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

Lenders should be aware that when taking security in certain goods with serial numbers in Canada, the rules regarding registration of financing statements vary across provincial jurisdictions; a detail that, if overlooked, could impact the priority of the lender’s security interest.

In Ontario, where the collateral includes motor vehicles (as defined in Ontario’s Personal Property Security Regulation 56/07), including the vehicle identification number will provide the lender with protections against: (i) purchasers or lessors of a motor vehicle that is proceeds and classified as consumer goods, and (ii) purchasers of a motor vehicle classified as equipment sold other than in the ordinary course of business of the seller.

In some other provinces, the rules regarding goods with serial numbers are broader and can include goods other than motor vehicles. These goods are referred to as “serial number goods” as defined in the personal property security regulations of some other Canadian jurisdictions. For example, in Alberta, “serial numbered goods” includes aircraft and boats; two types of goods not covered by Ontario’s definition of motor vehicle. For serial numbered goods that are classified as equipment, if a lender chooses not to register the serial number, the registration is valid; however, the lender will lose the priority of their interests in the equipment to purchasers and any other secured party who has included the serial number. In the case of a serial numbered good classified as a consumer good, the failure to register the serial number means the registration is invalid and leaves the registrant unperfected.

As the applicable rules vary from province to province, lenders should consult the applicable personal property security act when dealing with collateral that is located in several provinces. However, as a general rule, it is prudent to always include the serial number when registering against goods that fall within the definition of “serial numbered goods” or “motor vehicles”.
 

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Loan agreements governed by Ontario law commonly include a provision that is intended to address the maximum effective annual rate of interest that is chargeable thereunder without contravening the usury provisions of the Criminal Code (Canada). For purposes of the Criminal Code (Canada), “interest” is defined as including ordinary commercial interest, fees (other than those required to be paid to governmental authorities in connection with perfecting security) and expenses (such as legal expenses, including a lender’s legal expenses if the borrower has agreed to pay them) and, therefore, is not limited to what most bankers think of when they refer to “interest”.

In U.S. law governed loan agreements, the provision limiting interest is usually framed that if interest at the stated rates would result in unlawful rates, then the interest rates shall be reduced to the maximum lawful rates. Canadian courts have refused to enforce such a provision on the basis that they would be required to rewrite the contract by determining which, and in what sequence, element(s) of “interest” should be reduced in order to attain an effective annual interest rate that does not exceed the lawful rate. The result of the Canadian courts’ refusal to enforce such provisions has been, in some cases, that lenders have been denied all “interest”.

Accordingly, to be enforceable, provisions limiting interest should specify the order in which the elements of “interest” shall be reduced so that the effective annual rate of interest provided for in the loan agreement will not be in contravention of the Criminal Code (Canada) (for example, the interest rate on the loan shall be reduced first, then fees shall be reduced etc. until the lawful effective annual rate of interest is attained).

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On December 21, 2011, the Canadian federal government released a consultation paper (the Consultation Paper) containing certain proposals to strengthen Canada’s anti-money laundering (AML) and anti-terrorist financing (ATF) legislative framework, which is administered through the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLA) and related regulations (collectively, AML Legislation). The full text of the Consultation Paper is available here. The deadline for submitting comments on the proposed amendments is March 1, 2012.

On November 7, 2011, the Canadian federal government had released a consultation paper proposing certain amendments to the AML Legislation. Whereas the amendments proposed in November 2011 were limited to customer identification and due diligence and were meant to mainly address Canada’s rating of non-compliance with a recommendation of the Financial Action Task Force (FATF), the Consultation Paper released in December 2011 proposes a broader set of amendments. (See our Osler Update dated November 17, 2011.)

The key objectives of the Consultation Paper are stated to be the following: 

• reviewing Canada’s AML/ATF legislative framework in preparation for the upcoming Parliamentary review of the AML Legislation (this review is required by statute every 5 years);
• addressing the recommendations of an independent consultant included in the Report of the 10-Year Evaluation of Canada’s AML/ATF regime, released in March 2011;
• responding to stakeholder concerns, raised by both the private sector and federal regime partners, particularly law enforcement and intelligence agencies;
• meeting Canada’s international commitments by improving Canada’s compliance with the recommendations of FATF;
• responding to the interim report of the Special Senate Committee on Anti‑Terrorism, entitled Security, Freedom and the Complex Terrorist Threat: Positive Steps Ahead;
• responding to the final report of the Commission of Inquiry into the Investigation of the Bombing of Air India Flight 182, entitled Air India Flight 182: A Canadian Tragedy; and
• responding to the 2009 Privacy Commissioner of Canada’s Audit Report of the Financial Transactions and Reports Analysis Centre of Canada.

