Section 25 of the Canada Small Business Financing Regulations
Non-Compliance with Security Requirements and Effect of Borrower Fraud
The purpose of this bulletin is to clarify the Canada Small Business Financing Program's (CSBF Program's) application and interpretation of section 25 of the Canada Small Business Financing Regulations (Regulations) respecting the Minister's ability to pay lenders' claims for loss in circumstances where a loan has failed to comply with the requirement that it be secured by valid and enforceable security.
In order for the Minister to pay a lender's claim for loss, a lender is required to demonstrate that it has complied with the conditions set forth in the Canada Small Business Financing Act (Act) and the Regulations, including the condition that valid and enforceable security was obtained against the assets financed by the loan.
The CSBF Program recognizes that a lender's failure to comply with the conditions under the Act and the Regulations may occur as a result of fraudulent action by the borrower. In accordance with section 25(d) of the Regulations, the Minister may pay only that portion of a lender's claim for loss to which the non-compliance does not apply. For example, in a case where a lender failed to obtain valid and enforceable security due to fraud by the borrower, the Minister would not pay any loss attributable to such non-compliance. The Act and the Regulations do not provide an exception for cases where non-compliance was caused by fraud of the borrower.
Lenders are advised to consult the applicable sections of the Act and the Regulations including, without limitation, sections 14 and 25 of the Regulations.
The CSBF Program is aware that lenders may be faced with situations where, despite lenders' diligence, borrowers may have fraudulently caused the loans to be non-compliant with the requirements under the Act and the Regulations. The CSBF Program intends to examine this issue and, if changes are to be considered, stakeholders will be consulted.
The CSBF Program will issue, from time to time, additional bulletins that address matters of concern to stakeholders and the CSBF Program.
If you have any comments on the points raised by this topic, please feel free to contact us. We encourage you to submit any topics of interest that you would like to see addressed in future bulletins.
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