Canada: Focus On Financial Services - Fall 2008

Last Updated: October 15 2008

In this issue we discuss (i) the effect of a debtor's pension plan liabilities and pension plan deficit on its secured lenders; (ii) the enforceability of agreements signed and delivered by fax or PDF; (iii) personal guarantees under the Alberta Guarantees Acknowledgement Act; and (iv) perfection of a security interest in a cash collateral account.

Effect Of A Debtor's Pension Plan Liabilities And Pension Plan Deficit On Its Secured Lenders
Article by Ross Walker

Prudent lenders should monitor their corporate debtors' pension plan liabilities and pension plan deficits because they may have a significant impact on the priority of the lender's security and on the amount the lender will recover if the lender enforces its security.

Priority with respect to Lender's Security

The statutory deemed trust and statutory lien contained in the Pension Benefits Act (Ontario) secure payment of the normal and special contributions which the debtor is required to pay to the pension plan until the plan is wound up. Prior to a debtor's bankruptcy or receivership, they will likely have priority over the debtor's inventory and accounts charged by the lender's general security agreement or assignment of book debts (but likely not over the debtor's assets assigned to a bank lender under the Bank Act before the pension liabilities arose). If, after July 6, 2008, the debtor becomes bankrupt or a receiver of the debtor's assets is appointed, the arrears of normal pension payments (but not the arrears of special pension payments) would, as a result of the recent amendments to the Bankruptcy and Insolvency Act, have priority over the lender's security (including its Bank Act security) with respect to all the debtor's assets.

Effect of a Pension Plan Deficit on Lender's Recovery

The statutory deemed trust and statutory lien do not secure payment of the pension plan deficit prior to the winding up of a defined benefit plan and the recent amendments to the Bankruptcy and Insolvency Act do not give such deficit priority over a lender's security.

However, if the pension plan was established for the debtor's unionized employees and the debtor's pension obligations are included in its collective agreement, a purchaser of the debtor's business from the lender or others on the debtor's insolvency, would have to assume the debtor's pension obligations under the collective agreement. If there is a material deficit in the unionized employees' pension plan, the purchaser will likely reduce the amount of the purchase price it offers for the debtor's assets to compensate for the deficit. Accordingly, although the priority of the lender's security is not directly affected by the deficit, the lender would likely recover less from the sale of the debtor's assets.

This problem should not arise with respect to a deficit in a non-union pension plan because the purchaser would have no legal obligation to assume the debtor's pension plan.

Conclusion

Therefore a lender should be aware of the status of its debtor's pension plan liabilities and deficit and take it into account when establishing margin tests, granting credit and deciding how to realize on its security.

Are Agreements Signed And Delivered By Fax Or PDF Enforceable?
Article by Kevin von Bargen

Driven by advances in electronic commerce ("e-commerce"), parties have, with greater frequency, been utilizing electronic contracts to effect commercial transactions. E-commerce legislation, such as the Electronic Commerce Act (Ontario)1 and the common law have evolved to reflect this commercial reality giving parties greater assurance that agreements signed and delivered by fax or PDF should be considered legally enforceable in the same way as conventional originally executed agreements.

While e-commerce legislation does not require that parties transact electronically,2 parties that choose to create electronic contracts can use technological media such as fax or PDF.3 These types of media meet provincial statutory requirements as their "read-only" nature allows the recipient to retain the contract for subsequent reference in a format that preserves the integrity of the document from the time it was created. Both fax and PDF enable the recipient to either store the contract electronically or print and store it in hard copy for future evidentiary reference.4

It is notable that electronic signatures may also be employed.5 Provincial legal requirements for a signed contract are satisfied provided that an electronic signature is created or adopted by the signatory in a form that is reliable for identifying such person and the electronic signature is within, attached to or associated with the document.6 An identifiable personal signature includes the typewritten name of the signatory which may be included at the end of an agreement or communication.7 The font or format of an electronic signature is not of general concern provided the signatory intends to be bound by the markings that constitute the electronic signature.

Presently, certain documents are specifically excluded from the ambit of provincial e-commerce legislation and accordingly electronic transmission should not be relied on exclusively. Some documents that are excluded are wills, codicils, negotiable instruments and, in some jurisdictions, documents that transfer interests in land and require registration to be effective against third parties. Subject to the consent of the parties, documents which may be signed electronically include credit agreements, security agreements and most other documents related to typical financings that are not required to be filed or registered in original form. It is important to note that a party is never obligated to use, provide or accept information or a document in electronic form. It is exclusively a matter of consent.

Federally, e-commerce is governed by the Personal Information Protection and Electronic Documents Act (Canada).8 However, electronic transmission of most federally governed documents must still be in written and signed form, including those governed by the Bank Act (Canada)9 and the Bills of Exchange Act (Canada).10 Therefore promissory notes, cheques and bankers' acceptances should not be signed electronically and an electronic version should not be relied on.

Although electronic transactions are becoming more common, the parties should still indicate their intention to use and be bound by such electronic communications by including a provision in the agreement that the agreement may be executed and delivered by fax or PDF.