The amendments proposed by the Consultation Paper fall into the following categories, details of which are available by clicking "Continue Reading" below:

1. strengthening customer due diligence standards;
2. closing gaps in Canada’s regime;
3. improving compliance, monitoring and enforcement;
4. strengthening information sharing in the regime;
5. introducing a list of potential countermeasures; and
6. updating reporting requirements.

This entry is based on the Osler Update Canadian Government Proposes Comprehensive Amendments to Anti-Money Laundering Legislation authored by Stephen D.A. Clark and Kashif Zaman

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Intercreditor agreements often include a provision which prevents the junior creditor from taking enforcement action against collateral upon default under the junior debt for a specified period of time after notice of the default has been given to the senior creditor – this is described as the “standstill period”. The purpose of the standstill period is to give the senior creditor an exclusive period of time during which the senior creditor may assess its rights and, if the senior creditor determines that it will enforce its rights against the collateral, to so enforce such rights without interference from the junior creditor.

The length of the standstill period is usually negotiated, as the junior and senior creditors have competing interests. The junior creditor will usually favour a shorter standstill period, as it will be anxious to begin enforcement action upon default. However, the senior creditor will usually favour a longer standstill period, which will allow them more time to implement their own strategy for enforcement against the collateral. While the length of time of standstill periods vary, most are between 90 and 180 days. There are various factors specific to the circumstances of each transaction that can affect the length of time of the standstill period, including:

• the type and location of the collateral;
• the borrower’s business; 
• the amounts of the obligations owed to the junior and senior creditors under their respective credit facilities; and
• the relative bargaining power of the parties involved in negotiating the standstill period (i.e. the junior and senior creditors). 

Regarding the collateral, its type must be considered; specifically, whether it is perishable or could otherwise quickly diminish in value and how liquid and readily marketable it is. Perishable and liquid collateral usually justify a shorter standstill period. The location of the collateral must also be considered. If the collateral is located in multiple jurisdictions, a longer standstill period could be justified. For example, in a situation where the borrower’s collateral consists mainly of perishable inventory in a single warehouse which can easily be sold, the junior creditor can expect that the senior creditor will agree to a relatively shorter standstill period. However, if the collateral is mostly non-perishable equipment located in multiple jurisdictions, the senior creditor can expect that the junior creditor will agree to a relatively longer standstill period.

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The British Columbia (“BC”) legislature has introduced amendments to expressly identify transferable licences as personal property under the BC Personal Property Security Act (the “BC PPSA”). These amendments (the “Amendments”) received Royal Assent on November 24, 2011 and are expected to come into force by regulation in 2012. As a result of the Amendments, the BC PPSA will expressly permit the creation of security interests in transferable licences. In BC, this will facilitate the provision of credit on the security of licences provided as collateral.

The Amendments will expand the definition of “licence” under the BC PPSA to include any transferrable grant of rights entitling the holder of such rights to deal with or acquire personal property or provide services. The expanded definition is intended to capture transferable licences generally, including liquor, fishing and forestry licences, whether issued under a regulatory regime or by private contract.

By expanding the definition of “licences”, the Amendments will provide outcomes similar to the 2008 Supreme Court of Canada decision in Saulnier v. Royal Bank of Canada (“Saulnier”), in which a licence to participate in the fishery coupled with a proprietary interest in the fish harvested thereunder was ruled to be a “bundle of rights” sufficient to fit within the extended definitions of “personal property” in the Nova Scotia Personal Property Security Act.

The Personal Property Security Acts (“PPSAs”) of most other Canadian provinces and territories (including Ontario) do not have a definition for the term, “licence”; debtors and creditors in those jurisdictions must rely on the applicability of the factors in Saulnier to their particular circumstances in respect of any licences purported to be provided as collateral. The PPSAs of Saskatchewan, the Northwest Territories and Nunavut have definitions of the term, “licence” that are similar to that in the Amendments.

The Amendments will also provide that a licence provided as collateral may be disposed of, retained or held only in accordance with the terms and conditions of such licence and the terms and conditions applicable by law or contract to such licence. The Amendments will require any secured party who wishes to seize a licence on default to provide notice of such seizure to the relevant minister if the licence was granted pursuant to legislation or, in any other case, to the grantor of the licence; notice of seizure to the debtor will continue to be required, as is the case under the current BC PPSA.

It will be interesting to see if the inclusion of the defined term, “licence” in the PPSAs of BC, the Northwest Territories, Nunavut and Saskatchewan leads other Canadian jurisdictions to enact similar legislation.
 

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