Canada: Fully Secured @ Gowlings - March 28, 2012 - Volume 3, Number 1

Last Updated: April 9 2012

Edited by Richard Dusome

In this issue:

  • Update on the Re Indalex Limited Decision
  • Parliament Addresses the Issue of Priority as between Bank Act Security and PPSA Security
  • Limitation Period for "Delayed-Demand" Notes Clarified in British Columbia
  • Alberta: Financial Assistance Disclosure Requirements
  • Spotlight on Security Documents: Assignment of Lease vs. Mortgage of Lease
  • A Banker Asked Us: Can I take Bank Act Security from a Guarantor?


By: Jeffrey Oliver (Calgary)

In a recent edition of Fully Secured (September 29, 2011 – Volume 2, No. 3), the decision of the Ontario Court of Appeal in Re Indalex Limited was discussed, in which the Ontario Court of Appeal held that a statutory deemed trust claim arising out of a pension plan wind-up deficiency ranked in priority to debtor in possession ("DIP") financing.

There have been several recent developments with respect to this decision since the date of that publication.

First, the Supreme Court of Canada has granted leave to appeal that decision and ordered that the hearing be expedited.  The appeal is scheduled to be heard on June 5, 2012.

Second, two recent decisions of the Ontario Supreme Court of Justice have offered practitioners additional guidance with respect to the potential impact of that decision, which guidance has provided some comfort to lenders with respect to the priority of DIP financing.

In Timminco Limited (Re) 2012 ONSC 506, the debtors sponsored two underfunded defined benefit pension plans, one of which had already been declared wound up.  In the debtors' application for relief pursuant to the Companies' Creditors Arrangement Act ("CCAA"), it sought orders, inter alia, suspending the debtors' obligations to make special payments to fund the pensions' solvency deficiency; permitting the debtors to grant an administration charge (which covers fees of the debtors' service providers, such as their counsel) and the directors and officers charge (which secures an indemnity in favour of the directors and officers) on their assets (collectively, the "Charges"); and that the Charges be in priority to all other charges.

Despite the Indalex decision, the Court granted all of the aforementioned relief.  In granting that relief, the Court held that the debtor could not afford to pay the pension deficiency during the course of the restructuring, and that the debtors' employees were not prejudiced, as in the absence of the restructuring the debtors would be bankrupt. In the circumstances, the court held that the concerns of pension administrators being conflicted and wearing "two hats" was not relevant, as avoiding bankruptcy was in the best interests of the pension plan beneficiaries and the debtors.  With respect to the priority status of the Charges, the Court took a similar approach, finding that it was not reasonable to expect professional service providers to not be paid during the course of a restructuring, or expose directors and officers to various liabilities while attempting to restructure.  The Court determined that it had authority under the CCAA to override the provisions of provincial legislation that conflicted with the CCAA where the application of provincial legislation would frustrate the ability of the debtor company to restructure.

In a subsequent decision (Timminco Limited (Re) 2012 ONSC 948), the Court also approved the terms of a super-priority DIP financing charge.  In so doing, the Court held that it was unreasonable to expect any commercially motivated DIP lender to advance monies in the absence of such protection.

It is important to note that, unlike Indalex, the materials in support of each application were widely served, including upon the various unions and pension plan committees.  This, in addition to pension matters being addressed at the outset of the hearing, may be a distinguishing factor between the Timminco cases and Indalex.

This clarity will hopefully provide additional comfort to DIP lenders and other stakeholders in insolvency proceedings with respect to the super-priority status of DIP charges and other court ordered charges until the Supreme Court of Canada clarifies the implications of the decision in June.

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By: Christine Marchetti (Toronto)

The federal government has recently introduced Bill S-5 (Financial System Review Act) to address the issue of priority as between registered security taken pursuant to Section 427 of the Bank Act and an unregistered (unperfected) security interest taken pursuant to the provisions of the provincial personal property security statutes across Canada. The proposed amendments to Sections 425, 426 and 428 of the Bank Act contained in Bill S-5 have been drafted to reverse the effects of the Supreme Court of Canada's decisions in Bank of Montreal v. Innovation Credit Union ("Innovation") and Royal Bank of Canada v. Radius Credit Union Ltd. ("Radius").

