Guidelines

Section C: Realization and Claim Submission

2 Realization

If a borrower fails to comply with the Demand for Repayment, the lender must take any or all of the following measures to minimize its loss:

• seize, take possession of and sell or engage a third party to sell secured assets;
• realize on any security and guarantees or suretyships;
• realize on any insurance policies;
• reach and fully implement a compromise settlement with the borrower or with a guarantor or surety or any other person on behalf of the borrower, guarantor or surety;
• take legal action where the cost of the proceedings is estimated to be less than the amount to be recovered;
• file a writ of execution and execute where appropriate.

Regs ss.37(3)

Lenders should apply the same policies and procedures used in their normal business practices to minimize any losses. For example, if a lender normally insures secured assets once a loan has defaulted, it should follow this practice in the case of CSBF loans.

Where the secured assets are sold, the lender should provide with the claim documentation any appraisals obtained to substantiate the reasonableness of the sale price. If the asset is sold to a related party, an appraisal must be provided with the claim. Item 6.2, Section B

Lenders do not require the CSBFP Directorate's permission to sell or abandon assets taken as security or to reach a compromise with any of the parties obliged to repay a loan. They should consider the relative cost effectiveness of realizing or not realizing on the security and the method chosen for realization. Before incurring legal costs to obtain judgment, a lender should investigate whether the parties involved have the means to satisfy it. Before realizing on an asset, the lender should determine whether the sale proceeds will exceed the realization costs, including assessing the amount and validity of any priority claims (i.e., government priority claims).

Note: If a lender has valid and enforceable security, the fact that a lender may abandon the security because it is unable to realize on the security or it is not cost effective to realize on the security, will not invalidate a claim for loss. However, a lender is required to provide documentation substantiating the realization or non realization of secured assets when a claim for loss is submitted.
Bulletin – December 1999

Methods of Realization: Realization on business assets can include sale by auction, advertisements and bids, negotiations with potential interested parties, etc. It can also include assignment of the debt to a third party. In this case, the lender typically receives a flat sum in exchange for the obligation. In reviewing a claim for loss, the CSBFP Directorate will expect documentation of the reasonableness of any decision to assign, including the relative value of the lump sum to the obligation, the prospects for realization by more conventional methods, and justification for abandoning recovery against guarantors or sureties. The transaction between the lender and the third party is then finalized and no further monies are expected to be paid to the lender by that third party

Environmental Problems: If it is suspected that an environmental problem does or may exist, lenders should apply the same policies and procedures used in its normal course of business. Any decision to abandon security on the basis that realization would make a lender responsible for environmental clean-up should be supported with relevant documentation.

2.1 Other Assets of the Business

Since the borrower has an obligation to repay the total CSBF loan, all assets of the business are subject to realization. Where a borrower has business assets other than those held as security for the loan, the lender is expected to follow its normal lending practices in determining the cost effectiveness of realizing on those other assets.

2.2 Guarantees or Suretyships (personal or corporate)

A lender must take reasonable steps to collect from guarantors or sureties. Such steps can include legal action and/or compromise settlements. There is no limit to the amount a lender may realize on corporate guarantees or suretyships. Realization on personal guarantees or suretyships is limited to the lesser of:

• the amount of the guarantees or suretyships signed by the guarantors or sureties plus interest, taxed costs, legal fees and disbursements and other costs, and;
• 25% of the CSBF loan disbursed in cases where the loan disbursed is less than the loan registered, plus interest, taxed costs, legal fees and disbursements and other costs.

Note: Lenders are encouraged to settle out-of-court on any guarantees or suretyships and to resort to a legal judgement only when it is cost effective. Abandoning procedures against guarantees or suretyships because realization is not cost effective will not invalidate a claim for loss. However, a lender is required to provide documentation substantiating the realization or non realization of guarantees or suretyships when a claim for loss is submitted.

2.3 Liability of Sole Proprietors and Partners

A borrower operating as a sole proprietorship or as a partnership is liable for 100% of the repayment of a CSBF loan.

Upon default, the lender can realize on the personal assets of the sole proprietor or partner up to, in the aggregate, 25% of the amount of the loan that was disbursed plus interest, taxed costs, legal fees and disbursements and other costs. This liability is in addition to personal guarantees or suretyships from any other person. This liability may be collected by a voluntary settlement or by legal procedures. Regs ss.37(4)

2.4 Compromise Settlements

A lender can, at its discretion, make compromise settlements when realizing on guarantees or suretyships or on the personal assets of sole proprietors or partners, based on the financial situations of the obligants. Such settlements can be made before or after a judgement has been obtained. The reasons and basis for compromise settlements must be well documented. Examples of documentation to support a subsequent claim for loss include: Credit Bureau Reports, Investigation Reports, recent Personal Statements of Affairs, letters of negotiation between lender and obligant or their representatives, proof of payment of the settlement amount and, release of the borrower, guarantor or surety.