Trends and regulatory climate
What is the current state of the lending market in your jurisdiction and have any new trends emerged over the last 12 months?
The current state of the lending market in Canada could be described as business as usual. The pipeline for secured loans is neither particularly robust nor particularly dry. Generally speaking, there is a more limited secondary market in Canada than in the United States, with less market depth and liquidity, and a higher concentration of banks providing financing. As a result, Canada sees more relationship lending with a buy-and-hold mindset from lenders, rather than yield-oriented investors looking for upside participation in the secondary market. This also translates into smaller lending syndicates.
Trends in Canadian credit agreements often follow trends seen in the United States. Therefore, 0% floors on base interest rates are becoming prevalent and bail-in provisions based on either the Loan Market Association or Loan Syndications and Trading Association models are also becoming common. Canadian credit agreements are increasingly including a mechanism for amendments to replace the London Interbank Offered Rate – although the substance of the provisions varies broadly and may provide that the effectiveness of such amendments requires either approval of majority lenders or merely the absence of a veto by majority lenders.
More specific to Canada, in 2018 an Ontario court rendered a decision with respect to disclosure required under the Interest Act (Canada), which called into question the effectiveness of a formula – typically included in credit agreements – to calculate an equivalent annual rate of interest or fees (where the rate is expressed in the agreement only on the basis of a period of less than one year). In response to the decision, lenders’ counsel began to add provisions in credit agreements to buttress the interest rate disclosure, including:
- acknowledgements by the borrower of its understanding of, and ability to calculate, interest rates applicable to the loan; and
- waivers of any defences to the payment of interest available under the Interest Act by reason of non-compliance with its disclosure requirements.
The court’s decision was appealed and was recently overturned by the Ontario Court of Appeal; however, it remains to be seen whether lenders’ counsel will retire these acknowledgments and waivers going forward.
Is secured lending a regulated activity in your jurisdiction?
Regulation exists at the federal level and at the provincial level to the extent that a lender carries on business in Canada. At the federal level, there is legislation that requires lenders to obtain a licence (or to act through a Canadian licensed branch) if they carry on business in Canada. There is also provincial legislation that requires any entity carrying on business in the province to obtain an extra-provincial licence from the province, and certain provinces ‒ notably, Saskatchewan ‒ impose additional registration requirements on entities that carry on the business of lending in the province. For these purposes, factors relevant to determining whether a lender carries on business in Canada or any Canadian jurisdiction when entering into a lending transaction, may include:
- where the decisions to extend credit are made;
- where negotiations relating to the credit documents are conducted or where the officers and employees of the lender or the agent on behalf of the lender participating in telephone communications with respect to such negotiations are located;
- where funding by and payments to the lender occurs;
- where the lender executes and delivers the credit documents; and
- whether the lender maintains an office or has employees in Canada.
Additional regulatory considerations may apply where real property security is to be taken in connection with the lending transaction as, generally speaking, in Canada a lender holding real property security must be licensed or extra-provincially registered in the relevant jurisdiction in order to hold registered title to the real property (ie, on a realisation on such security). Some provinces require an entity to be licensed or extra-provincially registered in the relevant jurisdiction to register any interest (including a mortgage) against real property located in such jurisdiction. There is also mortgage broker legislation at the provincial level (with associated licensing requirements) that requires consideration when a lender is going to lend money to be secured by real property security.
Additional regulatory considerations may also apply in the context of consumer lending.
Are there any specific regulatory issues which a prospective borrower should consider when arranging or entering into a secured loan facility?
No – other than to take into account the above when identifying potential members of the lending syndicate.
Are there any specific regulatory issues which a prospective lender should consider when arranging or entering into a secured loan facility?
No – other than to take into account the regulatory considerations described above.
Are there plans or proposals for reform or significant changes to the regulatory landscape in this area?
The nature and degree of regulation of financial institutions remains under scrutiny. In particular, capital requirements for commercial loans are subject to ongoing consideration and review, and the residential mortgage market is expected to be increasingly restricted.
Structuring a lending transaction
Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)?
