Federal Security Interests Research Study and Report 2000

APPENDIX A

Summary of legislative and regulatory provisions relating to Banks and other financial institutions

Atlantic Canada Opportunities Agency Loan Insurance Regulations, SOR/90-289, ss. 5(1)(f).

This regulation enables the Atlantic Canada Opportunities Agency to provide loan insurance to certain individuals and businesses.; Pursuant to s. 5(1)(f), one of the criteria; that must be satisfied is that "the lender acquires enforceable security for the repayment of the loan by way of a security interest in a form that is consistent with standard banking practice".

The regulations also provide a procedure to be followed to recover the debt from the Crown in the event of default by the borrower.; Under s. 10, the financial institution must begin by making a formal demand to the applicant and take all reasonable steps to protect its rights and realize on the security.; Once this is done, the lender can make a claim under the loan insurance agreement.; Pursuant to section 11, this claim must contain "all of the information that is required by the Agency in order to determine the amount that is payable".; The maximum amount payable by the Agency to a lender in respect of a claim is defined in subsection 12(1).;

Bank Act, 1991, c. 46, s. 369, 419, 425-439, 473, 552, 627, etc.

Section 369 outlines the order of priority in the event that a bank becomes insolvent.; (Section 627 is identical except that it applies to authorized foreign banks.); Section 419 stipulates that a bank shall not create a security interest in any property of the bank to secure an obligation of the bank, unless the obligation is to the Bank of Canada or the Canada Deposit Insurance Corporation or the Superintendent has approved in writing the creation of the security interest.; (Section 552 is identical except that it applies to authorized foreign banks.); Section 473 states that a bank may acquire an investment in a body corporate, an interest in an unincorporated entity, or an interest in real property, if the investment or interest is acquired through the realization of a security interest held by the bank.

Aside from the above-noted provisions, sections 425 to 439 are the main provisions of the Act dealing with security interests.; These provisions are the most comprehensive of the federal statutes governing personal property security interests.; Section 427(4) creates a notice filing system where, instead of registering the security document, a bank can register a document called a notice of intention in the Bank of Canada registry.; The latter registry is created under section 427(6).; The Act also permits, at section 427(2)(b), the granting of a fixed security interest in collateral which is automatically attached to the debtor's after-acquired property (but which does not carry the inferior priority status of an equitable interest or the complexities of a floating charge).

Business Development Bank of Canada Act, 1995, c. 28, s. 15(1).

Section 15 enables the Business Development Bank of Canada to acquire, hold, assign and realize on a "security interest of any kind".; Pursuant to s. 15(2), the Bank can also acquire and hold a warehouse receipt or bill of lading as security, or take security on goods, wares and merchandise "in the same form and manner as security on such property may be taken by a bank under section 427 of the Bank Act".

Canada Deposit Insurance Corporation Act, R.S.C. 1985, c. C-3, s. 10(1), 39.13 and 39.15(6).

Section 10 of the Act enables the CDIC to "make or guarantee loans or advances, with or without security" to a financial institution for the purpose of reducing a risk to the CDIC or reducing or averting a threatened loss to the CDIC.; Section 39.13(3) empowers the Governor in Council to appoint CDIC as receiver of an insolvent; federal financial institution.; As a receiver, CDIC can take possession and dispose of the assets of the financial institution.; Section 39.15 imposes strict limitations upon the rights of other creditors if the Governor in Council exercises his powers under section 39.13.

Canada Mortgage and Housing Corporation Act, R.S.C. 1985, c. C-7, s. 27-28.

Section 27 empowers CMHC to "acquire, hold and dispose of collateral security for the repayment of loans or the payment of debentures, other evidences of indebtedness, guaranteed investment receipts or guaranteed investment certificates, made or purchased by the Corporation".; Section 28 also enables CMHC to "protect its security in respect of any indebtedness to it, make loans to the debtor and take such other measures and steps as may be required in accordance with normal mortgage practice to safeguard the interests of [CMHC]".

Canada Small Business Financing Act, 1998, c. 36, s. 4-5 and Canada Small Business Financing Regulations, SOR/99-141, s. 13-14.

Section 5 of the Canada Small Business Financing Act states that the Minister is liable to pay to a lender a specified percentage of a loss sustained by it as a result of a loan, provided that the requirements of the CSBFA and the Regulations have been met.; The Regulations outline the specific procedures and conditions in the granting and administering of Canada Small Business Financing loans and in the submission and substantiation of claims for loss for loans made after March 31, 1999.

Pursuant to section 8 of the Regulations, lenders are expected to make loans under the CSBFA with the same care as in the conduct of their ordinary business.; More specifically, section 8 states that before making a loan, a lender must (a) obtain credit references or conduct a credit check on the borrower; and (b) complete an assessment of the repayment ability of the borrower, taking into account all other financial obligations of the borrower.; In addition, section 14 states that a lender providing certain types of loans under the CSBFA must "take valid and enforceable first-ranking security in the assets of the small business whose purchase or improvement is to be financed by the loan".; Section 13 states that the borrower must pay the cost incurred by the lender for taking such securities.

