ambiguous.

Guarantees are commonly used in Canada and are guarantee agreements executed by the guarantor. created by Negative pledge clauses are often used but are in often subject to credit a pre-agreed list agreements of standard permitted encumbrances. In addition, the Civil Code invalidates any clause under which a creditor reserves a right to become the irrevocable owner of the perform to fails debtor the if it, of dispose to or property, debtor’s its obligation. 13. are How jurisdiction? your in used commonly guarantees GUARANTEES 12. negative pledge clauses commonly used in your NEGATIVE PLEDGE Canadian courts generally respect the legal form of a transaction Canadian However, agreement. their in parties the by specified as if either: courts may recharacterise the transaction Due Due to the PPSA’s very broad are no sales contracts used, longer like conditional scope, agreements. arrangements security once-common as financing treated and PPSA the to subject are they as Chattel leases are very common, but leases for a term of more must be registered. than one year are subject to the PPSA and Other structures Consignment arrangements based on retention of title are used. However, they are not consignment true a very as recognised be will arrangement an common whether as it is often uncertain that is excluded from the PPSA. Hire purchase arrangements are not commonly used in Canada as Canada in used commonly not are arrangements purchase Hire quasi-security structures. Retention of title Factoring is common in Canada. Factoring is common Hire purchase Sale and leaseback transactions are common in Canada. Sale and leaseback transactions Factoring Sale and leaseback QUASI-SECURITY 11. types of quasi-security structures are common in FINANCE MULTI-JURISDICTIONAL GUIDE 2012 MULTI-JURISDICTIONAL GUIDE 2012 FINANCE

Others as agent for all of them). If there is a change in the lender holding Canadian corporate law statutes do not have any other rules security, it is usually only necessary to amend the registration of which would directly affect the taking of security by a creditor. the security and sometimes obtain confirmation of the security from the debtor.

15. Can a lender be liable under environmental laws for the actions of a borrower, security provider or guarantor? AGENT AND TRUST CONCEPTS

18. Is the agent concept (such as a facility agent under a Generally, merely holding security over land, as opposed to syndicated loan) recognised in your jurisdiction? enjoying possession, does not have the requisite degree of control to trigger environmental liability. However, environmental laws in most provinces are drafted broadly and therefore there is Common law jurisdictions. Agents are typically used on syndi- a risk that, once a creditor enforces its security, liability could cated loans. be imposed on a creditor who is deemed to have (or have had) the requisite degree of control over the property, even if it is not Québec. Agents are typically used on syndicated loans. However responsible for the pollution. To avoid this open-ended statutory agents must be specifically appointed under the credit documents liability, some provinces have enacted provisions to protect as fonde du pouvoir (that is, the holder of the lenders’ power of creditors from environmental liability in certain circumstances. attorney) by each of the lenders.

STRUCTURING THE PRIORITY OF DEBTS 19. Is the trust concept recognised in your jurisdiction?

16. What methods of subordination are there? Common law jurisdictions Trusts, both domestic and foreign, are recognised and a security Contractual subordination trustee can enforce its rights in the courts. Contractual subordination of debt is possible and common in Canada. Contractual subordination of debt can be achieved by an Québec intercreditor agreement between the debtor’s secured creditors. The trust concept is recognised. However, security granted in favour of a person or entity acting for the benefit of others must be Structural subordination in the form of a notarial deed of hypothec securing the payment of Structural subordination is possible in Canada if a loan is made bonds or other titles of indebtedness (Civil Code). and security is given at different levels in the corporate structure.

Intercreditor arrangements SECURITY AND LOAN DOCUMENTATION Intercreditor arrangements are common. Typically the borrower 20. Do the different types of security in your jurisdiction need to and each of the relevant lenders are party to such arrangements. The typical terms of these agreements relate to: be documented separately or does your jurisdiction allow a single security document? The sharing of collateral/priority of liens. Country Q&A The sharing of information. See Questions 2 and 3. The application of proceeds.

Insolvency proceedings. 21. What (if any) are the rules on how loans (including syndicated loans) should be documented for the loan to be enforceable? DEBT TRADING AND TRANSFER MECHANISMS

There are no specific formalities on how loans should be 17. Is debt traded in your jurisdiction and what transfer documented to be enforceable. mechanisms are used? How do buyers ensure that they obtain the benefit of the security and guarantees associated with the transferred debt? ENFORCEMENT OF SECURITY INTERESTS AND BORROWER INSOLVENCY

Secured debt is traded in Canada. If the debt is widely held 22. What are the circumstances in which a lender can enforce its by a number of lenders, debt can usually be traded on a book- loan, guarantee or security interest? What requirements must entry basis (like other debt and equity securities) and security the lender comply with? is held by a trustee under an indenture for the lenders’ benefit. If the debt is held by only a few lenders, the loan agreement and security documents usually give the lenders broad powers The circumstances in which a secured creditor will be entitled to to assign their interests in the debt and security without the enforce its security are specified under the contract(s) it has with debtor’s consent (the security is again often held by one lender the debtor, typically a credit agreement and security agreement.

