Canada: Fully Secured @ Gowlings: September 29, 2011 - Volume 2, Number 3

Edited by Richard Dusome

Guarantor Waivers of PPSA Rights in British Columbia

By: Mike Todd (Vancouver)

Lenders should be aware that one of the waivers found in most standard form guarantees of certain statutory rights is not effective under the British Columbia Personal Property Security Act ("BCPPSA").

This was the result in the recent BC Supreme Court decision HSBC Bank Canada v. Kupritz. The facts of that case are unremarkable. A trucking company went out of business leaving an unpaid debt to the bank of approximately $1 million. The bank was unable to recover that amount from the company's assets and therefore sued the two principals of the company on their unlimited guarantees. One of the principals defended the claim on the basis that the bank had breached its obligations to him under the BCPPSA by failing to secure the company's assets, improvidently realizing on the collateral seized, failing to provide notice of the impending sale of the collateral and failing to provide an accounting.

The guarantee contained the usual provision that no loss in security by the bank would lessen the guarantor's liability under the guarantee. The bank therefore argued that the guarantor was precluded from asserting as a defence that the bank failed to properly realize on the collateral. However, the BCPPSA states that provisions in a security agreement or other agreement (such as a guarantee) that purport to exclude a duty under the Act are void, and that certain rights of a debtor cannot be waived by agreement. The court found that the prohibitions against contracting out of the protections under the BCPPSA apply not just to primary debtors, but also to guarantors. Based on this analysis, the court held that a guarantor cannot contract out of his or her statutory rights under the BCPPSA, and therefore the specific waiver of improvident realization in the guarantee did not prevent the guarantor from raising that defence against the bank.

The court then considered all of the circumstances surrounding realization by the bank and its receiver, and found that none of the bank's obligations to the guarantor under the BCPPSA that were the subject of the waiver had actually been breached. As a result the guarantor was found liable to the bank on his guarantee, and judgment was rendered against him for the full amount of the primary debt remaining unpaid.

The important lesson for lenders from the case is that guarantors cannot waive the statutory rights given to them under the BCPPSA. A similar argument can probably also be made by guarantors in other Personal Property Security Act jurisdictions, but the court in this case did note some differences in the wording of the Ontario Personal Property Security Act which make the result less clear in that province. Despite that, lenders should be aware that not all provisions of a guarantee are enforceable as written, and that in BC in particular, a waiver of improvident realization claims by a guarantor of rights under the BCPPSA will not be effective.

Pension Decision Raises Questions About Canadian DIP Loan Priority

By: Jeffrey Oliver (Calgary)

A recent decision of the Ontario Court of Appeal (Re Indalex Ltd., 2011 ONCA 265) has raised questions regarding the validity of the super priority status afforded to Debtor in Possession ("DIP") financing in circumstances in which there is a statutory deemed trust arising out of a pension plan windup deficiency.  Although the decision is very fact specific, it nonetheless came as a surprise to many Canadian insolvency practitioners, who understood that courts would apply a priority scheme under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA") that was consistent with the scheme under the Bankruptcy and Insolvency Act, R.S.C.  1985, c. B-3, in which many such statutory deemed trust claims are inoperative.


The Indalex group of companies were the second largest manufacturer of aluminum extrusions in the United States and Canada.  It was the sponsor and administrator of two registered pension plans: one for salaried employees (the "Salaried Plan") and one for executive employees (the "Executive Plan").

On April 3, 2009, Indalex and other Canadian companies in its corporate family obtained protection from their creditors pursuant to the CCAA.  As of the date of the commencement of those proceedings, the Salaried Plan and Executive Plan were both underfunded, and the Salaried Plan was in the process of being wound up.

Early in the proceedings, Indalex obtained a court order permitting it to obtain DIP financing.  Pursuant to that order, the DIP lender obtained a charge over all of Indalex's assets in priority to all other claims.  The DIP loan was also guaranteed by Indalex's parent corporation in the United States (the "Guarantor").

There were ultimately insufficient assets to repay the unfunded liabilities in the Salaried Plan and Executive Plan.  At a hearing to approve the sale of Indalex's assets, the United Steel Workers Union ("USW"), appearing on behalf of beneficiaries under the Salaried Plan, and a group of retired executives appearing on behalf of beneficiaries of the Executive Plan, asked for and obtained an order from the court requiring the Monitor to retain $6.75 million of the sale proceeds (the "Proceeds") pending resolution of a priority dispute.  In particular, the USW and retired executives argued that the unfunded pension liabilities in both the Salaried Plan and Executive Plan should rank in priority to the court ordered charge securing the DIP loan, and as such the Proceeds should be used to fund those pension liabilities rather than repay the DIP loan.  The basis for this argument was, among other things, s. 57 of Ontario's Pension Benefits Act, R.S.O. 1990, c. P.8 (the "PBA"), which creates a statutory deemed trust for "an amount of money equal to employer contributions accrued to the date of the wind up but not yet due under the plan or regulations".

