Banking & Financial Services Law

Securitization Available for Canadian Uninsured Conventional Residential Mortgages?

Peter Milligan — Mon, 06 Feb 2012 11:02:26 -0500

At the American Securitization Forum annual conference last month, a panel discussed the future of U.S. mortgage finance. Following the 2007 financial crisis and the collapse in U.S. housing values, there has been a transfer of U.S. mortgage funding from private sources of capital to government sources. At a basic level, the panel discussion was about the prospects for the return of private (as opposed to government) risk capital to the U.S. mortgage funding market. There was very little optimism that this transformation would take place in the foreseeable future.

Although with less intensity and clarity, the same debate is under way in Canada. Last month, CMHC announced limits on the amount of portfolio mortgage insurance it will provide. Portfolio mortgage insurance is used by Canadian banks and other mortgage lenders to insure conventional residential mortgages. The use of portfolio mortgage insurance for mortgages that are otherwise very low on the risk scale has been encouraged because of the favourable capital treatment it gives to regulated financial institutions holding mortgages and because it is a requirement for access to the federal government sponsored residential mortgage securitization programs. Directly or indirectly, portfolio mortgage insurance has been used to transfer mortgage funding risk to the federal government. This risk transference will now be reduced.

If this channel of mortgage funding is reduced, will other channels open up? One question to be answered is whether uninsured conventional residential mortgages will again be privately securitized in Canada? Will credit rating agencies, which operate globally, be willing to isolate Canadian experience from their world-wide experience? Should they? Questions that will be answered in the next year or so.

Perfection by Control of Deposit Accounts and Cash Collateral - Proposal to Amend The Ontario PPSA

Dale Seymour — Wed, 01 Feb 2012 14:20:42 -0500

A working group of the Personal Property Security Law Sub-Committee of the Ontario Bar Association’s Business Law Section has developed a proposal for amendments to the Ontario Personal Property Security Act to provide for perfection by control of deposit accounts and other forms of cash collateral. If approved by the Ontario Bar Association, the proposals will be submitted to the Ministry of Consumer Services for consideration. We understand that these proposals, if adopted, would amend the PPSA to create a new class of collateral – the “financial account” - and provide rights for secured parties to perfect a security interest in a financial account through control.

“Financial accounts” would be broadly defined to include deposit accounts and any other monetary obligation of a financial institution in respect of funds it holds or receives as security for an obligation. Consumer accounts would be excluded from the definition of financial account, an approach which is consistent with Article 9 of the UCC.

The proposed amendments would allow a secured party to perfect a security interest in a financial account by 1) registration (this is already provided for under the PPSA and is a departure from Article 9 of the UCC) and 2) control.

The means by which a secured party could obtain control are very similar to those currently in place for securities accounts as a result of the Securities Transfer Act, 2006 (Ontario). Those methods would include:

automatic control if the secured party is also the financial institution that is obligated to the customer under the financial account; and
a control agreement entered into by the customer, the secured party and the financial institution maintaining the customer’s financial account whereby the financial institution agrees to comply with instructions originated by the secured party in respect of the financial account without further consent from the customer.

A secured party with control of a financial account would have priority over a secured party that does not have control, as well as over a secured party that perfected its interest in the financial account only by registration.

Importantly as well, the PPSA choice of law rules for financial accounts would mirror those in UCC Article 9 for similar collateral, such that the jurisdiction for determining issues of validity, perfection and priority of a security interest in U.S. cross-border deals could be easily established.

Perfection and Priority: Dealing with Serial Numbered Goods

Danielle Boyd — Mon, 30 Jan 2012 11:03:13 -0500

Lenders should be aware that when taking security in certain goods with serial numbers in Canada, the rules regarding registration of financing statements vary across provincial jurisdictions; a detail that, if overlooked, could impact the priority of the lender’s security interest.

In Ontario, where the collateral includes motor vehicles (as defined in Ontario’s Personal Property Security Regulation 56/07), including the vehicle identification number will provide the lender with protections against: (i) purchasers or lessors of a motor vehicle that is proceeds and classified as consumer goods, and (ii) purchasers of a motor vehicle classified as equipment sold other than in the ordinary course of business of the seller.

In some other provinces, the rules regarding goods with serial numbers are broader and can include goods other than motor vehicles. These goods are referred to as “serial number goods” as defined in the personal property security regulations of some other Canadian jurisdictions. For example, in Alberta, “serial numbered goods” includes aircraft and boats; two types of goods not covered by Ontario’s definition of motor vehicle. For serial numbered goods that are classified as equipment, if a lender chooses not to register the serial number, the registration is valid; however, the lender will lose the priority of their interests in the equipment to purchasers and any other secured party who has included the serial number. In the case of a serial numbered good classified as a consumer good, the failure to register the serial number means the registration is invalid and leaves the registrant unperfected.