This involves retaining the underlying collateral collateral underlying the retaining involves This www.practicallaw.com/finance-mjg

the collateral is perishable; the collateral is perishable; believes that the collateral the secured party reasonably value will decline quickly; customarily traded on a the collateral is of a type recognised market; of the collateral is the cost of care and storage value; disproportionate to its that a on application to the court, the court is satisfied notice is not required; of the after default, every person entitled to notice disposition consents, in writing, to the immediate disposition of the collateral; or in the a receiver and manager disposes of the collateral business. course of the debtor’s may be disposed of wholly or partially. Any disposition of wholly or partially. may be disposed and lease or otherwise sale, private sale, can be by public is of the disposition as long as every aspect on any terms does of the collateral reasonable. Disposing commercially right to sue the debtor or creditor’s not prejudice a secured outstanding amount. any guarantor for any is not required if: Notice of disposition Identify the events of default. Contain a description of the hypothecated property. an objection will be successful if it can be shown that the the that shown be can it if successful be will objection an owed obligation the than greater is collateral the of value successful or timely no If creditor. secured enforcing the to have to deemed is party secured the made, is objection satisfaction full in collateral the accept to elected irrevocably any have not will therefore, and, obligation secured the of guarantor. any or debtor the against claim remaining take possession of the property for purposes of To administration. take the property in payment of the debt. To cause the property to be sold privately. To cause the property to be sold by judicial authority. To Foreclosure. a serve must creditor secured A full. in debt the satisfy to 15-day a for provides generally which PPSA, the under notice other or debtor (the party affected any If period. objection must collateral the objects, successfully creditors) secured ( PPSA the with accordance in sold be ). The notice must, among other among must, notice The jurisdictions). law Common above, matters: Private receivers or receiver-managers would exercise security the the under same rights any to addition in PPSA, the under rights according assets sells court a by appointed receiver A agreement. orders. to that court’s At the start of enforcement the the debtor creditor of his must intention to give exercise one notice of these to rights ( Québec Under the Civil Code, a hypothec holder has four rights. These rights are inherent to hypothec and therefore need not be stated in the deed. The four rights are: - about this publication, please visit about Practical please Law visit Company, The sale can be private (by (by private be can sale The FOR MORE FOR ). ). When the debtor is a insolvent, secured INFORMATION see Question see 23 Question What requirements must a lender comply with? What requirements must a lender comply How sealed tender, auction or a private receiver (if the security security the (if receiver private a or courts auction the to tender, applying sealed (by public or this)) the for of provides jurisdiction agreement general the under either receiver a BIA). the appoint in to provisions receivership or courts provincial The PPSA generally provides for a 15-day notice period before a private sale of personal property collateral and stipulates the parties who must be notified. Collateral Selling the underlying collateral. underlying the Selling Accounts receivable(s). or used in relation to, Other property that was acquired for, business. the insolvent debtor’s Inventory. The debtor’s ability to refinance the indebtedness. The debtor’s The length of the lending relationship. The length of the lending Amount of the loan.

creditor must also provide a notice of intention to enforce its security security its enforce to intention of notice a provide (BIA), also Act must Insolvency creditor and Bankruptcy federal the under the of debtor all the to substantially or all over security enforce to intends it where debtor’s: insolvent The The secured party enforcement cannot enforce earlier its an to security for consent ten can days debtor after The notice. the giving notice the receiving before given be cannot consent but security, of interest. security the enforce to intention of ests ests ( Additional notification requirements exist for certain security inter security certain for exist requirements notification Additional Generally, a security interest can be enforced by either: Generally, Common law jurisdictions Security over real property in different common law can provinces normally be documented in a single However, enforcement security procedures instrument. vary considerably. Typically, enforcement is available through both judicial and non-judicial means. Deficiency judgments (that to funds sufficient produce not did sale foreclosure whose debtor is, a judgmentStrict againstjurisdictions. most in available a are full) in creditor the repay statutory notice provisions (as to timing, parties to and be the form served, of notice) apply on enforcement in all provinces, particularly in the case of agricultural lands. 23. enforced? usually interest security of types main the are Methods of enforcement In addition to complying with the requirements in the security provinces, Canadian all in must, creditor secured the agreement, provide common law “reasonable notice” before being entitled to enforce its security interest. Under common law, reasonable circumstances of the case, including: notice depends on the In common law provinces, when a debtor defaults under a security a under defaults debtor a when provinces, law common In agreement, the secured party has the rights and remedies under under creditor a Québec, In PPSA. the and agreement security the The default. debtor’s the on hypothec the enforce can hypothec a Civil the in out set are creditor the to available remedies statutory ). Code (see Question 23 FINANCE MULTI-JURISDICTIONAL GUIDE 2012 MULTI-JURISDICTIONAL GUIDE 2012 FINANCE

