Banking & Financial Services Law : Canadian and U.S. / Cross-Border Credit Market Lawyers & Attorneys : Osler Hoskin & Harcourt Law Firm

Anyone who perceives the syndicate agent appointment and related provisions in credit agreements as mere boilerplate, relatively unworthy of close attention, is likely doing themselves a disservice. The following is a brief overview of a few occasionally overlooked points.

Agent for Non-Signatories

The parties on whose behalf the agent is to act (collectively, the “creditors”) must formally appoint the agent as their agent. On occasion, not all secured creditors will actually sign the credit agreement (collectively, “non-signing creditors” (as distinguished from “signing creditors”)), such as cash management or hedging providers. Before any non-signing creditor is entitled to the benefits of the collateral security, such non-signing creditor should be required to deliver a simple agreement pursuant to which the agent is appointed as its agent and it agrees to the exculpatory and indemnity provisions of the credit agreement in favour of the agent. Alternatively, signing creditors might, on behalf of (and explicitly acting as agent for) any of their affiliates which are non-signing creditors, formally appoint the agent as agent for such affiliates as well as for themselves under the credit agreement.

Scope of Duties

Credit agreements typically include specific provisions to the effect that the agent has no independent duties except as may be specifically provided for in the loan documentation. The agent and the creditors should consider how to best describe the duties (and powers) of the agent in the credit agreement so that the agent can react appropriately to creditor direction. The agent will typically be authorized to take direction from a majority (or whatever the appropriate level of voting might be) of the signing creditors as to matters not expressly provided for in the loan documentation (including, for example, credit bidding). Prohibiting any creditor from taking any action to protect or enforce its rights arising out of the loan documentation without first obtaining the prior consent of the agent and a majority (or whatever the appropriate level of voting might be) of the signing creditors may offer an additional level of protection to the agent in the event of disagreement between creditors.

Reimbursement and Indemnification of Agent

It is conventional for the agent to be fully protected by the signing creditors against liability to the creditors, the borrower(s) and any guarantor(s) (collectively, the “loan parties”), and/or any third parties (except, in all cases, to the extent of gross negligence or wilful misconduct on the part of the agent). This indemnity will usually also cover all losses suffered and expenses incurred by the agent, including the non-payment of any fees owed to the agent. It is also conventional to provide for reimbursement and indemnification by the loan parties of the costs and expenses of the agent and of the creditors.

Related issues to consider from the agent’s perspective include:

• specifying that the agent’s indemnities apply notwithstanding the comparative, contributory, or sole negligence of the agent;
• specifying that the agent’s indemnity from the creditors applies to claims by creditors against the agent;
• authorizing the agent to refrain from acting on the direction of the creditors if in the opinion of the agent its indemnities are insufficient or the ability of the agent to potentially make a claim thereunder has been impaired; and
• ensuring that the obligations secured by any liens granted in favour of the agent (the “secured obligations”) include loan party obligations in respect of reimbursement and indemnification, and that such liens are granted to the agent in its own capacity as well as for the benefit of the creditors.

The agent will, however, usually have to accept any risk associated with collecting from the creditors their respective shares of any amounts owing to the agent pursuant to its indemnity from the creditors.

Contingent Obligations

The agent should also ensure that the secured obligations include contingent obligations. This way, unless a reserve (or letter of credit or similar protection) is provided for its benefit, the agent could potentially refuse to discharge its liens upon termination of the credit agreement if there remains a reasonable possibility that it may need to claim against the loan parties for reimbursement and/or indemnification. This may be particularly useful to the agent in a bankruptcy or insolvency scenario if the creditors propose to settle their claims against the loan parties notwithstanding the agent’s potential exposure to continuing contingent liability. It is similarly desirable, albeit uncommon, for the agent to be specifically authorized to withhold reserves from distribution proceeds after default in respect of future amounts anticipated to become payable to the agent pursuant to reimbursement and indemnification provisions of the loan documentation.

Provisions Surviving Termination

More generally, the agent should ensure that all reimbursement and indemnification obligations in its favour survive not only termination of the credit agreement but also the resignation or dismissal of the agent (accordingly extending to any post-transaction activities of a former agent in connection with an agency succession) or departure of a creditor from the syndicate.

The agent should also consider bargaining at the outset that any creditor sponsored entity emerging in a bankruptcy or insolvency scenario from a bid by the creditors shall assume (ideally on a secured basis) the reimbursement and indemnification obligations of the loan parties.
 

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On June 18th, 2010 the Minister of Finance announced the launch of the Task Force for the Payments System Review. The Task Force is to make recommendations to the Minister by the end of 2011. This is an effort to have public policy keep pace with the rate of change in payment methods.