As reported in our December 2010 issue, the Supreme Court ruled in the Innovation and Radius cases that an unregistered security interest granted to a credit union by way of a general security agreement had priority over subsequent, but registered, Bank Act security granted to a bank. The Supreme Court concluded that the common law principles of: (1) "first in time" vis-à-vis the granting of the security, and (2) "nemo dat quod non habet" (or, "no one gives what they do not have") must prevail where no statutory priority provision applies. In each case, because the debtor had already granted a security interest in all of its present and after-acquired personal property to the credit union, it could not subsequently transfer an unencumbered interest in those assets to the bank. In other words, the debtor could not transfer to the bank a greater interest in its property than the debtor itself possessed at that time.

When amended, Subsections 426(7) and 428(1) of the Bank Act will provide that the rights of a bank in respect of property subject to security taken and registered under the Bank Act will have priority over the rights of "any person who had a security interest in that property that was unperfected at the time the bank acquired its security in the property".  Subsection 425(1) of the Bank Act will also be amended to add a broad definition of the term "unperfected" which, in relation to a security interest, will refer to a security interest that has not been registered or publicized to third parties under the law under which the security interest was created.

One note of caution is that other proposed amendments to Subsections 426(7.1) and 428(2) of the Bank Act introduce important knowledge qualifiers that constitute exceptions to the newly established priority rule. The Bill's new priority rule will not give a bank priority over an unperfected personal property security interest if, at the time the bank acquired its security in the property, the bank did so with knowledge of that other security interest. The term "knowledge" has not been defined in the proposed amendments and, as such, there will be some uncertainty as to what constitutes knowledge.  Will, for example, verbal communication of the existence of another creditor be sufficient to trigger the knowledge exception?  In addition to muddying the waters with a knowledge limitation, Bill S-5 stops short of expressly codifying any priority rule as between a registered personal property security interest and registered Bank Act security interest, which is presumably that the first registered security interest (in time) would prevail.

Despite the introduction of Bill S-5, banks should not take Bank Act security in isolation in reliance upon the Bill's provisions.  Where possible, Bank Act security should be paired with a general security agreement with appropriate PPSA registrations made in all applicable provinces in order to defeat any unregistered PPSA interests that may exist.

Bill S-5 passed third reading in the Senate on December 16, 2011 and, on second reading in the House of Commons on February 14, 2012, was referred to the Standing Committee on Finance.  The Standing Committee reported back on March 16, 2012 without proposing any amendments  to the Bill.  It is expected to soon receive third reading in the House of Commons.

* * * * * * * * * *


By: Matt Mitchell (Vancouver)
Articling Student

A recent British Columbia Court of Appeal decision has clarified the limitation period applicable to "delayed-demand" promissory notes in British Columbia.  The terms of a "delayed-demand" note require a demand to be made and a specified period of time (either days, months or years) to pass before the note becomes due and owing. Unlike the limitation period in British Columbia for a standard demand note which runs from the date of the note's execution, the Court concluded that the limitation period for a "delayed-demand" note begins to run only once demand has been made and the designated period passes.

This conclusion was reached by the British Columbia Court of Appeal in Ewachniuk Estate v. Ewachniuk1 ("Ewachniuk"). The decision in this case turned on whether a claim for payment under a promissory note was barred by Section 3(5) of the Limitation Act (British Columbia).  The original note holders had deceased, and the administrator of their estate made written demand for payment of the note almost thirty (30) years after it was originally executed.

The "delayed-demand" note which was the subject-matter of the appeal was executed on December 23, 1980 and "payable one (1) year after demand".  In analyzing whether the applicable limitation period had expired, Chief Justice Finch affirmed the reasoning in the earlier case of Zeitler v. The Estate of Alfons Zeitler2 ("Zeitler"). Chief Justice Finch reviewed over two centuries of well-established jurisprudence which formed the basis for the decision in Zeitler and confirmed that the limitation period for "delayed-demand" notes begins to run only once demand is made and the designated period has passed. In Ewachniuk, the applicable limitation period began to run one year after demand was made.