As the applicable rules vary from province to province, lenders should consult the applicable personal property security act when dealing with collateral that is located in several provinces. However, as a general rule, it is prudent to always include the serial number when registering against goods that fall within the definition of “serial numbered goods” or “motor vehicles”.

Limits on Interest Rates in Loan Agreements

Scott Horner — Thu, 19 Jan 2012 14:07:03 -0500

Loan agreements governed by Ontario law commonly include a provision that is intended to address the maximum effective annual rate of interest that is chargeable thereunder without contravening the usury provisions of the Criminal Code (Canada). For purposes of the Criminal Code (Canada), “interest” is defined as including ordinary commercial interest, fees (other than those required to be paid to governmental authorities in connection with perfecting security) and expenses (such as legal expenses, including a lender’s legal expenses if the borrower has agreed to pay them) and, therefore, is not limited to what most bankers think of when they refer to “interest”.

In U.S. law governed loan agreements, the provision limiting interest is usually framed that if interest at the stated rates would result in unlawful rates, then the interest rates shall be reduced to the maximum lawful rates. Canadian courts have refused to enforce such a provision on the basis that they would be required to rewrite the contract by determining which, and in what sequence, element(s) of “interest” should be reduced in order to attain an effective annual interest rate that does not exceed the lawful rate. The result of the Canadian courts’ refusal to enforce such provisions has been, in some cases, that lenders have been denied all “interest”.

Accordingly, to be enforceable, provisions limiting interest should specify the order in which the elements of “interest” shall be reduced so that the effective annual rate of interest provided for in the loan agreement will not be in contravention of the Criminal Code (Canada) (for example, the interest rate on the loan shall be reduced first, then fees shall be reduced etc. until the lawful effective annual rate of interest is attained).

Canadian Government Proposes Comprehensive Amendments to Anti-Money Laundering Legislation

Stephen Clark — Mon, 16 Jan 2012 16:26:19 -0500

On December 21, 2011, the Canadian federal government released a consultation paper (the Consultation Paper) containing certain proposals to strengthen Canada’s anti-money laundering (AML) and anti-terrorist financing (ATF) legislative framework, which is administered through the Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLA) and related regulations (collectively, AML Legislation). The full text of the Consultation Paper is available here. The deadline for submitting comments on the proposed amendments is March 1, 2012.

On November 7, 2011, the Canadian federal government had released a consultation paper proposing certain amendments to the AML Legislation. Whereas the amendments proposed in November 2011 were limited to customer identification and due diligence and were meant to mainly address Canada’s rating of non-compliance with a recommendation of the Financial Action Task Force (FATF), the Consultation Paper released in December 2011 proposes a broader set of amendments. (See our Osler Update dated November 17, 2011.)

The key objectives of the Consultation Paper are stated to be the following:

reviewing Canada’s AML/ATF legislative framework in preparation for the upcoming Parliamentary review of the AML Legislation (this review is required by statute every 5 years);
addressing the recommendations of an independent consultant included in the Report of the 10-Year Evaluation of Canada’s AML/ATF regime, released in March 2011;
responding to stakeholder concerns, raised by both the private sector and federal regime partners, particularly law enforcement and intelligence agencies;
meeting Canada’s international commitments by improving Canada’s compliance with the recommendations of FATF;
responding to the interim report of the Special Senate Committee on Anti‑Terrorism, entitled Security, Freedom and the Complex Terrorist Threat: Positive Steps Ahead;
responding to the final report of the Commission of Inquiry into the Investigation of the Bombing of Air India Flight 182, entitled Air India Flight 182: A Canadian Tragedy; and
responding to the 2009 Privacy Commissioner of Canada’s Audit Report of the Financial Transactions and Reports Analysis Centre of Canada.

The amendments proposed by the Consultation Paper fall into the following categories, details of which are available by clicking "Continue Reading" below:

strengthening customer due diligence standards;
closing gaps in Canada’s regime;
improving compliance, monitoring and enforcement;
strengthening information sharing in the regime;
introducing a list of potential countermeasures; and
updating reporting requirements.