The Task Force will try and balance innovation and competition in payment systems with the issues of payment security and industry oversight. Specifically, the mandate of the Task Force is to:

• Identify public policy objectives to be pursued in the operation and regulation of the payments system.
• Identify and assess the regulatory and institutional structures best suited to achieving those public policy objectives.
• Assess and report on the safety and soundness of the Canadian payments system.
• Assess the competitive landscape for current participants by identifying any potential barriers for new entrants and mechanisms to improve the competitive landscape of the domestic payments system.
• Assess the degree of innovation in the domestic payments system and report on the challenges and opportunities to bring new and innovative products to market in Canada.
• Assess and report on whether consumers and merchants are well served by the domestic payments system.
   

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The decision of the Ontario Court of Appeal in Fairbanx v. Royal Bank of Canada contains some useful information about how courts view inaccurate debtor names in financing statements and their approach to s. 46(4) of the Personal Property Security Act (Ontario)(“PPSA”) regarding materially misleading filings. The case also reminds secured parties to use a debtor corporation’s name as found in its articles of incorporation when filing a financing statement, in accordance with section 16(4)2 of the PPSA Minister’s Order.

In this case, a factor called Fairbanx Corp. purchased receivables from a debtor. The incorporated name of the debtor was “Friction Tecnology Consultants Inc.” However, it often carried on business with an additional letter “h”, as “Friction Technology Consultants Inc.”, and the company used that form of name on the receivables purchase documents entered into with Fairbanx. Fairbanx registered its PPSA financing statement in respect of the receivables purchase (an assignment of accounts) against the business name of the debtor but did not file against the debtor’s correct corporate name.

The debtor then obtained bank financing from Royal Bank of Canada (“RBC”). Over the course of negotiating the loan, RBC had searched the debtor’s name with, and without, the “h”. RBC then registered against the proper incorporated name. Subsequently, the debtor went bankrupt and a priority contest ensued between Fairbanx and RBC.

The first secured party, Fairbanx, argued that their registration against the misspelled debtor name remained effective to perfect their security interest due to section 46(4) of the PPSA, which provides as follows:

46(4) A financing statement or financing change statement is not invalidated nor is its effect impaired by reason only of an error or omission therein or in its execution or registration unless a reasonable person is likely to be misled materially by the error or omission.

Fairbanx asserted that since the debtor carried on business using the misspelled name, and RBC had searched against that name, a reasonable person would not be materially misled since they would search the incorrect name of the debtor. The Court did not agree. Its reasoning provides a good overview for interpreting s. 46(4):

• a financing statement with an error is prima facie effective - it loses effect if a reasonable person would be materially misled by the error;
• whether a person would be materially misled by the error is an objective test - RBC’s subjective knowledge of the registration against the wrong name was irrelevant;
• a financing statement with an error in a debtor’s name is unlikely to be saved by s. 46(4) of the PPSA because,
  • a search against the debtor’s correct name will not reveal the registration, or
  • even when a reasonable person searches against an incorrect name and finds the registration, that person may not be able to know whether the misspelled name is an error or the proper spelling of the name of another similarly named person or corporation. 

When registering a financing statement against a corporate debtor, a secured party should use the name found in a government certified copy of the articles of incorporation of the debtor.
 

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On March 22, 2010, the Superior Court of Quebec approved a plan of arrangement under the Canada Business Corporations Act (the “CBCA”) that allowed MEGA Brands Inc. to achieve a worldwide restructuring of its business under a corporate statute, rather than a more typical insolvency and restructuring statute like the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”).

The Arrangement

MEGA Brands is a corporation governed by the CBCA, with its head office and senior management in Montreal. The arrangement involved a transaction between MEGA Brands and a number of related corporations and direct and indirect subsidiaries in Canada, the United States, Luxembourg, and Mexico.

The arrangement affected the claims of secured lenders under a credit agreement and two swap agreements as well as the claims of holders of convertible debentures. The arrangement also effected a significant dilution of shareholders, but preserved an equity stake in the continuing company for these shareholders. The Court granted a temporary stay of proceedings against the applicant corporations as well as impleaded parties in the United States, Europe, and Mexico.
Shareholders and lenders voted overwhelmingly in favour of the arrangement.

The Court allowed the company to have recourse to the CBCA because the restructuring involved solvent entities and would result in a solvent entity.

On March 23, 2010, the United States Bankruptcy Court for the District of Delaware granted an order enforcing the arrangement in the United States.

Unique Restructuring

It is the first time an arrangement of this nature has been implemented in Canada.

These orders confirm that the arrangement provision at CBCA section 192 provides an effective mechanism for a company to restructure its debt securities by exchanging them for cash, equity, new debt, or a combination thereof.