In light of the Court's decision to require the Monitor to withhold the Proceeds, the Guarantor paid the $10.75 US million shortfall on the DIP loan to the DIP lender, making the DIP lender whole.  The primary secured creditor of the US parent company was then subrogated to the DIP lender's rights to collect the Proceeds.


At first instance, the CCAA judge held that the deemed trust provisions of the PBA were not applicable, on the basis that the Executive Plan was not being wound up, and the payments to the Salaried Plan to address its deficiency were not yet "due" or "accruing due" under the PBA or its regulations.  That decision was overturned on appeal.

With respect to the Salaried Plan, the Court of Appeal held that the deemed trust provided for in s. 57(4) of the PBA extended to the entire wind-up deficiency of the Salaried Plan.  Further, as Salaried Plan beneficiaries were not given notice of the DIP lender's application to subordinate their deemed trust claim when it obtained approval for the DIP loan, and because full disclosure of the pension priorities issue was not placed before the judge when the DIP loan was approved, the Court held that the PBA deemed trust priority was not subordinated to the super priority DIP charge.  It should be noted, however, that the Court left open the possibility of the PBA deemed trust being subordinated to DIP charges on a "case by case basis", citing as an example a circumstance in which ".. the application of the provincial legislation [ie. the PBA] would frustrate the company's ability to restructure and avoid bankruptcy."

With respect to the Executive Plan, the Court noted that as that plan was not being wound up as of the date of the asset sale, a deemed trust with respect to the Executive Plan appeared to be inconsistent with the PBA.  However, rather than making a definitive finding on that issue, the Court agreed with the USW and Former Executives that Indalex acted in a conflict of interest during the CCAA proceeding.  In particular, the Court held that during the course of the restructuring Indalex was duty bound as a debtor corporation to treat the interests of all stakeholders fairly when their interests conflicted, but ultimately was obliged to act in the best interests of Indalex.  Meanwhile, as a plan administrator, Indalex was also duty bound to act in the best interests of the pension plans' beneficiaries.  Due to this conflict, the Court found that Indalex breached its fiduciary duties as plan administrator to the Executive Plan's beneficiaries, and imposed a constructive trust over the balance of the Proceeds in favour of beneficiaries of that Executive Plan, in priority to the DIP charge.

An application for leave to appeal this decision to the Supreme Court of Canada is currently outstanding.  Clarification of the matters at issue will surely be well received by members of the insolvency, lending and pension industries.

Retractable Shares: The Unexpected Creditor

By: Richard Dusome (Toronto)

When structuring a new financing for a corporate borrower, lenders typically obtain postponements from all other creditors and shareholders advancing loans to the proposed borrower.  Postponements establish the lender's priority to receive payment from the borrower vis-à-vis these other known creditors.

However, some shareholders who have not actually advanced loans to the borrower may still hold shares that contain a right of retraction that will require the borrower, at the shareholder's option,  to purchase the retractable shares at a pre-arranged price following the issuance of an exercise notice.  The retraction serves to create a new debt obligation out of what was originally an equity holding. 

Ontario courts have held in some cases like Itak International Corp. v. CPI Plastics Group Ltd., that the existence of negative covenants in a loan agreement between a borrower and a lender prohibiting the making of any payment in connection with the retraction of shares are not effective as against the shareholder.  Those negative covenants will not preclude a shareholder from issuing a retraction notice and independently creating the debt obligation, and they cannot be used by the borrower to justify a refusal to make the payment. 

Thus, it is important to determine at the outset of a financing if the borrower is authorized to issue retractable shares, and if so, whether any such shares have actually been issued.  Lenders should then ensure that any holder of retractable shares provides a satisfactory postponement that will become operative if the retraction option is ever exercised.  This will avoid any surprise payment being made to an unexpected creditor that cannot be recovered by the lender from the shareholder in the absence of a direct contractual obligation created by a postponement.