Chief Justice Finch also rebuffed public policy concerns of indeterminate liability raised by the defendant and considered other methods of limiting the length of time for which an action based upon a "delayed-demand" note can be brought. In particular, he noted that Section 2(c) of the Limitation Act (British Columbia) provides for an equitable defence against a "delayed-demand" note based on inexcusable delay.

In a separate concurring judgment, Justice Ryan canvassed fundamental principles applicable to legal reasoning and the value of legal precedent. While Justice Ryan agreed with Chief Justice Finch that the jurisprudence on the issue of "delayed-demand" notes was properly decided, she held that courts should adhere to well-established jurisprudence whether or not its line of reasoning is sound. In reaching this conclusion, Justice Ryan noted that reversing over two hundred years of jurisprudence would cause considerable detriment to those who have relied upon it, and she therefore declined to do so.

The Ewachniuk case confirms that in British Columbia introducing a payment delay into a traditional demand note can help a lender avoid having a limitation period expire inadvertently.

* * * * * * * * * *


By: Richard Myers (Calgary)

I.         Introduction

Recent changes to the Alberta Business Corporations Act3 have repealed long-standing restrictions on an Alberta corporation's ability to give a guarantee or other financial assistance and have replaced them with a less onerous requirement that the corporation disclose to its shareholders guarantees and other financial assistance which it provides to certain related parties. However, these amendments have not fully relieved lenders of the compliance issues which they face when taking guarantees or other financial assistance from parties related to their borrowers.

II.        General Scope of Section 45

Section 45 of the ABCA requires that an Alberta corporation4 must, in certain instances, disclose to its shareholders financial assistance which it provides to what may be described as related parties5.  Section 45(1) defines financial assistance to mean "financial assistance by means of a loan, guarantee or [somewhat unhelpfully] otherwise".  The "otherwise", although undefined, would, no doubt, capture a pledge of assets by a corporation to secure obligations of another party without an underlying covenant to pay.

III.       Historical Context

Historically the courts have had two interrelated concerns regarding the capitalization of corporations and the impact upon stakeholders (both shareholders and creditors) of "self-dealings" which could damage the corporation's financial well-being.  The first of these concerns was characterized as a prohibition upon a company "trafficking" in its own shares, as expounded by the House of Lords in the case of Trevor v. Whitworth6.  The notion was that a company should not underwrite in any manner the financial hazard  inherent in an investment in its share capital.  The second concern was that stakeholders should be protected from major or controlling shareholders or directors of a company misappropriating the assets of the company by causing the company to guarantee or pledge its assets as security for their obligations or by causing the company to make loans to them.  Restrictions on both share trafficking and corporate financial assistance were historically incorporated in Canadian corporate laws.

View the full article - Disclosure Requirements under Section 45 of the Alberta Business Corporations Act Regarding Financial Assistance

* * * * * * * * * *


By: Manuel A. Martins (Waterloo)

When Lenders consider their real property security options, their analysis should go beyond simply taking a mortgage from a debtor who owns real estate. A debtor's interest in real property leases (whether as landlord or tenant) means a Lender should obtain either an Assignment of Lease or a Mortgage of Lease as additional security. Like any other specific security agreement, these agreements facilitate the orderly and more effective enforcement of the Lender's security in the underlying debtor asset.

Assignment of Lease

In cases where the debtor owns real property but does not occupy it, the revenue stream from third party leases is a significant asset that should be secured. Although most mortgage standard charge terms include at least a brief paragraph related to assignment of leases, they do not provide the benefit of the more fulsome provisions typically contained in a stand alone specific Assignment of Lease (in cases where there may be a significant tenant) or a general Assignment of Lease (securing all present and future leases without reference to a specific tenant).

The debtor's interest as landlord is secured by registration against title to the debtor's real property, typically immediately following the registration of the mortgage of land. It should be noted that in order to register a specific Assignment of Lease, there first requires the registration of a Notice of Lease in respect of the lease that is being specifically assigned. The Assignment of Lease also has a personal property component that cannot be overlooked. The rents and leases that are secured by the Assignment of Lease fall within the definition of personal property under the personal property security legislation; and as such require the registration of a financing statement against the debtor.