This entry is based on the Osler Update Canadian Government Proposes Comprehensive Amendments to Anti-Money Laundering Legislation authored by Stephen D.A. Clark and Kashif Zaman

1. Strengthening Customer Due Diligence Standards

In addition to the amendments proposed in the November 2011 consultation paper, the government is proposing additional amendments to address other issues relating to customer due diligence (CDD) raised by stakeholders.

a. Client Identification Records for Authorized Signers for Business Accounts

Financial entities are currently required to ascertain the identity of at least three authorized signers of a business account. A similar requirement applies to casinos. However, there is no related requirement for either financial entities or casinos to keep a record of the identity of those signers or the measures taken to ascertain their identity. To ensure that financial entities and casinos have the necessary information available to include in a suspicious transaction report, the government is considering requiring financial entities and casinos that ascertain the identity of an authorized signer to also keep a client identification record in respect of that signer.

b. Enhancing Customer Due Diligence Exemptions for Introduced Business

There are several situations in which one financial business may “introduce” (or refer) a client to another financial business (e.g., insurance brokers introducing their clients’ business to insurance companies or banks introducing their clients to securities dealers).

Under the current AML Legislation, there are two specific “introduced business” scenarios where one reporting entity can rely on the CDD performed by another reporting entity. These exemptions limit the duplication of procedures by reporting entities. In 2008, amendments were made to the AML Legislation to allow agents or mandataries to perform certain CDD obligations on behalf of a reporting entity. This differs from the introduced business exemptions in that it allows non-reporting entities to perform the CDD obligations on behalf of a reporting entity. Unlike the introduced business exemptions, there must also be a contractual agreement in place between the parties for the agency relationship to exist.

Under the current AML Legislation, there is no explicit requirement for financial institutions to obtain from the third party the necessary information concerning certain elements of the CDD process and satisfy themselves that copies of identification data are made available from the third party upon request without delay. In addition, the AML Legislation does not set out that the ultimate responsibility for customer identification and verification should remain with the financial institution relying on the third party.

The FATF has recommended that reporting entities be required to take more responsibility for CDD in introduced business scenarios. Canada received a Non-Compliant rating with the FATF’s Recommendation 9, which addresses introduced business.

The government is reviewing the current exemptions from CDD and record-keeping for scenarios involving introduced business, in order to improve the continuity of record-keeping and to clarify how responsibility for the CDD information is divided between the party introducing the business and the party receiving the business. In addition, the government is considering expanding the scope of introduced business scenarios that would qualify for an exemption from certain CDD obligations.

The government is seeking views from industry on these issues, including the following elements:

examples of “introduced business” scenarios where revising CDD and/or record-keeping requirements would eliminate a duplication of effort by the reporting entities involved;
current industry practices that may mitigate the risk of records being lost or destroyed in an “introduced business” scenario where the relationship between the recipient and introducer is terminated;
the feasibility of a reporting entity asking for and receiving documentation about the information used to verify a client’s identity from an introducer at the time of the commencement of the “introduced business” relationship; and
the feasibility of a reporting entity asking for and receiving documentation about the information used to verify a client’s identity from an introducer at the time when a relationship between the reporting entity and introducer is to be terminated.

c. Non-Face-to-Face Situations

In 2007, the government had made amendments to the AML Legislation to allow non-face-to-face client identification. In the Consultation Paper, the government recognizes that new technologies and business models are being developed by the financial sector in respect of which the current non-face-to-face client identification requirements may have to be modified. For example, various reporting entities have identified components of the existing non-face-to-face identification requirements that limit their ability to increasingly use evolving technologies to deliver financial products and services, without requiring an individual or entity to physically submit supporting documentation (e.g., a cleared cheque). The government is seeking feedback from the industry on these issues. For example, the government would like to receive comments from financial institutions regarding the security features that have been included in electronically provided bank statements and that would assist with determining the authenticity of such a statement.

Non-face-to-face Customer Identification Measures for Credit Card Companies

The government proposes to review the current non-face-to-face identification requirements for credit card companies in response to concerns related to the decreased usefulness of the telecommunications directory as a reliable independent data source to ascertain a client’s identity. Alternative independent data sources or methods will be considered but it is not intended that this review will provide reporting entities with access to government databases that are currently restricted under other legislation. The government is seeking views from industry on this issue, including the following elements:

explanations as to why the credit card industry is unable to use the other non-face-to-face identification methods specified under the AML Legislation;
explanations as to why financial institutions have not established a process to confirm directly to another financial intermediary that a client maintains a deposit account with that institution, where the client has consented to the disclosure of such information; and
information on other types of third party sources currently being used by credit card companies to assess account applications and whether these sources could be considered as an alternative to the telecommunications directory.