Spotlight on Security Documents: The Landlord Waiver

By: Richard Dusome (Toronto)

Having enforceable security over all of a borrower's assets is obviously of primary importance to a lender.  However, where a borrower occupies leased premises, ensuring the lender has quick and reliable access to the collateral is equally important, especially if the landlord proves to be unco-operative after a borrower's default.  Although court-ordered access to a borrower's leased premises can be sought after a borrower's loan default, a landlord waiver obtained prior to an initial advance of a loan can bring some added certainty to the realization process outside of a bankruptcy.   

The provisions contained in a landlord waiver will vary depending upon the overall bargaining power of a borrower in terms of whether it is a single tenant of a large leased premises, or just one of many tenants in a multi-unit building where the rental income provided by the borrower is not material to the landlord's business.

Ideally, a landlord waiver will include a waiver by the landlord of all of its present and future liens and rights of distraint against the inventory and other secured collateral of the applicable borrower.  This waiver will reduce the lender's exposure to rental arrears that could arise after the loan is advanced.

An acknowledgment from the landlord that the collateral is deemed to be the personal property of the borrower and not a fixture of the leased premises is another key component of a landlord waiver.  This acknowledgment will ensure any collateral in the form of heavy machinery and similar assets do not inadvertently become fixtures that constitute property of the landlord as owner of the leased premises.

A landlord waiver will often provide a lender with the right to occupy the leased premises for a negotiated period of time for the purpose of possessing, removing or selling the collateral.  The lender will of course need to pay a negotiated amount of occupation rent for the right of easy access to the collateral, but it can generally avoid any responsibility for putting the lease back in good standing by paying all rental arrears and curing other lease defaults.

Finally, the landlord waiver will ideally include an obligation on the part of the landlord to obtain its mortgagee's consent and agreement to comply with the terms of the landlord waiver.

There are many alternative provisions that can be negotiated into a landlord waiver to address any specific characteristics of a particular borrower or a particular leased premises.  But having a landlord waiver in advance of a borrower's default at least gives the lender a better position to bargain from, as opposed to trying to negotiate access to the leased premises with the landlord after the loan is in default. 

Lenders should ensure their term sheets and commitment letters specifically refer to the requirement for the delivery of a landlord waiver in respect of each leased location of the borrower where a material amount of inventory and other collateral is located.    

A Banker Asked Us: General Security Agreements from Individuals

By: Richard Dusome (Toronto)

Q:        As part of my security package, I am obtaining an unlimited personal guarantee from the president of my corporate borrower.  Can I also take a general security agreement from that individual in Ontario to secure his/her personal guarantee?

A:        The answer really depends upon what type of assets you are looking to secure with the general security agreement.  A general security agreement typically calls for the debtor to grant a security interest to the lender in all of the debtor's present and after-acquired personal property.

If that personal property consists of assets used primarily in connection with the operation of a business (for example, when the debtor is the sole proprietor of a small business), then it is possible to charge all present and after-acquired business assets of an individual with a general security agreement.

However, if the personal property to be secured consists of consumer goods (generally defined as goods used or acquired for use primarily for personal, family or household purposes), then Section 12(2)(b) of the Ontario PPSA precludes a security interest from attaching to consumer goods under an after-acquired property clause unless the debtor acquires rights to them within ten days after the secured party gives value.  Thus, an after-acquired property clause would simply not be effective over the natural term of any typical loan. 

In addition, the Ontario Consumer Protection Act places further restrictions on after-acquired property clauses and on the ten day allowance period referred to above vis-à-vis any of the borrower's goods other than those acquired by the borrower from the lender.  There are also exemptions (which vary from province to province) which prevent a lender from seizing certain types of secured assets, including certain household furnishings, clothing, tools used to earn income and other assets within certain prescribed amounts.

In light of these restrictions on after-acquired property clauses affecting consumer goods, a personal guarantee from an officer or director of a corporate borrower is more customarily secured by a charge on his or her residence or recreational real property, or by a security interest granted over specific individual items of valuable personal property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
8 Nov 2016, Seminar, Ottawa, Canada

The prospect of an internal investigation raises many thorny issues. This presentation will canvass some of the potential triggering events, and discuss how to structure an investigation, retain forensic assistance and manage the inevitable ethical issues that will arise.

22 Nov 2016, Seminar, Ottawa, Canada

From the boardroom to the shop floor, effective organizations recognize the value of having a diverse workplace. This presentation will explore effective strategies to promote diversity, defeat bias and encourage a broader community outlook.

7 Dec 2016, Seminar, Ottawa, Canada

Staying local but going global presents its challenges. Gowling WLG lawyers offer an international roundtable on doing business in the U.K., France, Germany, China and Russia. This three-hour session will videoconference in lawyers from around the world to discuss business and intellectual property hurdles.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.