Unlike the CCAA, the CBCA allows the arranged entities to remain in control of the restructuring process and does not call for a trustee or court-appointed monitor to oversee the transaction. Thus, a CBCA arrangement may provide a more efficient and flexible alternative for corporations that choose to restructure debt. In addition, the CBCA process is faster and less costly than the CCAA, and there may be a business benefit to not undertaking insolvency proceedings.

For more detailed information on this restructuring, please see this Osler Update.
 

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As reported in Bloomberg Businessweek, on June 5, 2010, the G-20 finance ministers failed to agree on a proposal to impose a global tax on banks, settling instead for a common set of guidelines. G-20 finance ministers and central bank governors said in a statement in Busan, South Korea, that governments will take account of each nation’s “circumstances and options.” The result allows nations such as Canada, China and Brazil, whose banks suffered less during the global financial crisis, to skip introducing a tax. European countries and the U.S. have advocated the levy. This statement by the G-20 finance ministers leaves in place an initiative to seek tighter global standards for capital levels at banks. The Ministers said they now recognized that there are a “range of policy options” open to countries and agreed instead to adopt “principles” that protect taxpayers and reduce the risks of further crises.

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The Ontario government has taken steps to “fix” its inadvertent repeal of former section 46(3) of the Personal Property Security Act (Ontario)(“PPSA”). The repeal occurred on August 1, 2007 as part of former Bill 152 which contained a number of amendments to the PPSA. The repealed section 46(3) provided that a collateral description could limit the scope of a collateral classification in a financing statement to perfect only the collateral described. That section read as follows:

Except with respect to rights to proceeds, where a financing statement or financing change statement sets out a classification of collateral and also contains words that appear to limit the scope of the classification, then, unless otherwise indicated in the financing statement or financing change statement, the secured party may claim a security interest perfected by registration only in the class as limited.

This section was sometimes relied upon by secured lenders when reviewing PPSA search results prior to advancing funds. Lenders could choose not to obtain a subordination of a prior secured party’s security interest, or an acknowledgement of that secured party’s limited collateral, where the scope of that secured party’s PPSA registration was sufficiently limited by a collateral description. This could reduce transaction costs by reducing the number of documents to be obtained from third parties. After this section was repealed in 2007, collateral descriptions could not technically be relied upon to limit the scope of the prior registration.

Schedule 5 of Bill 68 (An Act to promote Ontario as open for business by amending or repealing certain Acts) received first reading on May 17, 2010. It includes an amendment to the PPSA that would add a new section 46(2.1) to reinstate the language excerpted above. Further, the legislation would deem this amendment to have come into force as of August 1, 2007, the date that this provision was inadvertently removed. 

This amendment will restore some certainty regarding the effect of a collateral description in a financing statement. It will also reduce transaction costs where prior secured parties choose not to obtain acknowledgements or subordinations due to the limited nature of certain prior registrations.

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In its recent decision in Ted Leroy Trucking v. Century Services Inc., the Court of Appeal for British Columbia upheld a decision of that province’s Supreme Court which determined that employee “wages” recoverable under the Wage Earner Protection Program Act (Canada) ("WEPPA") include components from an employee's compensation package that are remitted by an employer to third parties on behalf of an employee. This would include payments for items such as union dues or extended health coverage provided by a third party service provider. This determination affects the scope of employee wage claims that would benefit from a super-priority charge under the Bankruptcy and Insolvency Act (Canada) ("BIA"). As a result, lenders should account for such payments when structuring a loan transaction, including in the calculation of any borrowing base.

Protection for “Wages” Under the WEPPA

The WEPPA and consequential amendments to the BIA were proclaimed in force in 2008. Under section 7 of the WEPPA, an employee can recover wages owing that were earned in the 6 months immediately before the date of bankruptcy or the first day on which there was a receiver in relation to the former employer.

"Wages" is defined in the WEPPA as follows:

2 (1) In this Act, "wages" includes salaries, commissions, compensation for services rendered, vacation pay, severance pay, termination pay and any other amounts prescribed by regulation.

The maximum amount recoverable is the greater of:

• $3,000, and
• an amount equal to four times the maximum weekly insurable earnings under the Employment Insurance Act (Canada)

Section 81.3(4) of the BIA creates a super-priority for outstanding wages of up to $2,000. The government is entitled to subrogate to recover any monies it pays under WEPPA and on such a proceeding is entitled to the benefit of the BIA $2,000 super-priority.

The Lower Court Decision

The union representing employees at the bankrupt trucking company argued that all monetary liabilities arising from the compensation package in the applicable collective agreement ought to be included in the calculation of wages protected by WEPPA, irrespective of whether the amount is payable directly to the employee or to a third party on an employee’s behalf. The receiver of the company disagreed, asserting that the only certain wages directly payable to an employee are protected.