The active providers of secured finance are varied. It is principally provided by Canadian chartered banks, but also by non-bank financial institutions, as well as international banks.
Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?
No well-established market-standard facility documentation exists in Canada for secured lending transactions. For smaller transactions (ie, typically less than C$10 million), transactions with Canadian chartered banks and non-bank financial institutions, standard form documentation of the bank or financial institution would typically be used. For medium-size and larger deals, loan documentation is tailored for each transaction and negotiated on a case-by-case basis.
Are syndicated secured loan facilities typical in your jurisdiction?
Syndicated secured loan facilities are very typical in Canada.
How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members?
Syndicated credit facilities are commonly structured with a lead lender as the administrative and collateral agent for the lending syndicate. The law does not restrict the administrative agent from acting on behalf of the other bank syndicate members. Often there are also one or two lead arrangers or syndication agents that may or may not be the same lender as the administrative agent. Among other functions, the administrative agent facilitates the exchange of information between the borrower and the lenders. While the agent acts on behalf of the syndicate, the loan documentation would typically require unanimous lender consent for changes to things such as interest rates, amortisation and payment terms, term to maturity, security and releases thereof, while a majority or 66.6% of lender consent is required for other amendments to covenants and loan documentation.
Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate?
Most common types of security may be granted to a security trustee for the benefit of a syndicate of lenders. Similarly, a guarantee of obligations owed to a syndicate of lenders may be granted in favour of a security trustee.
It would be typical in Canada in the context of a syndicated credit facility to have an administrative agent or collateral agent (in Quebec, acting as a hypothecary representative) hold security for a lending syndicate, rather than to appoint a security trustee. This may be due in part to legislation at the provincial level that regulates, among other things, the ability of a corporation to act in the province as a trustee in respect of a service that it provides to the public or otherwise to carry on all or any part of the business of a trust corporation. This legislation may be relevant if:
- the syndicate of lenders or any substantial portion of the syndicate is located in Canada;
- the security trustee has responsibilities in connection with the security which need to be discharged in Canada; or
- in connection with the enforcement of the security, the security trustee takes steps to operate the business of the debtor directly (eg, rather than through a receiver).
Special purpose vehicle financing
Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security?
In a typical secured financing transaction to a corporate borrower or corporate group for a business as a going concern, it would not be common to use an SPV to hold the assets being financed. SPVs appear more commonly in the area of real estate lending where a specific asset or group of assets is being financed.
Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction?
Syndicated loans in Canadian dollars are commonly available to a borrower with reference to a bank base rate or a market variable rate, at the borrower’s option.
Typically, interest on Canadian dollar-denominated loans is calculated with reference to the Canadian prime rate, which is usually defined in credit documentation to be the greater of either the administrative agent’s prime rate for loans made in Canada to Canadian borrowers or the 30-day Canadian dollar offered rate (CDOR) (described below) plus 1%.
Canadian dollar loans are also commonly available to be drawn in the form of bankers’ acceptances. Rather than loans which bear interest, bankers’ acceptances consist of drafts that are issued by the borrower and accepted by the lenders, with a face amount and a specified maturity date. The drafts are purchased by the lenders at a discount to their face amount and the borrower receives the discounted proceeds as a loan. The discount rate at which the lenders purchase the drafts is often based on the CDOR rate, a screen rate published for various terms to maturity of bankers’ acceptances in a manner similar to the London Interbank Offered Rate. On the maturity date for the bankers’ acceptances, the borrower is required to pay the full face amount of the bankers’ acceptances to the lenders.
Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?
The Criminal Code makes it an offence to enter into an agreement providing for the payment of interest at a criminal rate. It is also an offence to receive interest at a criminal rate. ‘Criminal rate’ is defined as an annual rate of interest determined in accordance with generally accepted actuarial principles which is in excess of 60% per year. For these purposes, ‘interest’ is defined broadly and includes virtually all elements of the cost of borrowing, regardless of how such elements are characterised by the parties to the loan. This issue may require particular consideration where warrants or other ‘equity kickers’ form part of the financing.
Other statutory restrictions on the rate of interest include restrictions under the Interest Act that limit the rate of interest that may be charged on arrears of principal or interest secured by a mortgage on real property to the rate of interest applicable to principal or interest not in arrears.