Record of Signing Authority

The government proposes to review the requirement that a hand-written signature card, or electronic image of a hand written signature, must be maintained by reporting entities for record-keeping purposes when accounts are opened. The government is seeking views from industry on this issue, including:

clarification as to what kind of technological information reporting entities would propose to maintain where the authority for an account holder to give instructions in respect of an account would be established by electronic means; and
the ability for a reporting entity to provide another reporting entity with a copy of a client’s signature card, where a client has consented to that information being shared.

d. Politically Exposed Foreign Persons

Politically exposed foreign persons (PEFPs) are defined in the AML Legislation as persons who are, or have been, entrusted with prominent public functions such as heads of state, senior politicians, senior government, judicial or military officials, senior executives of state-owned corporations and important political party officials. The AML Legislation requires certain reporting entities to determine whether a customer is a PEFP when they conduct designated financial transactions or open designated accounts. Reporting entities are required to implement enhanced measures in respect of their customers who are PEFPs.

The government has identified aspects of Canada’s PEFPs provisions that could be strengthened in order to assist Canada’s anti-corruption work, provide reporting entities with increased tools to better know their customers and to take appropriate measures based on the risk level of those customers, and to enhance Canada’s compliance with the current FATF Recommendation 6 on foreign politically exposed persons.

Amend the Definition of “Politically Exposed Foreign Person” to Include Close Associates

The government is considering the definition of “politically exposed foreign person” to include close associates of such a person.

“Politically exposed foreign person” is currently defined in the AML Legislation as persons holding or having held certain designated high-profile political positions, as well as the immediate family members of those persons. The proposed amendment would provide that, in circumstances in which reporting entities are required to take reasonable measures to determine if a customer is a PEFP, they would also be required to take reasonable measures to determine whether that customer is a close associate of a PEFP.

Require Life Insurance Companies to Determine if Persons are PEFPs when Opening Designated Accounts

The government is giving consideration to requiring life insurance companies and life insurance brokers and agents to take reasonable measures to determine if persons are PEFPs when opening an investment or loan account for a client, or in respect of existing clients who have investment or loan accounts. Where such persons are determined to be PEFPs, life insurance companies and life insurance brokers and agents would be required to implement all relevant PEFP obligations.

Requirement to Assess all Account-holders

The government is considering amending the AML Legislation to clearly provide that reporting entities would be required to assess whether “all” existing account-holders are PEFPs, where such a determination has not already been made. Currently, financial entities and securities dealers are required to take reasonable measures, based on the level of risk they have assessed, to determine whether persons who are existing account holders are PEFPs. The effect of these provisions is that, where customers have been identified as low risk, reporting entities are not required to determine whether those customers are PEFPs.

e. Lower Risk Situations

Currently, reporting entities are exempted from conducting customer identification and due diligence measures when they conduct certain transactions or interact with certain types of clients deemed to be at low risk of money laundering or terrorist financing. These exemptions exist primarily in respect of products that are well regulated and structured in such a way to make money laundering difficult or clients who are well-regulated and subject to stringent legislative disclosure obligations.

Under existing requirements, reporting entities are not required to keep records when conducting transactions with public bodies or corporations with a minimum of $75 million net assets whose shares are traded on a Canadian or other designated stock exchange. Listed corporations are considered to be at lower risk for money laundering and terrorist financing as they are subject to stringent disclosure obligations outside of the AML Legislation. The government is considering extending this exemption to all listed corporations without regard to the amount of net assets.

f. Ongoing Due Diligence

Reporting entities have the obligation to confirm the existence of a corporation for which they open an account or conduct a financial transaction. Currently, the existence of a corporation is confirmed by referring to a corporation’s certificate of corporate status or any other record that confirms its existence as a corporation (such as its published annual report or a letter or notice of assessment from a government). However, the AML Legislation does not specify how current these documents must be in order to qualify as proof of the existence of a corporation. The government is considering amending the AML Legislation to specify that any document that is used as proof of the existence of a corporation must be no more than one year old.

g. Identification of Third Parties

The AML Legislation requires reporting entities to take reasonable measures to collect third party information where a required client information record is created, or where a client conducts large cash transactions or opens an account. The Consultation Paper states that the existing legislative requirement for third party determination is often misunderstood by reporting entities because of conflicting understandings of the term “third party.” For the purposes of the AML Legislation, it is intended that third parties are those who provide instructions, whereas many reporting entities have interpreted third parties as being those who carry out those instructions. The government is considering amending the provisions that establish the third party determination requirements to replace the term “third party” with “instructing party.”