Alberta Guarantees By An Individual Without A Notarial Certificate May Not Be Enforced By A Lender
Article by David Mann

One of the avoidable causes of legal disputes arises from a failure to comply with province-specific legislative requirements. In Alberta, this is especially true with respect to financing transactions involving guarantees by individuals because personal guarantees must be delivered in compliance with Alberta's Guarantees Acknowledgment Act (the "Act").

Failure to comply with the provisions of the Act can render a personal guarantee unenforceable - even where the guarantor's understanding of the content of the guarantee can be established. The requirements apply to any guarantee, as defined under the Act, which may include other agreements that create a guarantee type obligation, such as an environmental indemnity or an acknowledgment of debt. Without knowledgeable local counsel, there is a risk that technical requirements may be overlooked.

The importance of compliance with the Act was recently emphasized in a case decided by Madam Justice Romaine of the Alberta Court of Queen's Bench, Bharwani v. Chengkalath [2007] 2 W.W.R. 368. In this case, a guarantee was found to be unenforceable against the guarantor because the guarantor had not provided a notarial certificate as required by the Act. Click here to see a summary of the Court of Queen's Bench case.* The case was affirmed by the Alberta Court of Appeal, Bharwani v. Chengkalath [2008] Carswell Alta 518.

*The linked case summary originally appeared in our Insolvency & Workout Group's April, 2008 newsletter which was published prior to the release of the Court of Appeal's decision.

Perfection Of A Security Interest In A Cash Collateral Account
Article by Cynthia Hickey and Julie Burgis

A bank should file a PPSA financing statement against its debtor to perfect its security interest in a cash collateral account.

Banks have a recognized right to set off amounts owing by the bank to its customer (i.e. a credit balance in the customer's bank account) against the customer's debt to the bank. However, banks frequently wish to have the additional comfort of obtaining a security interest in the customer's credit balance in a designated bank account. Banks frequently refer to this security as a pledge of cash collateral.

The Personal Property Security Act (Ontario) (the "PPSA") provides that a security interest may be perfected by the registration of a financing statement, or in some cases by the secured party taking possession of the collateral. Some may think that a security interest in a bank account may be perfected by possession, because the account is held at the bank which holds the security interest. However, the concept of "possession" in the PPSA only applies to tangible personal property. Coins and bank notes are tangible, but money in a bank account is intangible. A credit balance in a bank account is merely evidence of a debt owing by the bank to its customer. The bank's security interest in the account can therefore only be perfected by the filing of a financing statement, not by possession.

Therefore a bank should file a PPSA financing statement against its debtor to perfect its security interest in a cash collateral account. The bank should also conduct a PPSA search against its debtor to ensure that no other secured creditors have registered financing statements against the debtor which rank in priority to the bank's financing statement. If any such prior registrations are found, subordination agreements should be obtained from the secured parties in question to ensure that the bank's security interest has priority over such other security.

Banks have a recognized right to set off amounts owing by the bank to its customer (i.e. a credit balance in the customer's bank account) against the customer's debt to the bank. However, banks frequently wish to have the additional comfort of obtaining a security interest in the customer's credit balance in a designated bank account. Banks frequently refer to this security as a pledge of cash collateral.

The Personal Property Security Act (Ontario) (the "PPSA") provides that a security interest may be perfected by the registration of a financing statement, or in some cases by the secured party taking possession of the collateral. Some may think that a security interest in a bank account may be perfected by possession, because the account is held at the bank which holds the security interest. However, the concept of "possession" in the PPSA only applies to tangible personal property. Coins and bank notes are tangible, but money in a bank account is intangible. A credit balance in a bank account is merely evidence of a debt owing by the bank to its customer. The bank's security interest in the account can therefore only be perfected by the filing of a financing statement, not by possession.

Therefore a bank should file a PPSA financing statement against its debtor to perfect its security interest in a cash collateral account. The bank should also conduct a PPSA search against its debtor to ensure that no other secured creditors have registered financing statements against the debtor which rank in priority to the bank's financing statement. If any such prior registrations are found, subordination agreements should be obtained from the secured parties in question to ensure that the bank's security interest has priority over such other security.

Footnotes

1. Electronic Commerce Act, 2000, S.O. 2000, c. 17 ("Ontario Act"); Electronic Transactions Act, S.B.C. 2001, c.10 ("British Columbia Act"); Electronic Transactions Act, R.S.A. 2000, c. E-5.5 ("Alberta Act").

2. Ibid. at Ontario Act s. 3(1); British Columbia Act s. 8; Alberta Act s. 4.

3. Mark J. Fecenko & Anita M. Huntley, E-Commerce Corporate-Commercial Aspects (Markham, Ontario: Lexis Nexis Canada Inc., 2003) at 66.

4. Supra note 1 at Ontario Act ss. 5, 6, 8 and 16; British Columbia Act ss.5, 6 and 8; Alberta Act ss. 11, 12, 14 and 21.

5. Ibid. at Ontario Act s. 11(1); British Columbia Act s. 11; Alberta Act s. 16.

6. Ibid. at Ontario Act s. 1(1); British Columbia Act s. 1; Alberta Act s. 1(1)(c).

7. Leoppky v. Meston, 2008 ABQB 45 at para. 42.

8. Personal Information Protection and Electronic Documents Act, S.C. 2000, c. 5.

9. Bank Act, S.C. 1991, c. 46.

10. Bills of Exchange Act, R.S.C. 1985, c. B-4.

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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