Canada Student Loans Act, R.S.C. 1985, c. S-23, s. 7 and 19 and Canada Student Loans Regulations, SOR/93-392, s. 29-32.

Section 7 states that the Minister may be held liable to pay to a lender the amount of any loss sustained by it as a result of a loan made to a qualifying student provided that certain conditions are satisfied.; Section 19 provides that a guaranteed student loan made by a lender to a borrower not of full age, and interest thereon other than interest payable under section 6, is recoverable by the lender from the borrower as though the borrower had been of full age at the time the loan was made.; Section 29 of the Regulations states that where the Minister makes a payment to a lender pursuant to section 7 of the Act in respect of any guaranteed student loan, the lender shall, on behalf of Her Majesty, take such reasonable steps as the Minister may require to collect due payments of principal and interest, to realize on any security and to otherwise effect collection of the loan.; Sections 30-32 of the Regulations provide that where the Minister pays to a lender the amount of loss sustained by the lender as a result of a guaranteed student loan, Her Majesty is subrogated in and to all the rights of the lender in respect of the guaranteed student loan.

Canadian Payments Association Act, R.S.C. 1985, c. C-21, s. 17 and 31.

Section 17 empowers the Canadian Payments Association to mortgage, pledge or otherwise create a security interest in all or any property of the Association owned or subsequently acquired, to secure any obligation of the Association.; The terms "debt obligation" and "security interest" are defined in subsection 17(3).; Section 31 provides that where a receiving order or a winding-up order is made against a member of the Association, any claim with respect to certain types of property will be paid from the estate of the insolvent member in priority over any other claims.

Cooperative Credit Associations Act, 1991, c. 48, s. 2, 353, 383, 386, 395, 397, 475, etc.

Section 2 defines "security interest".; Section 353 gives an order of priority to be followed in the event of the insolvency of a cooperative credit association.; Section 383 limits the power of associations to take security interests in any property of the association to secure an obligation of the association.; Section 395 states that notwithstanding anything in this Act, an association may acquire an investment in a body corporate, an interest in an unincorporated entity, or an interest in real property, if the investment or interest is acquired through the realization of a security interest held by the association.; Section 475 states that a central cooperative credit society may create a security interest in any of its property to secure an obligation to an association of which the central is a member or to a deposit protection agency, or the government of the province in which the central is incorporated, if the agency or government is designated by the Minister.

Export Development Act, R.S.C. 1985, c. E-20, s. 10(1.1)(d) and 10(6).

Subsection 10(1.1)(d) states that the EDC, in performing its duties under the Act, is empowered to "take any security interest in any property".; Subsection 10(6) provides that the Governor in Council may make regulations governing the acquisition by the Corporation of any interest, other than a security interest or an interest resulting from the realization of a security interest, in any entity.

Fisheries Improvement Loans Act, R.S.C. 1985, c. F-22, s. 10 and Fisheries Improvement Loans Regulations, C.R.C., c. 864, s. 19 and 22-24.

Subsection 10(1) identifies the types of security interests that may be taken by a bank which makes a loan guaranteed by the Minister in respect of which it is required by regulation to take security on real or personal property.; Subsection 10(2) states that a bank may exercise, in respect of any mortgage, hypothec or assignment taken under the Act and the real or personal property affected thereby, all rights and powers that it would have or might exercise if the mortgage, hypothec or assignment had been taken by the bank by way of subsequent security under the Bank Act.; Section 19 of the Regulations identifies the circumstances under which a security may be taken under the Fisheries Improvement Loans Act and the types of security that may be taken.; Sections 22-24 of the Regulations outline the procedure to be followed by a lender upon default by the borrower.

Insurance Companies Act, 1991, c. 47, s. 470, 500, 542.07 and 559.

Section 470 states that a company shall not create a security interest in any property of the company to secure an obligation of the company, unless the security interest is created in relation to the reinsurance by the company of risks insured by another insurer or the Superintendent has approved in writing the creation of the security interest.; (Section 542.07 is identical, but relates to fraternal benefits society.); Section 500 enables a company to acquire an investment in a body corporate, an interest in an unincorporated entity, or an interest in real property if the investment or interest is acquired through the realization of a security interest held by the company. (Section 559 is identical, but relates to fraternal benefits society.);

Trust and Loan Companies Act, 1991, c. 45, s. 374, 419 and 458.

Section 374 outlines the order of priority in the event that a trust or loan company becomes insolvent.; Section 419 provides that such a company shall not create a security interest in any property of the company to secure an obligation of the company, unless the obligation is to the Bank of Canada or the Canada Deposit Insurance Corporation or the Superintendent has approved in writing the creation of the security interest.; Section 458 states that a trust and loan company may acquire an investment in a body corporate, an interest in an unincorporated entity, or an interest in real property, if the investment or interest is acquired through the realization of a security interest held by the company.

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