Section A: Making a CSBF Loan
Security for CSBF loans is divided into 3 groups:
Lenders must ensure that the security is made valid and enforceable as of the date of the first disbursement on the CSBF loan. Regs ss.14 (1)
This security is mandatory. It includes first ranking security and alternate security where applicable.
First ranking: When a CSBF loan is made to finance the purchase of real property or immovables or equipment, the security must consist of a valid and enforceable first charge on the assets financed. The security is to be registered under the appropriate registry system so that ranking is not compromised and realization procedures, if required, can be enforced against the secured assets. Regs ss.14(1)
A loan that finances real property or immovables must be secured with a first mortgage on the property. If such a loan is secured by any other document, the lender should ensure that all necessary steps are taken to create a registered security interest in the real property or immovables, such that the property can be realized upon in the same manner as if it had been secured by a mortgage.
In determining whether "valid and enforceable security" has been obtained the facts of each loan must be assessed against: (i) in the case of provinces other than the Province of Québec, the applicable provincial personal property security and real property security legislation, (ii) in the case of Québec, the Civil Code of Québec as it relates to hypothecation of personal and real property as security.
When making a loan, the lender must ensure that the requirements for a valid and enforceability have been met by considering the following factors, among others:
- the advancement of funds by the lender to the borrower;
- the registration of the security interest or charge over real or personal property in the appropriate provincial registry system;
- the signed security agreement by the borrower containing a description capable of identifying the collateral;
- the borrower having rights in the collateral, the determination of which will be based firstly, on accepted commercial practice, and secondly, on the unique facts in each claim.
Lenders are reminded that additional legislation (provincial, municipal or otherwise) may impose further obligations on a lender to ensure that valid and enforceable security has been obtained. Bulletin – January 2009
Alternate security: If a CSBF loan finances leasehold improvements or computer software, the lender can take either:
- a first ranking security on the assets financed, or;
- security on other business assets, even if these other assets are already subject to prior charges. These other business assets, therefore, become the primary security for the loan. In this case, the lender must treat such security in the same manner as any other primary security. Regs ss.14(3)
Note: Alternate security must not be treated as additional security.
Equal ranking security: If the purchase or improvement of an asset is financed by a CSBF loan and other sources of financing (other than the borrower's funds), all security taken on the assets financed must be equal in rank. Regs ss.14(2)
30 days equal ranking: The objective of the 30 days equal ranking provision is to consider as a whole any project submitted by the borrower. Regs ss.14(4)
The provision states that if, within 30 days (before or after) of the first disbursement of a CSBF loan, the lender makes an initial disbursement under a conventional term loan to finance assets that would have been CSBF-eligible, all security taken on CSBF-eligible assets for the term loan and the CSBF loan will become equal in ranking and in proportion to the total financing.
The 30-day equal ranking applies only to all assets that would be eligible for a CSBFA loan and that are held as security for one or more conventional term loans.
Example: A lender makes the first disbursement on a CSBF loan of $100,000 for leasehold improvements on June 5. On July 3 of the same year the lender makes the initial disbursement to the same borrower on a term loan of $300,000 for equipment, secured by the equipment, $200,000 in securities held by the borrower. In realization, the proceeds from the security on the leasehold improvements and the equipment only taken for the two loans would be shared based on the outstanding loan balances. In this example, the sharing would be 25% for the CSBF loan and 75% for the term loan, assuming both loans were amortized over the same period.
Where a conventional loan is secured by a security in the borrower's personal property (commercial in nature and that would be eligible for a CSBF loan) without taking a personal guarantee, the lender shall take and retain an equal-ranking security in the same personal property to secure the loan granted under the CSBFA.