An Assignment of Lease document includes certain generally accepted provisions.

The debtor assigns to the Lender (as collateral security for the payment of principal and interest under the mortgage of land) all rents and other monies due to it by tenants and the benefit of all tenant covenants under all current and future leases.

The debtor covenants to not collect rent more than one month in advance (to ensure that the normal revenue stream is available to the Lender on enforcement) and to not amend any material terms of the leases without the Lender's approval. In the case of a specific Assignment of Lease, it is prudent to also obtain similar covenants from the tenant itself and an acknowledgement that the tenant will attorn to the Lender in the event of default by the debtor.

The debtor is permitted to continue to collect rent according to the terms of the leases until an event of default occurs pursuant to the mortgage of land, after which the Lender may give notice to the tenants to pay all future rents to the Lender directly.

Mortgage of Lease

In cases where the debtor does not own real estate but rents space instead, the right to occupy the premises may be a key asset of the debtor that should be secured. Although it is typical that a general security agreement includes a reference to leasehold interests in the description of the charged collateral, the general security agreement does not provide the benefit of the more complete language in a stand alone specific Mortgage of Lease document.

The debtor's interest as tenant is secured by registration against title to the debtor's leasehold interest in the real property. This requires the prior registration of a Notice of Lease in respect of the lease that is being secured.

It should be noted that if there is a real property mortgage on title granted by the owner/landlord to another lender prior to the lease, and if the tenant/debtor or tenant's lender has not obtained a non-disturbance agreement from the owner/landlord, the Mortgage of Lease will be no better security than the lease itself (i.e., subject to being terminated at the option of the prior mortgagee in the event of default under the real property mortgage). Most leases will contain a prohibition against mortgaging the lease, so it will be necessary to obtain the landlord's consent to a Mortgage of Lease in those cases.

A Mortgage of Lease document typically contains some basic provisions.

As in a mortgage of land, the Mortgage of Lease specifies a principal amount, interest rate, payment dates, and contains charging language whereby the debtor's leasehold interest is security for payment of the principal and interest.

Similarly, in the event of default, the Lender has the ability to exercise a power of sale and sublease or assign the leasehold interest to a third party.

The debtor covenants to not pay rent more than one month in advance, to not amend any material terms of the leases without the Lender's approval, to not terminate or surrender the term of the lease and to hold possession of the premises in trust for the Lender.

Most Lender mortgage standard charge terms contain flexible language that contemplates the use of the terms for both cases where the chargor owns a freehold interest in the property or a leasehold interest in the property.

So please consider an Assignment of Lease or Mortgage of Lease as part of your security package. We would be pleased to assist you with these documents.

* * * * * * * * * *


By: Richard Dusome (Toronto)

Q:        Can I take Section 427 Bank Act security from a guarantor of my borrower?

A:        Unfortunately, the bank cannot take Section 427 Bank Act security from a guarantor of its borrower. 

The provisions giving banks the right to take security pursuant to Section 427 of the Bank Act represent some extremely old legislation.  They were originally enacted in the late 19th century to address bank financing issues at that time, when specific authority to take security was required. Thus, Section 427(1) only permits banks to "lend money and make advances" to specific types of persons on the basis of Section 427 security.  As such, there must be a direct loan or advance made by the bank to the person giving security in order for Section 427 security to be taken in respect of that loan. 

However, there is no statutory authorization to take Section 427 security from a person as collateral security for a guarantee given in respect of the indebtedness and liabilities of some other person.  Thus, Section 427 security can only be used to support the repayment of the direct borrowings of a person, and cannot be used in respect of  debt that person has guaranteed.  


1. 2011 BCCA 510 (CanLII)

2. 2008 BCSC 775 (CanLII)

3. Business Corporations Act, R.S.A. 2000 c. B-9 (the "ABCA")

4. i.e. a body corporate incorporated or continued under the ABCA and not discontinued under that Act;  Section 1(l) of the ABCA

5. ABCA (Section 45(3)

6. Trevor v. Whitworth (1882) 12 App. Cas. 409

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.

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