1. What forms of security can be granted over immovable and movable property? What formalities are required and what is the impact if such formalities are not complied with?
In Canada, the common forms and requirements for the creation and perfection of security granted over immovable and movable property depend on provincial/territorial legislation. Canada is a federal jurisdiction with two distinct legal systems. All provinces and territories are common law jurisdictions except the Province of Québec, which is a civil law jurisdiction.
Immovable property
Common law jurisdictions
Forms of security over immovable property/real property commonly utilized in the common law provinces include:
- Mortgages. Generally used on specific parcels of real property, financed by one or multiple lenders.
- Debentures. Commonly used in commercial lending transactions to cover multiple parcels of real property, as well as movable property. Similar to a mortgage, there may be one or multiple lenders.
- Trust deeds. Commonly used in sophisticated bond financings and syndicated loan transactions where many lenders are involved.
In rare circumstances, a person without a registered mortgage may be able to assert an equitable mortgage or interest in immovable property. An equitable mortgage may arise where the original mortgage documentation is defective in some way, and the court has been asked to deem the mortgage as an equitable mortgage. Generally equitable interests in land are not enforceable against the holders of registered mortgages.
For a security interest granted over immovable property to be enforceable, the mortgage, debenture or trust deed must be (1) in writing; and (2) registered on the title to the property that is subject to the charge.
Each province and territory in Canada has its own real property registry system. The registration of a charge in the applicable real property registry system constitutes notice of a security interest.
The various provincial Personal Property Security Acts (PPSA) may apply to fixtures that have become immovable property and are not collateral classified as consumer goods, provided the security interest was created when the fixture was movable property (see below, Movable property).
If registration requirements are not complied with, a creditor's security interest will be ineffective over the debtor's immovable property in a bankruptcy. Furthermore, any secured creditors holding unregistered interests in relation to such property will rank in priority with other unsecured creditors in a bankruptcy.
Québec
In Québec, security over immovable property is generally obtained through a hypothec, which is similar in function to a mortgage. To be enforceable, a hypothec must be (1) created by deed; (2) signed in the presence of a Québec notary; and (3) registered in the land registry office of the jurisdiction where the property is located.
Registration of rights on movable and immovable property must be in French. Documents accompanying these applications must be in French, or accompanied by a translation authenticated in Québec.
As in common law jurisdictions, the registration of a hypothec serves as notice of the security interest to third parties.
The impacts of non-compliance with the above registration requirements are the same as in common law jurisdictions. If registration requirements are not complied with, a creditor's security interest will be ineffective over the debtor's immovable property in a bankruptcy, and any secured creditors holding unregistered interests in relation to such property will rank in priority with other unsecured creditors in a bankruptcy.
Movable property
Like immovable property, the treatment of movable/personal property depends on whether the property is located in a common law or civil law jurisdiction.
Common law jurisdictions
Creditors can take security over movable property under a properly executed and registered security agreement. Typical types of security agreements include general security agreements, chattel mortgages, general assignments of accounts and equipment leases.
A general security agreement is an agreement under which the debtor grants the secured party a security interest over all of the debtor's present and after-acquired property. A chattel mortgage or equipment lease is an agreement under which the debtor grants a security interest over specific assets. A general assignment of accounts grants a security interest over accounts owing to the debtor.
For movable property, most Canadian provinces and territories have adopted provincial PPSA legislation. PPSA legislation is structured to apply to both (i) transactions which create (in substance) a security interest in personal property, regardless of the type of security involved; and (ii) certain enumerated transactions when the enumerated transaction secures payment or the performance of an obligation (for example, leases for a term of more than one year).
To be enforceable against third parties, a security interest in the debtor's personal property must be both attached and perfected.
Attachment of a security interest occurs when all the following conditions are met:
- value is given;
- the debtor has acquired rights in the secured asset over which the security is being granted;
- a written security agreement is signed by the debtor; and
- the written security agreement provides a clear description of the secured asset over which the security interest has been granted.
Perfection of a security interest can be achieved in a number of different ways. Most commonly, perfection of a security interest is achieved by registration under the PPSA in the applicable electronic registration system. Alternatively, perfection can be achieved by possession of the secured asset by the secured party. Perfection by possession can be used where the secured asset is chattel paper, a tangible good, an instrument, a negotiable document of title or money.