Additional regulatory restrictions apply in the context of consumer lending.
Use and creation of guarantees
Are guarantees used in your jurisdiction?
Yes ‒ guarantees are common.
What is the procedure for their creation?
Guarantees are generally documented in the loan agreement or in a standalone agreement. They commonly include an indemnity (which is not subject to the same panoply of defences as a guarantee) and, among other things, waivers of defences associated with:
- increases or other changes to the guaranteed obligations;
- amendments of the loan documentation;
- defects in enforceability of the guaranteed obligations; and
- changes in the structure of the borrower.
Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?
Financial assistance given by any corporation is regulated by the corporate statute that governs the corporation, and corporate statutes exist both at the federal level and in each Canadian province and territory. The financial assistance provisions formerly included in many of the corporate statutes, including the Canada Business Corporations Act and the Business Corporations Act (Ontario), have been repealed. However, there remain a number of provincial corporate statutes which require that a solvency test be satisfied in order for a corporation to give financial assistance to related parties (subject to exceptions generally including financial assistance provided by a wholly owned subsidiary to its parent or by a parent to its subsidiary). Certain corporate statutes also retain a prohibition on financial assistance by a corporation for the purposes of acquiring its own shares, subject to the same exceptions for financial assistance provided by a wholly owned subsidiary or by a parent to its subsidiary and, in some cases, subject to a solvency test.
Further, every director and officer of a Canadian corporation in exercising their powers and discharging their duties must act honestly and in good faith with a view to the best interests of the corporation. Therefore, in authorising any financial assistance, the board of the Canadian corporation must conclude that providing the financial assistance is in the best interests of the corporation.
Subordination and priority
Describe the most common methods of structuring the priority of debts and security.
Each Canadian province and territory (other than Quebec) has a personal property security act, which applies to consensual security interests in most types of personal property. Each province and territory’s personal property security act provides for methods of perfecting a security interest that vary according to the type of collateral, provided that security in all types of collateral subject to the personal property security act may be perfected by registering a financing statement in the personal property security registry of the province or territory. The priority of security interests subject to the personal property security act and perfected by registration is generally determined according to the order of registration. Therefore, it is typical for a lender to file a financing statement against a borrower before, and in anticipation of, taking security from the borrower, in order for the lender to predetermine, to the extent possible, the priority of the security when it is granted. Financing statements may be filed in multiple provinces or territories, depending on the nature and location of the collateral and the location of the debtor (as determined under the personal property security act).
Quebec also has a provincial register of personal and movable real rights which similarly provides for publication of security, and priority of consensual hypothecs over movable property will generally be determined according to order of registration in the register.
The lender may require that other creditors ‒ especially secured creditors ‒ of the borrower enter into intercreditor arrangements with the lender to contractually subordinate their security to the lender or otherwise address priorities as between the creditors.
Documentary taxes and stamp duty
Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement?
There are no documentary taxes or stamp duties payable to a regulatory authority for executing or registering loan, guarantee or security documents or on their enforcement. There are filing fees payable to the applicable registry or filing office on filing financing statements and other types of security document.
Is it more common for local law to govern the terms of the facility documentation or is the law of another jurisdiction often elected by the parties (eg, English law or New York law)?
For transactions in Canada where the borrower is organised under the laws of Canada or a province thereof, the governing law of the documents is often the provincial law of the head office of the borrower. If the borrower’s head office is in a different jurisdiction than the lending office of the lender or administrative agent, it will typically be one or the other. If the lender or administrative agent is managing the loan out of a US lending office and the market for the syndication of the loan is primarily in the United States, New York law may be elected.
Are there any restrictions on the making of loans by foreign lenders or the granting of security or guarantees to foreign lenders?
No ‒ subject to the regulatory considerations referred to in “Trends and regulatory climate” above.
Are there any exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?
No ‒ there are no currency or exchange controls in effect in Canada.
Security – general
Is it possible to create a security interest over all assets of an entity? If so, would a single security agreement suffice or is a separate agreement required for each type of asset?
