The secured financing market in Canada is well-established, and qualified borrowers have several borrowing options readily available from banks and other financial institutions, as well as from private lenders. Financing may be obtained from a single lender or from a syndicate of lenders where larger loan amounts are required. Loan syndications in Canada are structured in a very similar way to those in the United Kingdom and the United States.
The banking system in Canada is sophisticated and well regulated. Bank loans are available from domestic banks, as well as from foreign bank subsidiaries operating in Canada or Canadian branches of foreign banks. The six largest Canadian banks command most of the market and provide debt financing, cash management and investment services across the country. Some of these banks also have subsidiaries operating in the U.S. and outside of North America.
Banks are regulated under the Bank Act (Canada), which authorizes and governs domestic banks (Schedule I), foreign subsidiary banks controlled by eligible foreign institutions (Schedule II) and foreign bank branches of foreign institutions (Schedule III). With increasing competition in the banking sector, a business borrower has a wide range of financing sources and options.
2. Other financial institutions and private lenders
In Canada, there are also a number of non-bank lenders that provide debt financing, often in the form of asset-based loans, term loans or mezzanine debt. Among these institutions are trust and loan companies, credit unions, caisses populaires(primarily in Québec) and, in some instances, insurance companies. Financing is also increasingly available from investment funds, equipment lessors and a wide range of large private companies.
Loans can be unsecured or, more commonly, secured against the property of the borrower and any guarantors. In Canada, there are no statutory financial assistance rules that prohibit a corporation from giving guarantees to a lender in respect of loans made to a corporation’s subsidiary or parent. However, it is still necessary to comply with general global corporate law principles requiring directors to act in the best interests of a corporation. Security can be taken against personal property — including accounts receivable, securities and intellectual property — and against real property.
a. Personal property
Each of the common law provinces and territories has enacted a personal property security act (PPSA) that governs the creation, perfection and enforcement of personal property security interests. PPSA legislation is similar to Article 9 of the Uniform Commercial Code (UCC) in the U.S., although there are some differences (including differences among common law provinces and territories) in how the applicable PPSA addresses the perfection of a security interest in certain types of assets — such as deposit accounts, cash collateral and intellectual property — from the equivalent treatment under the UCC.
Each province has its own electronic public registry system to record PPSA security interests granted by borrowers and guarantors over their personal property. Each system consists of a notice-based registry, which provides notice of the existence of security interests that have been granted by debtors to their secured creditors. The underlying security documents creating those security interests are not registered.
Although the PPSA legislation in each of the common law provinces and territories is similar in concept, the provisions and requirements vary slightly. Consequently, security given by corporate borrowers with assets in multiple provinces and territories will need to comply with the statutes of each of those jurisdictions, and PPSA registrations in multiple provinces and territories may be necessary.
The choice of the province or territory of registration depends on several factors, including where the chief executive office — or “head office” in Québec — of the relevant borrower or guarantor is located, where the assets are located and what types of assets are subject to the security.
The Civil Code of Québec governs equivalent matters in the province, where security over personal property — known as “movable property” in Québec — is generally taken by way of a movable hypothec, with or without delivery. Movable hypothecs must be registered in the province’s Register of Personal and Movable Real Rights (RPMRR). Similar to the PPSA systems, the RPMRR is a notice-based registry providing notice of the existence of security and other rights that have been granted by debtors to their secured creditors. The underlying security documents creating those security and other rights are not registered. In Québec, the Civil Code permits a secured creditor to obtain control of monies on deposit in a bank account either by entering into an agreement with the third-party bank and the grantor, called a control agreement, by which the third party agrees to comply directly with the secured party’s instructions or the secured party becomes the account holder of the financial account.
Québec also has particular requirements for the execution of instruments. For example, certain instruments must be executed in front of a notary, and certain formal requirements for security documents and the timing of their registration — or “publication” in Québec — differ from those of the common law provinces and territories. For instance, an instrument must be executed prior to its registration at the appropriate registry office. Recent amendments to the Civil Code have served to streamline the structuring of syndicated loan transactions and the perfection — or “opposability” in Québec — of security in cash collateral and deposit accounts.
Canada is also a signatory of the Cape Town Convention, such that the perfection of security in aircraft and other similar mobile assets is also regulated by international protocol in conjunction with various laws in the majority of the provinces and territories.
b. Real property
A lender may take security over real property by way of a charge or mortgage of land, a debenture or — if real, or “immovable,” property is located in Québec — an immovable hypothec. Most provinces and territories have an electronic land registry system to record mortgage — or “hypothec” in Québec — and other secured interests in real property. Although these registry systems are similar in concept, each jurisdiction has certain unique provisions and requirements for real property security. In many cases, a title insurance policy will be obtained by the secured creditor in support of its charge or mortgage document.
c. Bank Act (Canada) security
Pursuant to the Bank Act (Canada), Schedule I, Schedule II and Schedule III banks also have the ability to take security from certain types of borrowers over certain types of property specified in the Act — such as raw materials, work in progress or finished goods in the inventory of businesses. Certain formal requirements must be met in order to take Bank Act (Canada) security. Special security documents must be executed by the borrower to obtain this security, and a separate registration system is involved. Bank Act (Canada) security is available only to secure the repayment of direct loans and advances made to a borrower, and is not available to secure a guarantor’s liabilities.
d. Inter-creditor arrangements
Borrowers frequently satisfy their financing requirements from multiple sources, with different secured creditors having security over different assets, or having different security rankings over the same asset pool. In these situations, inter-creditor agreements are usually required in Canada to modify those relative priority rankings that would otherwise apply to the assets under the applicable legislation in the absence of an inter-creditor agreement.
In Québec, if an inter-creditor agreement includes an assignment of rank — or “cession of rank” in Québec — such assignment of rank will be registered — or “published” in Québec — at the appropriate registry office. Additionally, in Ontario, estoppel letters often must be obtained from secured creditors with prior registrations in order to limit the scope of the security interests claimed by them.