The government is seeking industry views on whether this change in terminology will provide clearer guidance as to what is required.

2. Closing the Gaps

a. Eliminating the Electronic Funds Transfers Threshold

Reporting entities are currently required to report to the Financial Transactions Reports Analysis Centre of Canada (FINTRAC) any electronic funds transfer (EFT) of $10,000 or more entering or leaving Canada. The government believes that the $10,000 threshold for reporting EFTs may not be optimal. For example, while money laundering frequently involves large sums of money, cases of terrorist financing may involve smaller amounts of money. The government is considering eliminating the threshold at or above which international EFTs must be reported to FINTRAC. This would require financial entities, casinos and money services businesses (MSB) to report all EFTs entering or leaving Canada. The government is seeking views on this issue, including the following elements:

operational impacts for reporting entities associated with eliminating the threshold;
given existing CDD thresholds and other relevant factors, the implications of applying different thresholds for different types of transactions or reporting entities (e.g., a higher threshold for MSBs than for financial entities as per the U.S. model); and
examples of any current industry practices, trends, or requirements in other jurisdictions where operations would be relevant to the discussion of an eliminated threshold.

b. Prepaid Access

Prepaid access encompasses a range of payment technologies, from prepaid cards (such as retail gift cards, or open-loop prepaid cards that could be used to withdraw thousands of dollars from automated teller machines (ATMs) worldwide) to mobile payment devices. There have been increased calls by law enforcement and others to address the potential money laundering and terrorist financing risks posed by prepaid access. For example, Canada’s Special Senate Committee on Anti-Terrorism recommended that the government examine whether to define prepaid access as monetary instruments under the Cross-border Currency and Monetary Instruments Reporting Regulations. This would result in an obligation for individuals to report the importation or exportation of $10,000 or more in prepaid access products. The FATF has also noted the lack of CDD requirements for prepaid access products. The Royal Canadian Mounted Police has acknowledged that gift cards represent a serious money laundering option, especially in the absence of any money laundering control at retail locations and has noted that there is nothing in force at the financial institution level that requires them to implement policies and procedures addressing new technologies when face to face identification is not possible.

Across the border, the United States has recently taken action on prepaid access. In July 2011, the Financial Crimes Enforcement Network passed a final rule requiring providers of certain types of prepaid access to perform CDD, keep customer information and transaction records, have an anti-money laundering program, and report suspicious activities and large cash transactions. In October 2011, the Financial Crimes Enforcement Network formally sought input on making certain prepaid access devices subject to cross-border reporting requirements.

The Canadian government is examining two potential ways to mitigate the possible money laundering and terrorist financing risks posed by prepaid access.

First, the government proposes to review CDD requirements to determine whether to extend these measures to prepaid access devices. The government is seeking views on this potential course of action, including the following elements:

types of prepaid access devices that should or should not be covered (including the rationale for including or excluding them);
who among the several parties involved in providing a prepaid card (e.g., financial institution, payment network, program operator, retailer) should bear the responsibility for the various CDD requirements; and
operational impacts for reporting entities associated with potential CDD requirements.

Second, the government is examining the issue of expanding the definition of monetary instrument for the purpose of cross-border currency reporting under the Cross-Border Currency and Monetary Instruments Reporting Regulations to include prepaid access. The government is seeking views on this issue, including the following elements:

types of prepaid access that should or should not be defined as a monetary instrument (including the rationale for including or excluding them);
potential obstacles that would prevent, and potential solutions that would allow, border services officers to identify and determine the value of prepaid access products (e.g., ability to recognize or read prepaid cards at the border); and
privacy considerations.

c. Customer Due Diligence and Record-Keeping Requirements for Life Insurance Companies and Life Insurance Agents and Brokers

In the Consultation Paper, the government notes that the current requirements imposed on life insurance companies and life insurance brokers and agents related to customer identification may fail to adequately address the money laundering risks of the financial products that are now commonly provided in this industry. For example, there is no legislative requirement for life insurance companies, brokers and agents to perform customer identification requirements with respect to loans they offer. These requirements are legislated for other reporting entities. As well, varying practices exist across insurance companies with respect to whether the existing CDD requirements apply to insurance-based investment products, such as segregated funds. Further, the government suggests that certain life insurance annuities and policies that are currently exempt from client identification requirements are at risk of being abused by criminals and should be subject to these requirements under the AML Legislation.