Furthermore, investment property can be perfected by control, amongst other means. Control is obtained when a secured party can sell the property without any further action by the debtor. Depending on the type of investment property, this can be achieved by either the secured party becoming the entitlement holder, or the secured party and the debtor entering into a control agreement.
A security interest in a secured asset that is perfected as at the date a debtor commences insolvency proceedings will be effective against a trustee in bankruptcy. In contrast, an unperfected security interest will not be effective in an insolvency and, in terms of priority, the creditor will rank as an unsecured creditor.
Mistakes in registering a PPSA financing statement can be (although are not always) fatal to a secured creditor's security, rendering the security interest unperfected. A security interest in the personal property of a debtor that has not attached and/or been perfected will be ineffective against a trustee in bankruptcy. This means the creditor will rank with any other unsecured creditors for any recovery of debt.
Québec
Security over movable property in Québec is granted under a hypothec, as with immovable property. However, the requirements for deeds of hypothec over movable property differ from those applicable to hypothecs for immovable property. For example, a notary is not required for the creation of a hypothec over moveable property.
The movable hypothec may be granted with delivery or without delivery in favour of the creditor. The hypothec will be with delivery if: (i) the property subject to the security interest has been remitted to the creditor or third party (pledge); or (ii) the creditor has obtained control over the property subject to the security. The hypothec with delivery does not have to be published (the Québec equivalent to perfection, as discussed above) in order to be effective against a trustee in bankruptcy.
The hypothec will be without delivery if the creditor does not have possession or control of the property subject to the security interest. In such case, the hypothec must be published and, therefore, recorded electronically in the Register of Personal and Movable Real Rights (RPMRR), in order to be effective against a trustee a bankruptcy. Therefore, a movable hypothec without delivery that has not been published will be ineffective against a trustee in bankruptcy. This means the creditor will rank with any other unsecured creditors for any recovery of debt.
Although not a form of security per se, a reservation of ownership (title retention) must be published at the RPMRR by the owner of movable property subject to a contract of sale by instalment, a lease, or a leasing agreement (crédit-bail) to set up against third parties.
A security in the movable property of a debtor that has not been published will be ineffective against a trustee in bankruptcy. This means the creditor will rank with any other unsecured creditors for any recovery of debt. Similarly, the underlying debt must be enforceable against the debtor for the security to be effective against a trustee in bankruptcy.
2. What practical issues do secured creditors face in enforcing their security package (e.g. timing issues, requirement for court involvement) in out-of-court and/or insolvency proceedings?
A secured creditor must provide an insolvent debtor with reasonable notice of its intention to enforce its security. Under the BIA, a secured creditor who wishes to enforce its security on all or substantially all property and assets of an insolvent debtor must give prior notice of its intention to do so by way of notice pursuant to section 244 of the Bankruptcy and Insolvency Act (BIA) (a "244 Notice"). Following the issuance of a 244 Notice the secured creditor must wait ten days before taking further steps, unless the debtor consents to an earlier enforcement at the time of the delivery of the 244 Notice.
In certain circumstances, an interim receiver may be appointed where a creditor is concerned about the diminution of the value of the security in question during the statutory ten-day 244 Notice period (see below at Question 8 for specifications relating to Québec). To appoint an interim receiver, a court must be satisfied that (i) the debtor is an insolvent person as defined under the BIA; (ii) that the 244 Notice has been or is about to be sent to the insolvent debtor; and (iii) the appointment of an interim receiver is necessary to protect either the debtor's estate or the interests of the creditor who has or is about the send the 244 Notice.
Whether court involvement is sought typically depends on the terms of the underlying security agreement. Often, the terms of the security agreement will provide that the secured creditor may appoint a receiver both privately, or by seeking a court appointed receiver.
Apart from timing issues, creditors may become subject to statutory or court-ordered stays of proceedings where a debtor commences restructuring or insolvency proceedings (see below Questions 3 and 9).
3. What restructuring and rescue procedures are available in the jurisdiction, what are the entry requirements and how is a restructuring plan approved and implemented? Does management continue to operate the business and / or is the debtor subject to supervision? What roles do the court and other stakeholders play?