Personal property security legislation that applies to most types of personal property exists in each Canadian province and territory. Pursuant to such legislation, a security interest can be granted over most types of personal property pursuant to a single general security agreement, which charges inventory, equipment, accounts (including receivables and bank accounts), securities and other personal property, whether existing or subsequently acquired. Subject to any agreement between the parties to postpone attachment, the security will attach immediately to personal property in which the debtor has rights and, on acquisition of rights therein, in subsequently acquired personal property.
In Quebec, the concept of a security interest does not apply. Instead, a debtor may hypothecate its movable property (ie, personal property) or immovable property (ie, real property) in favour of the secured party or a hypothecary representative. The hypothec may charge the universality of present and future property of the debtor, similar in effect to a general security agreement in the other Canadian jurisdictions.
In addition to property in Quebec (that may be the subject of a hypothec), real property, ships, aircraft, rolling stock and governmental receivables are examples of types of property that may require specific security documentation.
Release of security
What are the formalities for releasing security over the most common forms of assets?
In general, security over assets is released by virtue of an agreement to that effect executed by the secured party. The agreement will typically authorise the borrower and its counsel to register discharges of any security registrations with respect to the released security and include a further assurances clause whereby the secured party agrees to execute any documentation necessary to effect the release and discharge. Personal Property Security Act financing statements may be discharged electronically. However, other types of security registration, including mortgages in certain jurisdictions and Quebec security, may require registration of originally executed copies of prescribed forms of discharge.
Asset classes used as collateral for security
Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?
In Canada, security can be granted over real estate. Security will commonly consist of a mortgage and a general assignment of rents and leases (or an immovable hypothec if the property is located in Quebec) to be registered against title to the real property in the applicable land registry office, as well as notice of a security interest against the borrower in the applicable personal property registry office pursuant to a general security agreement or movable hypothec in Quebec.
Machinery and equipment
Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Security over machinery, equipment and other types of goods such as inventory may be granted pursuant to a security agreement that charges this limited category of collateral or, commonly, may be included in a broader grant of security over all present and after-acquired personal property of the debtor (see “Security ‒ general” above with respect to security agreements and the procedure for taking such security).
Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
In general, security over receivables can be granted pursuant to a security agreement that charges this limited type of collateral or, commonly, may be included in a broader grant of security over all present and after-acquired personal property of the debtor (see “Security ‒ general” above with respect to security agreements and the procedure for taking such security).
Due to legislation at the federal level and in some provincial jurisdictions, security over debts due from some governmental bodies either may not be obtainable or may require additional specific steps in accordance with such legislation in order to obtain valid security. Contractual limitations on the assignability of an account may also prevent a valid grant of security in such account, although Personal Property Security Act provisions rendering such limitations unenforceable against third parties may operate to permit the security to attach.
Further, an assignment of accounts may not be enforced against any account debtor until such account debtor has been provided with notice of the assignment; until such a time, the account debtor may continue to make payment to the assignor of such account. Outside certain types of loan where the accounts are the primary collateral, this notice tends to be delivered only on contemplation of enforcement on the assignment.
Financial instruments and cash
Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Security over financial instruments may be granted pursuant to a security agreement that charges this limited category of collateral or, commonly, may be included in a broader grant of security over all present and after-acquired personal property of the debtor (see “Security ‒ general” above with respect to security agreements and the procedure for taking such security).
In addition to perfection by registration, security in investment property ‒ including securities and securities accounts ‒ may be perfected by control (involving physical delivery of share certificates, duly endorsed, or tri-party agreements with issuers of uncertificated securities or with securities intermediaries), which may give the secured party better priority. Commonly, secured parties may also require that the debtor deliver possession of instruments (eg, letters of credit and chattel paper) in order to best protect their security.
Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Security over accounts due to a debtor with respect to its bank or deposit accounts is granted and perfected in the same manner as other receivables and accounts (see “Receivables” above for the procedure).
In Quebec, security over bank accounts may be made enforceable against third parties (or perfected) by the secured party obtaining control over the account, potentially involving a tri-party agreement with the deposit bank, which may give the secured party better priority.
Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?
Security over intellectual property may be granted pursuant to a security agreement that charges this limited category of collateral or, commonly, may be included in a broader grant of security over all present and after-acquired personal property of the debtor (see “Security ‒ general” above with respect to security agreements and the procedure for taking such security).
There is some uncertainty over whether the federal or provincial levels of government have jurisdiction over security in intellectual property; therefore, it can be prudent to register evidence of the security agreement (often a simple one-page confirmation of the grant of security interest pursuant to the security agreement) in the Canadian Intellectual Property Office with respect to intellectual property registered in that office. Given the cost associated with such registration, it is common for lenders to require such registrations only when the intellectual property is material. Registration can take a couple of months to be processed.
Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
For non-demand loans, common enforcement triggers would be identified events of default. Typical events of default would include:
- failure to pay principal, interest or fees;
- failure to comply with negative or financial covenants;
- failure to comply with other covenants beyond a negotiated grace period;
- inaccuracy of representations;
- cross default to other indebtedness;
- insolvency or bankruptcy;
- appointment of a receiver, trustee or similar official, whether privately or pursuant to proceedings;
- change of control;
- judgment in excess of a specified monetary threshold;
- distress is levied or an encumbrancer takes possession of a material portion of assets of a borrower or guarantor;
- invalidity of loan documentation or security; and
- material adverse effect.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
The most common procedures for enforcement include:
- notifying account debtors to make payments directly to secured parties;
- appointment of receiver (whether privately or through court appointment);
- taking possession of collateral;
- disposition of collateral; and
- foreclosure on collateral.
There are various legal requirements that lenders must comply with. A high-level summary of some of the principal requirements and considerations would include the following:
- A requirement to give a reasonable time to pay and reasonable notice following a demand or default and acceleration before realising on collateral.
- A requirement to give 10 days’ prior notice under the Bankruptcy and Insolvency Act (Canada) if the secured creditor is realising on all or substantially all of the inventory, accounts or other property of an insolvent debtor.
- An obligation to account to the debtor for any surplus proceeds of realisation.
- A duty to exercise reasonable care in the keeping of collateral if the secured party takes possession.
- A requirement to give 15 days’ prior notice to all existing secured creditors appearing on a search under the Personal Property Security Act and to the debtor and any guarantors on a sale or foreclosure of collateral, who have the right to redeem.
- The secured party can be the purchaser of the collateral but, in those circumstances, it must be effected through a public sale or auction, rather than a private sale.
- Other parties have the right to object to a foreclosure. If a valid objection is made, the secured party will be required to dispose, rather than foreclose.
- As a general principle, all aspects of the disposition of collateral, including collection of accounts, must be conducted in a commercially reasonable manner.
- Various duties apply to receivers, both at law and in its appointment order.
- The Bankruptcy and Insolvency Act and Companies’ Creditors Arrangement Act place certain restrictions on a secured party’s enforcement rights and provide some protections for debtors – if a debtor makes a Bankruptcy and Insolvency Act proposal or obtains protection under the Companies’ Creditors Arrangement Act, or makes a voluntary assignment or is petitioned into bankruptcy, the secured creditor’s ability to realise on collateral may be stayed or delayed.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
In general, the ranking in insolvency will depend on the nature of the creditors of the borrower. It is also affected by which insolvency statute the borrower is filing under – the Bankruptcy and Insolvency Act or the Companies’ Creditors Arrangement Act. Often, there are specific court-ordered charges, such as:
- a professional and administrative charge;
- a director and officer charge;
- a critical supplier charge;
- a debtor-in-possession financing charge; and
- other charges.
Further, there may be applicable statutory super-priority charges in insolvency proceedings, such as:
- an environmental charge;
- an employee remuneration charge; or
- a pension charge.
There may be applicable priority claims for statutory liens and deemed trusts for certain tax, employee and pension obligations. Thereafter, the usual classes of creditors of a borrower would typically rank in the following order:
- secured creditors, subject to certain exceptions, in the order in which they have registered under the Personal Property Security Act;
- preferred creditors (applicable in bankruptcy); and
- unsecured creditors.