The government is considering amending the AML Legislation to expand the client identification and record-keeping requirements applicable to life insurance companies and life insurance brokers and agents beyond the specified purchase of annuities and life insurance policies. Client identification and record-keeping requirements would apply to transactions and account openings for investment and loan products offered by life insurance companies, agents and brokers that are not currently captured under the AML Legislation. The requirements would be comparable to those currently imposed by the AML Legislation on other financial entities and securities dealers. The exemptions for income tax purposes and the $10,000 threshold would be eliminated.

d. Large Cash Transaction Reports

Reporting entities are required to report to FINTRAC whenever they receive $10,000 or more in cash. The government notes that these requirements should be revisited to address existing gaps.

Extending Large Cash Transactions Reporting Obligations in the Life Insurance Sector

The government is considering amending the AML Legislation to limit the exemptions for large cash transaction reporting by life insurance companies and life insurance agents and brokers to only those transactions where the origin of funds may be easily identified and determined to be of low risk for money laundering, specifically those identified in paragraphs 62(2)(c) to (f) of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulation. The purpose of this proposed amendment is to close the gap resulting from the exemptions provided to life insurance companies and life insurance agents and brokers where the origin of funds to purchase specified financial products is unknown and, as such, there is a risk that they will be used for criminal purposes.

Expand the Application of Large Cash Transaction Obligations

The government is giving consideration to amending the AML Legislation to provide that reporting entities would be required to record and report large cash transactions of $10,000 or more, even where the cash would be received on behalf of the reporting entity by an agent or affiliated entity. This amendment would ensure that the chosen delivery channel does not lead to an unintentional exemption for reporting entities from their obligations to submit large cash transaction reports.

e. Dealers in Precious Metals and Stones and Accountants

Dealers in precious metals and stones (DPMS) and accountants are currently subject to the AML Legislation when they provide services or undertake activities that are specified in the AML Legislation. Although various activities are exempted from the reporting requirements in the AML Legislation, the government believes that certain activities performed by DPMS and accountants currently trigger reporting requirements beyond the original policy intent.

The government is considering excluding from reporting requirements activities undertaken by the DPMS sector related to the sale or purchase of metals and stones that are used in the manufacturing process and excluding from reporting requirements activities undertaken by accountants when providing trustee in bankruptcy services.

f. Clarifying the 24-Hour Rule

Reporting entities are currently required to file various reports for certain transactions performed by, or disbursements received by, individuals and entities. The AML Legislation sets out these single transactions to include both individual transactions above $10,000 as well as multiple transactions each under $10,000 but totalling $10,000 or greater undertaken by an individual within a 24-hour period. The government believes that there are deficiencies with the current descriptions of a single transaction under the AML Legislation, which limit the transactions that must be reported to FINTRAC, contrary to the objectives of the AML Legislation.

The government is considering amending the description of “single transaction” in the AML Legislation to include all transactions, regardless of their amount, conducted on behalf of the same person or entity within a 24-hour period where the combination of those transactions would total at least $10,000. The purpose of this proposed amendment is to provide greater certainty for reporting entities with respect to reporting multiple transactions.

3. Improving Compliance, Monitoring and Enforcement

a. Money Services Business Registration

MSBs have been required to register with FINTRAC since June 2008. In order to apply to register, an MSB must provide identifying information and specified business-related details. Once the initial registration has been accepted, the MSB’s registration must be renewed approximately every two years, on a date specified by regulations. In order to simplify the MSB renewal process and provide flexibility as to when within a 2-year period an MSB must renew its application, the government is considering amending the AML Legislation to reduce the type of information requested from MSBs applying to register with FINTRAC and revoking the requirements in the AML Legislation specifying the timing of MSB registration renewal.

The government is also considering amending the AML Legislation to ensure that individuals who have been convicted under certain repealed acts are also excluded from registering as MSBs. These acts would include the PCMLA, the Narcotic Control Act, and Parts III and IV of the Food and Drug Act. The AML Legislation does not allow individuals convicted under specified legislation to register as an MSB. However, current provisions do not reference convictions under repealed, older versions of relevant legislation.

b. Updating the Compliance Program

The government is considering amending the AML Legislation to provide FINTRAC with an additional tool to ensure that FINTRAC receives the reports that entities are required to submit under the AML Legislation.

