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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.
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