Identify the amount claimed. All procedures, except a formal bankruptcy, automatically stay a secured creditor’s enforcement rights. However, parties can agree to Request the debtor to surrender the hypothecated property before the expiry of the period specified in the notice. In exclude a secured creditor from a CCAA stay. In addition, a proposal the case of movable property, the period is 20 days from proceeding would not stay a secured creditor’s enforcement rights the publication of the notice in the Register of Personal and if that secured creditor had sent a notice of intention to enforce its Movable Real Rights. In the case of immovable property, security under the BIA (see Question 22) and the ten-day period the period is 60 days. However, both periods are reduced to expired before the debtor filed either: ten days if the creditor intends to exercise the right to take Its proposal. possession for the purposes of administration. A notice of intention to make a proposal under the BIA. Once notice is served, the debtor or any other interested party can prevent the creditor from exercising its hypothecary right 26. What transactions involving loans, guarantees, or security by paying the amount due. If the payment is not made and the interests can be made void if the borrower, guarantor or debtor fails to voluntarily surrender the hypothecated property security provider becomes insolvent? (specified in the notice), the creditor can obtain a court order to secure the forced surrender of the hypothecated property.

The Civil Code provides for a special regime to enforce security Transactions at an undervalue (that is, in which consideration over rents, receivables and other claims. If the deed of hypothec received by the debtor is conspicuously less than the fair market authorises the debtor to collect rents or other receivables or value of the property or services sold or disposed of by the debtor) claims until a default occurs, the creditor can withdraw that can be set aside under the BIA or CCAA if entered into during:

authorisation by both: One year before the initial bankruptcy event (defined in the

Sending a notice of withdrawal to the debtor. BIA) for transactions at arm’s length.

Filing that notice in the Register of Personal and Movable Five years before the initial bankruptcy event for Real Rights or land register. Once a creditor files the notice transactions not at arm’s length. and sends to the debtor(s) a copy of the deed of hypothec (or other evidence of the hypothecation), a creditor can Transactions executed to give one creditor a preference over others collect the hypothecated claims without having to provide or may also be set aside under the BIA or CCAA if entered during: register any additional notices. Three months before the initial bankruptcy event for transactions at arm’s length. Rescue, reorganisation and insolvency One year for transactions not at arm’s length. 24. Are company rescue or reorganisation procedures (outside of insolvency proceedings) available in your jurisdiction? How There is also provincial legislation allowing a court to set aside do they affect a lender’s rights to enforce its loan, guarantee fraudulent conveyances or preferences. This requires proof of or security? intent to defeat, hinder or delay other creditors by granting security. The intent generally cannot be shown if new money is provided in consideration for the security. However, this fraudulent conveyance Company rescue or reorganisation outside of insolvency proceed- and preference legislation can be used successfully to set aside a ings can only be achieved by private contract with the company’s

Country Q&A grant of security for already existing debt. Common law provinces creditors. A private contract does not affect a secured creditor’s generally have a limitation period of two or six years (depending on rights to enforce its security. the province) for these actions. In Québec, the limitation period is A company can restructure its debt by converting debt into a either one or three years, depending on the provision of the Civil combination of new debt and/or new equity by a court-supervised Code on which the claim is based. plan of arrangement under governing corporate legislation. These plans typically require: In certain cases, the court has set aside new security for a fresh advance of money when the secured lender knew or reasonably Approval by a two-thirds majority of the affected creditors. ought to have known that the debtor was insolvent or would

Shareholder approval. become insolvent as a result of borrowing the additional money. However, these cases were decided on their own specific facts.

25. How does the start of insolvency procedures affect a lender’s rights to enforce its loan, guarantee or security? 27. In what order are creditors paid on the borrower’s insolvency?

