Answer ... Common law provinces and territories: Security is often required from the borrower or primary obligor, and may also be required from one or more subsidiaries or affiliates of the borrower or primary obligor. When security is to be taken from a subsidiary or affiliate of a borrower or primary obligor, typically such persons enter into a guarantee agreement pursuant to which they agree to guarantee the payment and performance of the borrower’s or primary obligor’s and any other related obligors’ obligations (as applicable) under the financing arrangement.
In the Canadian common law jurisdictions, generally speaking, security interests are divided into two categories: personal property security and real property security.
Security interests granted in real property are governed by a number of different statutes for each common law province and territory, and vary between jurisdictions. Separate legislation governs charges on real property which fall under the Canadian federal jurisdiction, such as government lands and buildings, national parks and international airports.
Security interests granted in ‘personal property’ are governed by and defined in the Personal Property Security Act in force in each common law province and each territory. Each Personal Property Security Act sets out a comprehensive regime governing the creation, attachment and perfection of security interests, establishes the priorities of competing security interests and sets out the rights and remedies of secured creditors on enforcement. The Personal Property Security Acts are generally quite similar to each other across the Canadian common law jurisdictions.
When determining the type of security interests to be obtained, several factors should be considered, including:
- the type, value and location of the security provider’s assets; and
- the cost associated with putting such security in place.
Personal property security: The most common type of security documents used by secured creditors in the Canadian common law jurisdictions are security agreements (or general security agreements). Security agreements are often drafted so as to grant a security interest over all of a debtor’s present and after-acquired personal property. However, depending on the nature of the business and the assets of a debtor, security interests may be taken in collateral held or used at specific locations or in a number of specific items of personal property, such as a specific assignment of contracts, receivables, insurance proceeds or serial numbered goods (including motor vehicles). A debtor may also be required to pledge the shares it holds in any subsidiaries as security, which can often be effected under a security agreement but is also frequently effected by way of a separate securities pledge agreement.
Real property security: The methods and documentation required to perfect a security interest in real property across common law jurisdictions in Canada are largely prescribed by various provincial and territorial statutes and regulations, and vary from one common law jurisdiction to another. However, real property security is most often taken by way of a simple mortgage document, for which many Canadian lenders have a standard form or by way of a debenture which may or may not create a charge on personal property as well as real property. The presence of language charging personal property in a debenture does not impact registration or perfection requirements under real property statutes. The real property statutes of the Canadian common law jurisdictions stipulate to varying degrees certain essential terms, information and forms that a registrable mortgage or debenture must have.
Real property security can be burdensome to put in place, particularly when many real property assets are involved. While most of the common law jurisdictions in Canada charge only nominal amounts for registration of mortgages or debentures, in the province of Alberta the cost of registering a mortgage or debenture includes a nominal fee plus a fee based on the principal amount secured by the underlying mortgage or debenture. Given that taking real property security can be burdensome and expensive in certain of the common law jurisdictions in Canada, the value of the real property assets should be considered before real property security is taken.
Quebec: The Civil Code of Quebec sets out a comprehensive regime governing the creation and opposability to third parties (perfection) of liens, establishes the priorities among them and sets out the rights and remedies of secured creditors on enforcement.
In Quebec, the only conventional security that can be created is by way of a hypothec. A hypothec can secure any obligation and may be granted on all present and future movable (personal) and immovable (real) property of a grantor or on specific assets or categories of assets. In the case of movable property, a hypothec can be granted with delivery (a pledge) or without delivery. In order to be valid, a hypothec must be granted for a specific amount, expressed in Canadian dollars. Typically, the hypothec is granted for an amount exceeding the principal obligations secured at the time it is executed, in order to account for obligations that may fluctuate in time, such as:
- hedging obligations;
- potential increases to the financing in the future (including any contemplated accordion or incremental credit facilities); and
- currency fluctuations in the primary obligations owed to the creditors.
National Bank Act security: Section 427 of the Bank Act (Canada) allows certain banks regulated under that legislation, including authorised foreign banks, to take security over the inventory of certain debtors, including manufacturers, farmers and aquaculturists. The current scheme has existed in substantially similar form for at least a century and is being used with decreasing frequency. In order for a qualified bank to obtain Bank Act security, the debtor must enter into:
- an application for credit;
- a notice of intention;
- a grant of security over inventory; and
- an agreement concerning loans and advances.
The foregoing documents are fairly standard form documents and are not often negotiated.