Canada
Common forms of guarantees
Guarantees can take a number of forms. Two common forms are performance bonds and payment guarantees.
Performance bonds
A performance bond describes a financial undertaking used to protect a buyer against the failure of a supplier to deliver goods or perform services in accordance with the terms of a contract. The issuer of the bond undertakes to pay to the buyer a sum of money if the seller fails to deliver the goods or perform the contracted services on time or in accordance with the terms of the contract.
Payment guarantees
A payment guarantee provides that the guarantor will be obligated to pay either all outstanding monies owed under the primary contract or an amount up to a fixed amount if the debtor or obligor fails to make such payments.
Common forms of security
The common types of security agreements are as follows.
General security agreements (GSAs)
A GSA normally charges all present and after-acquired personal property of the debtor, but can be limited to specific items of personal property and can include a floating or fixed charge against the debtor’s interest in real property. In Québec, the equivalent of a GSA is a hypothec which charges present and after-acquired movable property (ie personal property).
Pledges
Pledges require debtors to deliver certain assets, such as securities or negotiable instruments, to the creditor.
Mortgages
A mortgage charges the real property of the debtor. In Québec, the equivalent of a mortgage is a hypothec which charges immovable property (ie real property).
Additionally, it is possible to grant security over all of the assets of the debtor (which is called in Québec the universality of the assets of the debtor). Granting security over all of a corporation’s assets will tend to be achieved by way of a debenture which will include:
- a mortgage over real property (and, in Québec, that would be a hypothec over the universality of all the immovable assets);
- a fixed charge over assets which are identifiable;
- a floating charge over fluctuating and less identifiable assets; and
- an assignment by way of charge over receivables and contracts.
Are there any restrictions on lending and borrowing?
Lending Banks
The operation of domestic and foreign banks is governed by the Bank Act (Canada) which requires that a bank receive authorization to carry on banking activities in Canada. The classification of the bank as a Schedule I Bank (Canadian-owned banks), Schedule II bank (foreign bank subsidiaries) or Schedule III bank (foreign banks operating through branches in Canada) determines which provisions of the Act apply to such bank.
Section 510(1) of the Bank Act (Canada) provides that:
‘Except as permitted… a foreign bank or an entity associated with a foreign bank shall not (a) in Canada, engage in or carry on (i) any business that a bank is permitted to engage in or carry on under this Act, or (ii) any other business; (b) maintain a branch in Canada for any purpose; (c) establish, maintain or acquire for use in Canada an automated banking machine, a remote service unit or a similar automated service, or in Canada accept data from such a machine, unit or service; or (d) acquire or hold control of, or a substantial investment in, a Canadian entity.’
An exemption to section 510(1) is found in section 524(1) of the Act which permits a foreign bank to establish a branch in Canada upon approval from the Minister of Finance.
A foreign bank can avoid the application of the Bank Act (Canada) while making loans to Canadian borrowers by ensuring that the bank’s activities in Canada do not amount to engaging in or carrying on business in Canada. This is a question of fact and depends on the circumstances of each individual situation.
Foreign banks may also establish Representative Offices in Canada with the required approval under the Bank Act and may promote the services of the foreign bank and act as a liaison with non-Canadian Offices of the foreign bank, but may not otherwise carry on business.
Borrowing
Borrowers are generally not regulated; however, some regulations apply if the borrower is classified as a consumer, depending on the Province’s consumer legislation.
What are common lending structures?
Lending in Canada can be structured in a number of different ways to include a variety of features depending on the commercial needs of the parties.
A loan can either be provided on a bilateral basis (a single lender providing the entire facility) or syndicated basis (multiple lenders each providing parts of the overall facility).
Syndicated facilities by their nature involve more parties (such as agents and trustees who fulfil certain roles for the finance parties) and are more highly structured and involve more complex documentation. Larger financings will typically be done on a syndicated basis with one of the syndicate taking the lead in coordinating and arranging the financing.
Loans are structured to achieve specific objectives (eg term loans, working capital loans, project facilities and letter of credit facilities).
Loan durations
The duration of a loan can vary among:
- a term loan, which is provided for an agreed period of time, usually 3-5 years;
- a revolving loan, which allows for the loan amount to be withdrawn, repaid and redrawn until the maturity date;
- an overdraft, which is provided on a short-term basis to solve short-term cash flow issues; and
- a standby loan, where the lender gives a commitment to advance a specified amount of money on demand or at a future date.
Loan security
A loan can either be secured, unsecured or guaranteed. For more information, see Giving and taking guarantees and security.
Loan commitment
A loan can also be:
- committed, which means that the lender is obliged to provide the loan if certain conditions are satisfied; or
- uncommitted, which means that the lender has discretion whether or not to provide the loan.
Loan repayment
A loan can be repayable on demand, on an amortizing basis (in instalments over the life of the loan) or on scheduled repayment dates (usually meaning the loan is repayable in full at maturity).
What are the differences between lending to institutional / professional or other borrowers?
Generally, there are no differences between lending to institutional/professional borrowers and other borrowers. There may be additional considerations regarding the taking and enforcing of security for secured loans and execution requirements.
Do the laws recognize the principles of agency and trusts?
Yes, both principles are recognized as a matter of Canadian law.
For instance, it is possible to appoint an agent to act on behalf of other parties and a trustee to hold rights and other assets on trust for the lenders or secured parties.
Are there any other notable risks or issues around lending?
Generally
Enforceability
Loan agreements and other finance documents are subject to general contractual principles. Enforcement of contracts is subject to applicable bankruptcy, insolvency, moratorium, reorganization and other similar laws relating to or affecting the enforceability of creditors’ rights generally, general equitable principles and the discretion of courts in granting equitable remedies.
Interest
Except with respect to mortgages on real property and, in Québec, hypothecs subject to the provisions of the Civil Code of Québec, a lender may charge any rate of interest pursuant to the Interest Act (Canada), provided that if the rate of interest is payable at a rate or percentage per day, week, month or for any period less than a year, the lender discloses in the agreement the yearly rate or percentage of interest to which the other rate or percentage is equivalent. If such disclosure is not included in the agreement, no interest exceeding the rate or percentage of 5% per annum is chargeable, payable or recoverable on any part of the principal money. In addition, the Criminal Code (Canada) prohibits the charging of annual interest that exceeds 60%. Any rate above 60% is a ‘criminal rate’ and is illegal. Debtors may use such a finding as a reason to avoid repayment. ‘Interest’ is broadly defined under the Criminal Code (Canada) and includes all charges and expenses, including fees, fines, penalties and commissions.
Environmental issues
Lenders must also be mindful of the various environmental liabilities and obligations that apply under federal, provincial and territorial laws to their debtors. In certain circumstances, these liabilities and obligation can extend to the lender. This can arise if the lender is found to have exercised control or direction over the day-to-day operations or financial management of the debtor or becomes the owner of a contaminated site by foreclosure or similar action.
Specific types of lending
For secured lending to individual debtors, lenders should consider the application of various provincial and territorial legislation which protects the rights of spouses. For more information, see Giving and taking guarantees and security.
Standard form documentation
Loan documents and other finance documents are generally the bank’s standard form documentation.
Are there any other notable risks or issues around borrowing?
Borrowers should consider the risks associated with defaulting under the loan agreements and ancillary documents and the rights of the lender on such default.
Marc Philibert
Partner
DLA Piper (Canada) LLP
[email protected]
T +1 514 392 8442
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