The following formal insolvency procedures exist in Canada: Subject to many fact-specific exceptions, the priority of claims is

Proceedings under the federal Companies’ Creditors as follows (BIA):

Arrangement Act (CCAA). Statutory priority claims in relation to an insolvent employer’s failure to remit to federal authorities amounts Proposal proceedings under the BIA. withheld in respect of employees’: Court-appointed receivership (provincially or under the BIA or both). income tax payments;

A formal bankruptcy under the BIA.

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insolvency statutes; PPSA; some provisions concerning remedies in the the Criminal Code (Canada); employment legislation; consumer protection legislation; the Competition Act; and possibly some common law doctrines relating to the enforcement of creditors’ rights. lenders or granting security (over all forms of property) lenders? guarantees to foreign or foreign lender under a security document, guarantee or loan agreement? or loan agreement recognised and in applied your jurisdiction? by Does local law the always apply courts in certain circumstances? Are Are Is Canadian courts apply certain provincial and federal Canadian courts apply certain provincial and statutes that have overriding effect, such as: Canadian courts apply Canadian laws that are procedural in nature. Canadian courts do not apply foreign law if its application In practice, this rarely would be contrary to public policy. happens.

There are no general restrictions in Canada on granting security to security granting on Canada in restrictions general no are There Canadian a acquires lender foreign a if However, lenders. foreign business on foreclosure, Canada’s legislation foreign applies. The legislation investment in certain provinces imposes review ownership of agricultural land. restrictions on foreign There are no exchange controls in Canada that restrict payments agreement. loan or document security a under lender foreign a to A foreign choice of law clause in a security agreement is recog nised and applied by Canadian courts in common law provinces, subject to certain limited exceptions, of which the following are the most significant: A foreign choice of law clause may not be enforceable in Québec, in enforceable be not may clause law of choice foreign A depending on the location of the secured property or domicile of the security grantor. CROSS-BORDER ISSUES ON LOANS 30. there restrictions on the making of loans by foreign 31. there exchange controls that restrict payments to a 32. a foreign choice of law clause in a security, guarantee about this publication, please visit about Practical please Law visit Company, FOR MORE FOR INFORMATION a trustee in bankruptcy or other creditor representative; or or representative; creditor other or bankruptcy in trustee a a bona fide purchaser of the collateral for value and without notice. employment insurance premiums; employment Plan contributions. Canada Pension does the security holder rank on the borrower’s insolvency? does the security holder rank on the borrower’s the same asset, how is priority between them determined? Do determined? them between priority is how asset, same the any specific ranking rules apply? If If Is subordinate to perfected security interests and other liens in the same collateral. Is not effective against: Unsecured creditors, including tax or other government Unsecured creditors, including tax or other claims. Secured creditors’ claims. which includes the Preferred creditors’ claims, of the bankrupt estate by the trustee in administration costs bankruptcy. Claims for registered pension plan contributions which were Claims for registered but were not made. required to be made wages (including vacation claims for arrears of Employees’ and severance pay), limited pay but excluding termination (as at 1 December 2011, to Can$2,000 per employee These claims rank ahead of all US$1 was about Can$1.03). in relation to the current assets of existing secured creditors the debtor.

Generally, an unperfected security interest: Generally, However, there are many exceptions. There are also other types of types other also are There exceptions. many are there However, registered or unregistered liens and charges (for example, there is a special type of security available only to Canadian chartered banks under the federal Bank Act) and complex priority issues can arise between these and PPSA security interests. Under the Civil Code, the first in time to publish a hypothec has A secured party in possession or priority. control of the collateral generally has priority over all other secured security interests in parties the same that collateral, regardless of have the order of registration. Generally, Generally, as between security interests governed by the PPSA and perfected by registration only, the first in time to register a first, and so on. financing statement under the PPSA ranks There is no separate category of subordinated creditors Canadian insolvency laws. Subordination under is a matter of contract between secured or unsecured creditors and does not affect the not has subordination equitable of doctrine US The priority. above been applied to any meaningful extent in Canada. For equitable subordination to apply in Canada, proof of bad faith or fraud is generally required. 29. a security interest has not been validly perfected, where 28. over interest security same the holds lender one than more FINANCE MULTI-JURISDICTIONAL GUIDE 2012 MULTI-JURISDICTIONAL GUIDE 2012 FINANCE

TAXES AND FEES ON LOANS, GUARANTEES AND SECURITY INTERESTS 34. Are there strategies to minimise the costs of taxes and fees on the granting and enforcement of a loan, guarantee or security? 33. Are taxes or fees paid on the granting and enforcement of a loan, guarantee or security? Strategies to minimise the costs of such taxes and fees are not usually required. Documentary taxes Except for a modest tax on real property security in Alberta, Canada does not impose stamp duties or any other type of documentary REFORM tax in connection with granting and enforcing security. 35. Are there any proposals for reform? Registration fees There are flat-rate registration fees to register security interests in There are currently no proposals for reform that would materially Canada but they are all generally nominal. affect secured lending practices in Canada, except as specifically Notaries’ fees noted in this chapter. Not applicable.

