Canada
Answer ... Personal property is generally available to secure lending (including project finance), subject to certain contractual or legal limitations. Security in personal property is most commonly taken under the respective provincial Personal Property Security Acts (PPSA), which govern the creation, perfection and enforcement of security interests. The legislation includes, among other classes of property:
- consumer goods;
- equipment and inventory;
- documents of title;
- securities;
- cash; and
- certain intangibles.
A notable exception is the province of Quebec, which is a civil law jurisdiction and operates under a civil code.
Federally, the Bank Act establishes a separate security framework available to chartered banks for certain classes of security interests. Separate federal legislation also regulates interests in:
- intellectual property;
- railways;
- federal property;
- deemed trusts; and
- certain matters relating to Indigenous peoples.
Interest in land, other than interests arising under a licence, are expressly excluded.
In the context of a project finance involving a special purpose vehicle (SPV), lenders will typically seek a general security agreement (or a deed of hypothec under Quebec’s Civil Code) over the assets, property and rights of the SPV. While general security agreements could apply to all property of the debtor, they are not the preferred instrument for taking security interests over real property or land (see question 6.3). Accordingly, collateral that is subject to general security agreements is typically limited to personal property of the debtor. Where the project entity is not an SPV or lenders are otherwise prevented from seeking general security, it will be necessary to enter into specific security agreements for the identified collateral. In Canada, the concept of a security trustee is recognised and agents are frequently employed in syndicated lending.
If real property is part of the collateral, the borrower may be required to enter into a mortgage or debenture in favour of the lenders, together with direct agreements with other parties that may have interest in the land. The real property charge or mortgage must be registered in the land titles system of the province or territory in which the property is located.
In rare cases, a partial or full guarantee of the project finance debt may be provided in non-recourse project financing structures.
Canada
Answer ... Each Canadian jurisdiction has its own PPSA (or the Civil Code, in Quebec), with a specific set of rules governing the perfection of security interests. While there are subtle differences between the jurisdictions with respect to documentary and procedural requirements, in all jurisdictions a security interest in personal property is most commonly perfected by registration (ie, filing a financing statement in the appropriate provincial personal property registry). Generally, and subject to conflicts of law rules governing personal property security interests, the proper place of registration for the purposes of perfection is in:
- the provincial or territorial jurisdiction in which the collateral is located for tangible property; and
- the jurisdiction where the debtor is located or organised, for intangible property.
Notwithstanding that registration of a financing statement will perfect a security interest in all forms of collateral to which the relevant PPSA applies, perfection by possession of certain types of collateral (eg, chattel paper, instruments, money and negotiable instruments) and perfection by control of investment property confer additional protection on the secured party.
For certain forms of personal property, additional steps may be required under the relevant provincial legislation in order to perfect security. For example, any financing statement registered against equipment situated in the province of Alberta that is ‘serial number goods’ will require a description of such equipment by serial number in such financing statement in order for the underlying security interest to be perfected.
There are some types of collateral to which the relevant PPSA does not apply. It is therefore important for parties to understand the rules governing personal property security interests for specific types of collateral. As noted above and below, a security interest in real property must be registered in the land titles system for it to be effective against third parties.
Canada
Answer ... Plant and equipment are considered personal property and security can be taken in the same manner as described above: by virtue of a security agreement and registration of a financing statement.
Security can also be taken in real property, including buildings and land, but such security is not governed by the PPSA regime. Rather, security is taken through:
- a mortgage of land;
- a mortgage of lease;
- a debenture; or
- if the real property is in Quebec, a deed of immovable hypothec.
Security over real property is registered in the land registry system of the jurisdiction in which it is located. ‘Real property’ is broadly defined, but is understood to mean land, buildings and improvements which are constructed on, or attached to, the land. It can also include various rights and interests, such as mineral or strata rights.
Canada
Answer ... The PPSAs and Quebec’s Civil Code allow for security to be taken over deposit accounts and receivables in Canada. In PPSA jurisdictions, security interests in bank accounts can be perfected by registering a PPSA financing statement where the debtor is located or organised. With physical cash, traceability is a consideration, as property must be sufficiently identifiable in order for attachment to occur; it is more straightforward with deposit accounts.
No PPSA jurisdiction has adopted control as a means of perfecting security in deposit accounts. Under Quebec’s Civil Code, however, it is possible to perfect monetary claims by effecting control. When the creditor is not the account bank, control is obtained by entering into an agreement with the debtor and the institution that controls the account or by becoming the account holder.
With respect to receivables, perfection is effected under the PPSAs and Quebec’s Civil Code in a similar manner to other property, and no notice is required to create a security interest. However, debtors for the receivables are obliged to pay the secured party directly only after receiving notice. As such, if the secured party expects to collect repayment, notice is constructively required. Under federal legislation, subject to exceptions, receivables owed by the government can only be assigned absolutely and with appropriate notice. Similar legislation exists in certain provincial jurisdictions.