Reporting entities may be subject to an administrative monetary penalty for failure to comply with a reporting obligation under the AML Legislation (for example, failure to submit a suspicious transaction report, a large cash transaction report, an EFT report or a terrorist property report). Currently, proceedings to address non-compliance with a reporting requirement would typically cease upon payment of the penalty. The proposed change would enable FINTRAC to direct a reporting entity to file a missing report that is required under the AML Legislation and that they have failed to report, even where an initial penalty has been imposed. Where the reporting entity subsequently fails to comply with the request for the report to be filed, FINTRAC would be entitled to impose additional penalties until such time as the reporting entity complies with FINTRAC’s request by filing the report.

c. Requiring the Documentation of Reasonable Measures

Reporting entities may be required to take reasonable measures to obtain particular information or to make a specific determination when performing due diligence. The government is considering requiring reporting entities to document and keep a record of any “reasonable measures” they are required to take under the AML Legislation.

d. Updating Reporting Forms

The AML Legislation prescribes the specific information that reporting entities are required to provide for various reporting and registration purposes. The government believes that the current framework narrowly defines the information that is required to be included on the form templates provided to reporting entities and limits the government’s ability to customize the forms to the specific or unique needs of individual industries. The government is considering amending the AML Legislation to provide the Minister of Finance with the authority to update the information requirements contained in reporting and registration forms that reporting entities are required to use when registering or submitting reports to FINTRAC. This would allow these forms to be updated in a timelier manner, to better reflect the needs of both FINTRAC and reporting entities.

e. Cross-Border Currency Reporting

Under the current requirements of the AML Legislation, individuals or entities are required to report to a Canada Border Services Agency (CBSA) officer the importation or exportation of currency or monetary instruments over $10,000. The AML Legislation currently requires individuals who have completed a cross-border currency report to respond truthfully to questions posed by a CBSA officer with respect to the information contained in the report. CBSA officers have indicated that it would be beneficial for them to also be provided with the authority to pose questions to individuals related to their compliance with the obligations of the AML Legislation, even when a report has not been completed. This would assist CBSA officers in performing their duties and responsibilities as specified under the AML Legislation. The government is considering amending the AML Legislation to provide the authority to CBSA officers to question passengers arriving in or departing from Canada with respect to their responsibilities under the AML Legislation and to compel passengers to answer these questions truthfully.

4. Strengthening Information Sharing in the Regime

a. Expanding Designated Information

The government is considering expanding the current list of designated information that FINTRAC can disclose to law enforcement and intelligence agencies to also include:

(a) an individual’s gender and occupation;
the grounds for suspicion developed by international partner Financial Intelligence Units;
information contained in the narrative section of cross-border seizure reports;
a description of the actions taken by reporting entities when making a suspicious transaction report; and
information setting out the “reasonable grounds to suspect” that FINTRAC has determined would enable it to make a disclosure.

The stated objective of expanding the information available in FINTRAC disclosures is to enhance the critical identifiers and investigative links that law enforcement and intelligence agencies can use to further money laundering and terrorist financing investigations while respecting the privacy and Charter rights of Canadians.

b. Expanding Information in Intelligence Products

The government is considering allowing FINTRAC to identify foreign individuals and entities in the intelligence products it provides to law enforcement, government institutions, or a foreign agency that has similar powers and duties, in those cases where the identification of the individual or entity would be important to the context of the financial intelligence.

c. Information Sharing to Detect and Deter the Funding of Terrorism Through Registered Charities

The AML Legislation does not contain provisions that permit the CBSA to share information with the Charities Directorate of the Canada Revenue Agency (CRA). The government is considering amending the AML Legislation to allow the CBSA to disclose to the CRA Charities Directorate cross-border seizure reports related to forfeited currency or monetary instruments suspected to be linked to the activities of a charity. The proposed amendment would allow the CBSA to proactively disclose directly to the CRA information obtained at the border that could assist with the determination of a charity’s registration status.

The government is also proposing to review the provision that enables FINTRAC to disclose to the CRA information related to registered charities in order to facilitate its ability to provide proactive disclosures. The proposed amendment would seek to clarify the conditions under which FINTRAC would disclose to the CRA activities of a charity in order to facilitate its ability to provide proactive disclosures.

d. Disclosures to Support Border Services

FINTRAC is currently required to disclose information to the CBSA when, in addition to a suspicion of money laundering or terrorist activity financing, it also determines that the information would be relevant to supporting the CBSA in performing its specified responsibilities related to administering immigration and customs programs. The CBSA has identified situations where FINTRAC disclosures could provide more information that would improve the efficiency of its investigations related to border services that support the government’s national security priorities.