CONTRIBUTOR DETAILS

DEREK VESEY JENNIFER PANKRATZ Davies Ward Phillips & Vineberg LLP Davies Ward Phillips & Vineberg LLP T +1 416 367 6921 T +1 416 367 7481 F +1 416 863 0871 F +1 416 863 0871 E [email protected] E [email protected] W www.dwpv.com W www.dwpv.com

Qualified.Canada (Ontario), 1998 Qualified.Canada (Ontario), 2004 Areas of practice. Banking; corporate commercial; Areas of practice. Banking; M&A (public and private);

Country Q&A infrastructure; private equity. corporate commercial; private equity. Recent transactions Recent transactions

Acting for Maple Group in its proposed Can$3.7 billion Acted for the government of Canada as shareholder in acquisition of TMX Group. the disposition by Atomic Energy of Canada of its CANDU reactor division to SNC-Lavalin Group. Acted for Bank of Montreal & CIBC in a US$250 million credit facility in favour of Consolidated Acted for Norddeutsche Landesbank Girozentrale, New York Thompson Iron Mines. Branch in connection with its financing of two solar power facilities in Ontario. Acted for CIBC & Scotia Capital in a US$300 million credit facility in favour of HudBay Minerals. Acted for Bank of Montreal & CIBC in a US$250 million credit facility in favour of Consolidated Thompson Iron Acted as counsel to the Molson brothers in connection Mines. with the financing of the acquisition of the Montreal Canadiens Hockey. Acted for CIBC & Scotia Capital in a US$300 million credit facility in favour of HudBay Minerals. Acted for Miami Access Tunnel consortium (Meridiam Infrastructure, Bouygues Travaux Publics & Transfield Services) for the design, build, finance, operation and maintenance of the US$1.3 billion greenfield Port of Miami Tunnel project.

W ROBIN SCHWILL LLP Phillips & Vineberg Davies Ward T F E Restructurings, insolvencies and Restructurings, insolvencies www.practicallaw.com/about/practicallaw

Canada (Ontario), 1996 www.practicallaw.com/finance-mjg

Acting as Canadian counsel to Nortel Network’s UK estate. Acting as Canadian counsel to Nortel Network’s billion Acted for Shaw Communications in its Can$2 Media according to its distressed acquisition of CanWest CCAA restructuring proceedings. bankruptcies. Qualified. Qualified. Areas of practice. Recent transactions about this publication, please visit about Practical please Law visit Company, [email protected] www.dwpv.com [email protected] www.dwpv.com +1 416 863 0871 +1 416 863 5572 +1 514 841 6427 +1 514 841 6499

FOR MORE FOR W W F E STEVEN MARTIN LLP Vineberg & Phillips Ward Davies T E ELIAS BENHAMOU LLP Phillips & Vineberg Davies Ward T F Secured (syndicated) lending; structured Secured (syndicated) Commercial real estate; corporate Canada (Québec), 1989 Canada (Ontario), 2001 INFORMATION Acted for Bank of Montreal, Canadian Imperial Bank of Acted for Bank of Montreal, Canadian Imperial a syndicate Commerce and JPMorgan Chase Bank and and of nine banks in connection with an amended restated US$800 million revolving credit facility agreement with Gildan Activewear. a leading Canadian Acted for Novacap Industries III LP, with its private equity and venture fund, in connection Holdings US$87 million acquisition of Idaho Pacific and its Canadian and US subsidiaries. Advising on public private partnership transactions. Acting for Walmart Canada and SmartCentres in a Acting for Walmart series of sales of shopping centres. Convention Acting in the sale of the Metro Toronto Centre Complex. financing; asset-based lending. financing; asset-based Recent transactions Qualified. Areas of practice. commercial; infrastructure. Areas of practice. Recent transactions Qualified. FINANCE MULTI-JURISDICTIONAL GUIDE 2012