The main restructuring and rescue procedures in Canada are proceedings pursuant to the CCAA and proposal proceedings pursuant to Part III of the BIA.
In addition, in appropriate circumstances, the arrangement provisions contained in the Canada Business Corporations Act and equivalent provincial corporate statutes may be used as an alternative to the formal insolvency proceedings under the BIA and CCAA outlined below.
CCAA proceedings
The principal objective of the CCAA is to enable a debtor company to formulate a plan of compromise or arrangement in respect of the debtor's obligations owing to its creditors, to be voted on by the creditors, and if approved by the requisite majority in each class of creditors, sanctioned by the court overseeing the debtor company's CCAA proceedings.
Despite this objective, in many CCAA proceedings, the debtor will not formulate or file a plan of arrangement, but rather uses proceedings under the CCAA as a mechanism to effect a sale of all, or part of its business, property and/or assets, through either the implementation of a sales or liquidation process, or a pre-packaged sale transaction that was formulated prior to (but consummated as part of) the CCAA proceedings.
Either a creditor or the debtor can initiate CCAA proceedings by application to the court.
CCAA proceedings can only be commenced in respect of insolvent corporations with outstanding debts in excess of $5,000,000.
Generally, the court will exercise its discretion to grant protection if:
- a reorganisation, or orderly sale/liquidation of the debtor company's business would be beneficial to the debtor company's stakeholders.
- the debtor company does not have an improper motive for making the application.
- the relief being sought pursuant to the initial order under the CCAA (Initial Order) is limited to that which is reasonably necessary for the continued operation of the debtor company in the ordinary course of business during the initial ten day stay period.
Provided the debtor company (or creditor as the case may be), can establish that the debtor company meets the requirements of the CCAA, the burden will be on any opposing creditors to show why the court should not grant the relief requested.
To proceed under the CCAA, the debtor must:
- be insolvent, meaning that either the debtor is unable to meet its liabilities as they fall due (cash flow test), or the debtor's assets are less than its liabilities (balance sheet test). Courts have also expanded the definition of "insolvent" to include a debtor facing a "looming liquidity crisis"; and
- have debts exceeding CAD 5 million (including any affiliate companies).
A company that has made an assignment in bankruptcy pursuant to the BIA can be granted protection under the CCAA provided it satisfies the necessary statutory conditions (including the requirement for inspector approval, if inspectors have been appointed in the bankruptcy), is not otherwise barred from relief, and can demonstrate that such relief is appropriate in the circumstances. Although possible, the commencement of CCAA proceedings by a bankrupt company remains uncommon at the time of writing.
Under the CCAA, a monitor (that is, a person licensed to act as a trustee) is appointed to oversee the proceedings of the debtor company, report on the debtor company's business and financial affairs from time to time, and to assist the debtor company with the formulation of its plan of reorganisation.
The CCAA is a debtor-in-possession regime meaning the debtor remains in control of its business and its property and assets. However, the debtor remains subject to the monitor's scrutiny and if a transaction is outside the ordinary course of business, or does not comply with any court-imposed restrictions, the monitor will report such activities to the court. CCAA proceedings commenced by a creditor of the debtor are also debtor-in-possession proceedings, however additional supervisory controls, such as the appointment of a chief restructuring officer or the granting of enhanced powers to the court-appointed monitor (including management powers) are typically sought in these circumstances.
Where a debtor is granted protection under the CCAA, the court will issue an Initial Order prohibiting all secured and unsecured creditors from commencing or continuing any existing or future claims against the debtor and its directors and officers, without either the prior consent of the debtor and monitor or leave of the court.
CCAA proceedings do not have a prescribed time limit. After the making of the Initial Order, the debtor is granted up to 10 days of protection from its creditors. Within the initial stay period, the debtor must return to court to request an extension. After the initial protection period, there is no limit on the length of any extension or on the number of extensions that a debtor may seek from the court, provided the applicant seeking the extension can show that circumstances exist that make the order appropriate and that the applicant has acted and is acting in good faith and with due diligence.
For a reorganisation plan to be accepted by creditors, a meeting must be held for the purpose of voting on the reorganisation plan, and a majority in number of each class of creditors holding two-thirds in value of the total debt represented by that class, must vote in favour of the plan. Once the reorganisation plan is accepted by the requisite majority in each class of creditor, the plan must be approved by the court before it becomes binding on those classes of creditors that voted in favour of the plan.