Highest available rank: If, at the time of the first disbursement of CSBF loan funds, prior security exists on the assets financed, the lender's security shall be a charge of the highest available rank. As a general rule, this situation will arise when the loan is made for improvements to an asset on which there is already a prior charge. Regs ss.14(5)
After acquired clause: Where the prior charge flows from an "after-acquired clause" in the security (e.g. a general security agreement or universal movable hypothec2) held by the lender or another creditor, the lender is required to obtain a postponement of the security for the assets being financed by the loan. This will result in the CSBF loan being secured by a first charge on the new asset. Regs ss.14(5); Bulletin – April 2000
Borrower and landlord not at arm's length: The lender shall take security on the real property or immovable where:
- leasehold improvements are being financed; and
- the borrower and the landlord are not at arm's length (as defined in the Income Tax Act, see Section D). Regs ss.14(6)
In some jurisdictions the only way the lender can secure a mortgage from the landlord is to take a guarantee or suretyship for 100% of the leasehold improvement loan and secure the guarantee or suretyship with a collateral mortgage on the property for the same amount. Where the landlord is an individual and this is the only guarantee or suretyship held for the loan, if the guarantee or suretyship does not clearly indicate that it is taken only for the benefit of the collateral mortgage, a lender can:
- realize on the property held under the collateral mortgage, and;
- if the proceeds from the property liquidation were insufficient to repay the indebtedness, realize on the personal assets of the guarantor or surety (the landlord) for an amount not exceeding 25% of the original loan amount.
Where a borrower conducts its business on personal premises and requests a loan to finance improvements to the real property or immovables, the lender must take the real property or immovables as security. Where the premises occupied by the small business can be separated from the borrower's personal residence, the lender should be receptive to a request by the borrower to subdivide the property
The lender may further secure the CSBF loan with additional security on any other assets of the business. Regs s.17
A lender may wish to further secure a CSBF loan by way of a guarantee or suretyship, personal or corporate. The guarantee or suretyship may provide for interest that would ordinarily be included in any judgment that the lender may obtain. See Section C, Item 2.2 of these Guidelines for realization on guarantees or suretyships.
Personal guarantee or suretyship: A lender can take unsecured personal guarantees or suretyships up to 25% of the original amount of CSBF loan disbursed.
In addition to the 25% principal amount, the guarantee document may provide for payment of interest on any judgment, taxed costs, legal fees, disbursements, and other costs relating to legal proceedings against the guarantor or surety. A CSBF loan is ineligible if the lender has taken a personal guarantee or suretyship that is secured by collateral assets.
Example: A leasehold improvement loan is authorized for $200,000, but only $175,000 is disbursed. The loan defaults with an outstanding principal balance of $95,000. The personal guarantee, if taken, may be enforced for $43,750 ($175,000 x 25%), plus any interest, taxed costs, etc., even if the guarantee or suretyship was originally taken for $50,000 ($200,000 x 25%).
When personal guarantees or suretyships are taken from more than one person, the liability can be joint and several or individual, but the aggregate guarantee cannot exceed 25% of the amount of the loan disbursed. If separate guarantees are taken from several guarantors, and the lender intends that the guarantees be joint and several, either the guarantee documents or some other loan documentation should indicate this intention. Regs s.19
As a rule, a borrower operating as a sole proprietorship or partnership is liable for 100% of the repayment of the CSBF loan disbursed. The lender is not required to prepare any documents limiting the sole proprietor or partner's liability to 25%.
If, at the time the first disbursement of the loan funds is made for the CSBF loan, a general unsecured guarantee or suretyship already exists or is signed and the loan is to be included under this guarantee or suretyship, the lender and the guarantor or surety must sign a document that limits the guarantee or suretyship, applicable to the CSBF loan, to 25% of the amount of the loan disbursed.
The restriction limiting personal guarantees or suretyships to 25% of the amount of the loan disbursed does not preclude a lender from also obtaining an assignment or postponement of shareholder's loans, because such an assignment or postponement would not constitute a demand for payment upon the guarantor or surety and has no realizable value in the event the borrower becomes insolvent.
1The term "guarantee" is used in the context of the Common Law, while the term "suretyship" is used in the context of the Civil Code of Quebec. (Back to reference)
2 The term "General Security Agreement" or "GSA" is used in the context of the Common Law, while the term "universal movable hypothec" is used in the context of the Civil Code of Quebec. (Back to reference)
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