Canada
Answer ... For licences and other types of specially regulated property, approval is typically required by government authorities for the creation and enforcement of security interests. Licences and permits issued by government are subject to specific laws and regulations requiring varying degrees of notice, consent or explicit approval.
Canada
Answer ... PPSA document registrations require modest administrative fees in each jurisdiction. These fees range from C$1.50 to C$26 per year, with additional costs for recurring time periods. Additionally, a similarly modest tax is paid upon registering real property in certain Canadian jurisdictions. However, stamp taxes or duties are not payable as a result of perfecting security interests. In Quebec, if a notarial deed of hypothec is used, a small fee will be charged for execution.
Canada
Answer ... Security documents will often contain representations, warranties and covenants by the debtor, in each case specifically relating to the collateral and the security interest created under such documents. Common representations and warranties given by the debtor include:
- ownership of the collateral;
- the absence of any liens other than those permitted by the finance agreements;
- locations of collateral; and
- the absence of any notices of claim or other proceedings received from third parties in connection with the collateral.
Typical covenants include:
- a negative pledge;
- prohibitions on disposition of collateral or other assets;
- protection of the collateral against damage (including the maintenance of insurance, if appropriate);
- delivery by the debtor to the lenders of any new collateral (eg, new share certificates); and
- notices of changes to the collateral’s or the debtor’s location (as jurisdictional changes could impact on the perfection of the secured party’s security interest).
Security agreements in project finance transactions will also often include rights of the lenders and their agents to access and inspect the collateral.
Security agreements may also seek to clarify the extent of the secured party’s rights in the collateral, such as the secured party’s ability to directly collect from or contact the borrower’s account debtors. Security agreements will also typically include specific lender remedies regarding the collateral where an event of default has occurred or is continuing, although there are certain provisions in the PPSAs which could limit secured parties’ enforcement rights and which cannot be varied by contract (eg, the duty of secured parties to use reasonable care in the custody and preservation of the collateral).
Canada
Answer ... In the event of default, self-help is available to secured creditors and possession and control of collateral personal property can be taken either individually or through a private receiver. Under Canadian legislation, enforcement of security interests occurs by providing the debtor with the prescribed notice as to whether assets will be seized and sold, or whether the creditor will take possession of the assets to satisfy the debt. The appropriate notice periods are set out in the PPSAs and Quebec’s Civil Code. If there is a concern for the safety of collateral, creditors can seek the appointment of an interim receiver by the court.
Real property security interests are enforced in a similar manner to personal property. Debt can be discharged by the sale of property in accordance with mortgage documents or, alternatively, it can be foreclosed upon. Additionally, real property can be held with any resulting revenues used to satisfy outstanding claims. Courts will not intervene in such a sale if done in accordance with a mortgage agreement, but the required time period for notices is set by provincial statute. However, while sales in accordance with mortgage documents do not require judicial intervention, foreclosure actions require a court order.
Canada
Answer ... Where registration is used to perfect security interests, secured parties must ensure that there are no errors in the debtor name as it appears on the financing statement; otherwise the security may remain unperfected and jeopardise such secured parties’ position relative to other creditors. However, not all registration errors will result in an unperfected security interest. The general rule is that a security interest will be perfected as long as a reasonable person would not likely be materially misled by an error or omission. In addition, even material errors can be corrected without affecting continuous perfection if a financing change statement is filed correcting the debtor name and there are no intervening registrations between the initial registration with the error and registration of the correction.
While registration is the most common form of perfection of security interests in personal property, each of the personal property laws in the provinces and territories does include further protection for secured parties by way of possession for investment property. Under each of the PPSAs and Security Transfer Acts (and the Civil Code, for Quebec), where a secured party has taken ‘control’ (as such term is understood under the relevant Security Transfer Acts or the Quebec Civil Code, and which includes physical possession of any certificates representing the investment property) of investment property, such secured party’s security interest in such investment property will have priority over any other security interest, in each case to which the relevant PPSA or Civil Code applies. Accordingly, where the collateral in a project finance transaction includes investment property, the lenders may require ‘control’ over such investment property, whether by way of:
- physical possession of certificated securities (eg, share or unit certificates); or
- a control agreement for uncertificated securities (eg, securities accounts or securities entitlements).
Canada
Answer ... In addition to taking security through a general security agreement or otherwise obtaining guarantees, lenders can safeguard their funds through other means during the financing process. Lenders can use:
- general assignments of accounts receivable;
- share pledges;
- promissory notes;
- bankers’ acceptances;
- debentures; or
- security specific to individual assets such as inventory.
The specific circumstances of a project will determine the type of instrument(s) used.
Canada
Answer ... Direct agreements with contractual counterparties are well understood in Canada as an important feature of project finance. Government sponsors that regularly procure infrastructure using project finance structures have established standard form direct agreements that are accepted in the market. Direct agreements aim to protect lenders against default of the main construction contract, long-term supply contract, concession agreement or other similar agreement. Direct agreements are employed in addition to, or as an alternative to, security interests. Even though most lending is done on a secured basis in project finance, parties will still focus on the contractual relations between project stakeholders and seek to limit downside risk where possible.