Once the CCAA reorganisation plan is approved by the requisite majority of the debtor's creditors in each class and is thereafter sanctioned by the court, the debtor will have successfully concluded a compromise or arrangement with its creditors with regard to the debts owed to such creditors before the commencement of CCAA proceedings, provided that the payments or consideration required under the CCAA and the plan are made or provided when required.
After the implementation of the plan and at the conclusion of the CCAA proceedings, the debtor can resume its normal business operations.
BIA proposal
The objective of proposal proceedings pursuant to the BIA is to enable a debtor to reach a compromise with its creditors through a restructuring of its obligations pursuant to a proposal. Proposal proceedings under the BIA may also be used by the debtor as a mechanism to effect a sale of all or part of its business, property and/ or assets.
Under the BIA, a proposal may be made by an insolvent person, a receiver, a liquidator of an insolvent person's property, a bankrupt, and a trustee of the estate of a bankrupt. There is no minimum debt requirement for companies to be eligible to make proposals under the BIA.
A BIA proposal is initiated by either filing a proposal, or filing a notice of intention to make a proposal ("Notice of Intention"). On the filing of the Notice of Intention, all creditors are stayed for an initial period of 30 days (unless a secured creditor has filed a notice pursuant to section 244 of the BIA and the statutory ten-day period has expired).
To proceed with a proposal under the BIA, the debtor must:
- be insolvent under either the cash flow test or balance sheet test (see above, CCAA proceedings).
- have at least CAD$1,000 in unsecured indebtedness.
Once the debtor has filed either a proposal or a Notice of Intention, the court will appoint a proposal trustee to supervise the proposal process. The role of the trustee in BIA proposal proceedings is to monitor the debtor's actions, assist the debtor in developing the proposal and in reaching a compromise with its creditors, and to alert the court if there are any material adverse changes.
The debtor remains in control of its property and assets throughout the duration of BIA proposal proceedings and the appointed trustee does not directly have any control over the debtor's affairs.
Once a proposal or Notice of Intention has been filed, no creditors (whether secured or unsecured) can bring or continue any proceedings against the debtor. The stay of proceedings prohibits any creditor from exercising any remedy against the debtor or its property, or commencing or continuing any action, execution or other proceeding for the recovery of a claim provable in bankruptcy without leave of the Court granted on motion on notice to the debtor and the proposal trustee (See Question 9).
Secured creditors may enforce their security interest only if they have served a notice pursuant to section 244 of the BIA on the debtor and the statutory ten-day notice period has lapsed (or the debtor company consented to an earlier enforcement by the secured creditor at the time that the section 244 notice was delivered by the secured creditor, or thereafter).BIA proposal proceedings proceed on defined time limits. On the filing of a Notice of Intention, all creditors are stayed for an initial period of 30 days. The time for filing a proposal (and the stay period) can be extended by the court for a maximum period of six months (including the initial 30 day stay), in 45-day intervals.
Both the debtor's creditors and the court must approve of a proposal pursuant to the BIA. At least two-thirds in value and a majority in number of the creditors, including secured creditors to whom the proposal was made, must approve of the proposal. Following the creditors' approval, the court will approve the proposal if it is for the general benefit of the creditors. To this extent, evidence must be adduced to show that the debtor's creditors will be better off under the terms of the proposal than they would be if the debtor were liquidated pursuant to bankruptcy proceedings.
Once the debtor has fulfilled all of its obligations as set out in the BIA proposal, the trustee will issue a certificate confirming the debtor's full compliance with its obligations under the proposal. Once the trustee's certificate is issued, the debtor is considered to have completed its restructuring and may resume normal operations of its business. However, if the debtor defaults on its obligations to its creditors under the proposal, as approved by its creditors and the court, the debtor will be deemed to have made an assignment into bankruptcy. Similarly, if a debtor's proposal is rejected by creditors by a majority in number or one-third by value, the debtor will be deemed to be bankrupt.
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Originally published by The Legal 500: Restructuring & Insolvency Country Comparative Guide
Read the original article on GowlingWLG.com
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