Considerations on forbearance and enforcement of security on Canadian loans

Introduction   

The legal landscape for secured lending in Canada is well established. Across Canada, all of the common law provinces and territories have personal property legislation and registration systems that allow lenders to confidently take security, and an equally secure regime exists in the Province of Quebec. Further, where restructuring or enforcement proceedings are required, Canada has the Bankruptcy and Insolvency Act (BIA) and the Companies’ Creditors Arrangement Act (CCAA), which are federal statutes and can be implemented across the country.

Lenders can rest assured that they can and will be entitled to enforce their security if and when necessary. The lead up to enforcement, however, can be less black and white and significantly more grey. Where a borrower is in default, a lender is often faced with the challenge of determining what response is appropriate. Responses can range from a simple acknowledgement, to a default notice, a forbearance agreement or immediate steps to enforcement.

A lender may agree to forbear for many reasons and on many terms. This article sets out just a few of the legal considerations that are specific to Canadian law and the Canadian legal regime, which lenders should consider in determining whether to forbear and on what terms.

Jurisdiction

The province where a borrower is headquartered as well as the province or provinces where its assets are located can be a key consideration. While a number of the provinces across Canada have sophisticated commercial courts and/or experienced commercial judges, others do not. In certain provinces, commercial hearings can only be scheduled periodically. Further, different provinces may have additional local procedures that are required to be followed in order to commence a proceeding. In the Province of Quebec, for instance, the lender must send and file “prior notices” at least 20 days in advance of an enforcement on mobile assets and 60 days in advance of an enforcement on immobile assets. In other provinces, it is still far more common for receivers to be appointed privately than through court order, and succeeding in a court application can be challenging without prior consent to the appointment.

These local considerations in filing for and/or enforcing security may factor into a lender’s agreed forbearance period, cure periods for curing defaults and/or governing laws and/or attornment to jurisdiction. Therefore, it is critical to get the right advisors and expertise based on the relevant jurisdictions.

Business operations and collateral base

Collateral make up is crucial to structuring a forbearance. Of course this is a crucial consideration for any lender in any jurisdiction, but within Canada, there are a number of additional Canadian legal considerations, which again, may impact the terms of a forbearance.

Understanding whether assets dispersed across several provinces is important. If assets or inventory are located in remote parts of the country, can they easily be consolidated?  If assets are mobile, such as aircraft, vehicles or otherwise, has the lender complied with all elements of the provincial personal property systems in every province?

Additional consideration should be given to the level of regulation in the industry in which the borrower operates. Companies that are in certain industries, such as transportation, are federally regulated and are subject to the Canada Labour Code. Commonly, the issue of additional requirements for termination and severance arise, including the personal liability of directors for such payments. In the event that the borrower requires licenses to operate its business, such as businesses in the cannabis industry, a debtor must generally remain in possession of its assets in order to restructure, which means that the appointment of a receiver may not be the ideal remedy for a lender. In those instances, a lender may consider including provisions in the forbearance agreement with respect to a cooperative CCAA filing or a lender led CCAA filing.

Position of management / the board

The degree to which management and the board are experienced, demonstrate cooperation and have a clear path towards a turn around and repayment can play a significant role in forbearance terms. Conversely, in many instances management and/or the board may lack sophistication, bandwidth or experience or have other considerations which are unhelpful to a situation. In such situations, a lender may want to lay the ground work early for the appointment of a chief restructuring officer, operational consultant or additional interim management. Where this is not immediately necessary, it may still be advisable to include in the forbearance agreement a provision granting the lender the right to require the borrower to retain additional help upon request. Cost and pricing, as well as consent rights, should also be negotiated.

Lenders may also wish to request observer status at board meetings (or in some instances a seat on the board). However, before proceeding with the latter, further consideration should be given as to whether the benefits outweigh any corresponding risks.

Employee and pension considerations

It is important for a lender to understand the employee base of the borrower. Are employees unionized? Does the borrower maintain any registered pension plans? If so, do any of them have a defined benefit component?

A key consideration for lenders relates to borrowers that sponsor defined benefit plans.  As a result of the Pension Protection Act, solvency deficiencies and liability for special payments (which previously did not have priority) will now have priority over all other claims, including secured lender claims.¹ While the grandfathering provisions of the statute defer the enactment of the priority claim for most situations until 2027, lenders should consider whether forbearance terms with respect to monitoring or retiring defined benefit plans should be considered.

Additionally, in Canada, there is personal liability and, in some instances, priority for other employee related requirements, such as payroll deductions and remittances to applicable tax authorities.  Lenders should require their borrowers to remain up to date in terms of those super priority amounts.

Conclusion

While there are many other considerations that a lender will need to make when determining how to work with a borrower in default, the foregoing provides a few considerations specific to the Canadian legal regime that may impact forbearance terms or may lead to lenders making different decisions than they might otherwise make. Ultimately, every situation will have its own nuances, and lenders, together with their financial and legal advisors, will assess situations with due consideration to all the circumstances.

1  See Canadian legislation aimed at protecting pension plans may mean significant changes for lenders, borrowers and employees, Norton Rose Fulbright International Restructuring Newswire (Q2 2023).

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