The Supreme Court of British Columbia found that "wages" do include payments directed to third parties on an employee's behalf pursuant to an agreement, including a collective agreement. The Court stated, in part:

“To answer this question one must consider the definition of "wages" in s. 2(1) of the WEPPA. It is relatively expansive; it defines wages as including "compensation for services rendered". In my view any reasonable definition of "compensation for services rendered" must mean all compensation earned by the employee. It cannot be limited to only that portion of the compensation earned by the employee and due to be paid directly to him, as opposed to being paid to third parties at the direction of and for the benefit of the employee.”

The Appeal Decision

The Court of Appeal for British Columbia dismissed the appeal of a secured creditor. Many of the issues on the appeal focused on statutory interpretation. The Court of Appeal agreed with the interpretation of the lower court. The appellants also claimed that the lower court decision distorted the balance between workers and secured creditors. The Court of Appeal disagreed saying that the protection of wages under WEPPA is limited temporally and by amount, and that Parliament had considered this balance when passing the legislation. 

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The Nova Scotia legislature has introduced Bill 33, the Securities Transfer Act (STA). The bill received third reading on May 4th, 2010.

STA legislation in Canada is based on the Uniform Securities Transfer Act ("USTA") - a model act that was developed and endorsed by the USTA Task Force of the Canadian Securities Administrators. The intent behind this legislative initiative is to have substantively uniform statutes across the country governing the holding and transfer of securities and other investment property. The STA affects how security interests in investment property are granted and perfected.

If the Act comes into force in Nova Scotia, then Prince Edward Island will be the only Canadian province without STA legislation.

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UPDATE

Saskatchewan has also introduced a bill to implement these location of debtor rules in that province's Personal Property Security Act.

ORIGINAL ARTICLE

As previously described (PDF) by Rupert Chartrand and Michael De Lellis of Osler, Hoskin & Harcourt LLP, a series of significant amendments to the Personal Property Security Act (Ontario) (the Ontario PPSA) were introduced through the Ministry of Government Services Consumer Protection and Service Modernization Act, 2006 (the Ontario Act) in 2007. Certain provisions of the Ontario Act have yet to be proclaimed into force, including certain amendments that would alter the “location of debtor” rules under the Ontario PPSA.

Current Rules

The Ontario PPSA contains conflict of laws rules which point to the law of the jurisdiction where the debtor is located to determine the validity, perfection, the effect of perfection or non-perfection and the priority of security interests in:

(i)                  intangibles (including accounts),

(ii)                goods that are of a type normally used in more than one jurisdiction (if the goods are equipment or inventory leased or held for lease by a debtor to others-- sometimes referred to as mobile goods), and

(iii)               non-possessory security interests in instruments, negotiable documents of title, money and chattel paper.

Under these rules, the location of the debtor is deemed to be located:

(iv)              at the debtor’s place of business if there is one;

(v)                at the debtor’s chief executive office if there is more than one place of business; and

(vi)              otherwise at the debtor’s principal residence.

Determining a debtor’s location for purposes of Ontario PPSA conflict of laws rules is rarely straightforward because the term “chief executive office” is not defined in the Ontario PPSA. Consider the following scenario. A Nova Scotia company has its registered or head office in Toronto, has offices in three other Canadian provinces, including executive offices in Calgary and Regina, and is controlled from the head office of its parent corporation in Missouri. Which of these offices is the “chief executive office”? That question is not easily answered and typically leads to lawyers registering in each jurisdiction where the “chief executive office” could potentially be located. This approach is inefficient and costly.

Amendments

The Ontario Act proposes to amend the conflict of law rules such that the location of a business debtor is no longer defined by reference to the debtor's place of business or chief executive office. Instead, the location of the debtor will be determined by rules (shaded gray) regarding the debtor’s jurisdiction of incorporation, which are much easier to apply. This would also make the Ontario PPSA rules regarding the location of a debtor substantively similar to those under Article 9 of the Uniform Commercial Code.

As noted above, amendments to “location of debtor” rules in the Ontario PPSA are not yet in force. It seems the Ontario government is waiting for other Canadian jurisdictions to follow suit before proclaiming the “location of debtor” amendments into force; uniformity of rules being the objective. A step toward uniformity was taken on March 31, 2010 when Bill 6 received Royal Assent in the British Columbia Legislature becoming the Finance Statutes Amendment Act, 2010 (the BC Act) (see s.43). The BC Act includes amendments to the Personal Property Security Act (British Columbia) (the B.C. PPSA) that adopt the same “location of debtor” rules as the Ontario PPSA. However as with the “location of debtor” rules in the Ontario Act, the B.C. PPSA amendments will not come into force immediately.

We will continue to provide updates in this space as to the progress of PPSA amendments across the remaining Canadian provinces and territories.

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