The government is considering amending the AML Legislation to require FINTRAC to disclose information relevant to a money laundering or terrorist financing offence to the CBSA where it would also be relevant to an offence related to illegal exportations.

The government is also considering amending the AML Legislation to require FINTRAC to disclose designated information to the CBSA where there would be reasonable grounds to suspect that it would be relevant for the purpose of managing the access of people and goods to and from Canada that pose a threat to national security.

e. Disclosures of Information by FINTRAC

The AML Legislation currently requires that FINTRAC disclose information to an appropriate police force where there are reasonable grounds to suspect that designated information would be relevant to investigating or prosecuting a money laundering or terrorist financing offence. It is possible that information collected by FINTRAC could also assist with investigations where an individual’s life is in danger.

The government is considering allowing FINTRAC to disclose information to a police force that would assist with an investigation for the purpose of preventing the death of, or imminent physical injury to, an individual.

5. Countermeasures

Certain amendments to the AML Legislation were introduced as part of Budget 2010. These amendments introduced two new authorities for the Minister of Finance:

the authority to issue directives that require reporting entities to take countermeasures in respect of transactions originating from or destined to designated foreign jurisdictions and foreign entities; and
the authority to recommend that the Governor-in-Council issue regulations limiting or prohibiting reporting entities from entering into transactions originating from or destined to designated foreign jurisdictions and foreign entities.

The two new authorities for the Minister have not yet been brought into force. The new Ministerial authorities would be brought into force in conjunction with the regulatory amendments detailed in the Consultation Paper. In order to clarify the application of the Minister’s new authorities, the government proposes to implement regulations that will provide greater detail and certainty to reporting entities and other stakeholders as to how the use of these powers will be undertaken. These regulatory amendments would:

prescribe a list of specific countermeasures that the Minister, when issuing a directive, can require reporting entities to take in respect of a designated foreign jurisdiction or foreign entity;
define the term “foreign entity,” in order to provide further guidance to reporting persons and entities as to the types of entities that may form the subject of a directive or a regulation limiting or prohibiting business; and
update the existing AML Legislation to allow for administrative monetary penalties to be issued to reporting entities that are in violation of a directive or a regulation.

6. Other Proposals

a. Broadening the Requirement to Report Suspicious Transactions

The government is considering broadening the requirement to report suspicious transactions to encompass activities conducted for the purpose of a financial transaction.

The legislation currently requires reporting entities to report suspicious transactions. A suspicious transaction is any financial transaction that occurs or is attempted in the course of a reporting entity’s activities that gives rise to a suspicion of money laundering or terrorist financing. Under this proposal, the AML Legislation would be amended to set out that a suspicious transaction is any financial transaction that occurs or is attempted, including an activity undertaken for the purpose of a financial transaction, in the course of a reporting entity’s activities that gives rise to a suspicion of money laundering or terrorist financing. This would clarify that reporting entities would be required to submit a suspicious transaction report if, for example, an account application was considered suspicious.

b. Submitting Reports to FINTRAC

The government is considering requiring the CBSA to submit cross-border currency reports to FINTRAC both physically and electronically. The legislation currently requires the CBSA to submit to FINTRAC complete and incomplete cross-border currency reports they receive from individuals. Though it is not a legislative requirement, in practice, the CBSA has been providing FINTRAC with both the paper copies of these reports and the electronic transmission of the information included in these reports. This facilitates FINTRAC’s data collection by providing reportable information in a format that may be searched. This proposal would formalize this existing operational arrangement.

c. Amending the Threshold for Non-compliance Disclosures

The government is considering replacing the term “is evidence of” with “would be relevant to” in order to clarify the threshold that would enable FINTRAC to disclose compliance-related information to law enforcement by more broadly referencing information that it suspects on reasonable grounds would be relevant to investigating or prosecuting specified compliance-related offences. The government believes that the existing threshold for disclosing compliance information to law enforcement is inconsistent with the scope of FINTRAC’s mandate; it is not responsible for investigating or prosecuting contraventions of the provisions of the AML Legislation. As a result, while FINTRAC may make a determination on the relevance of information it collects to investigating and prosecuting certain offences, it is unable to determine whether that information could be used as evidence.

d. Amending Obligations Related to Client Credit Files

The government is considering amending CDD and record-keeping requirements to clarify that financial entities are required to create a client credit file when they enter into a credit arrangement with a client, and to repeal the obligation for MSBs to maintain a client credit file. This amendment would clarify that financial entities are required to both create, and keep records of, a client credit file when entering into a credit arrangement with a client. As well, this amendment would recognize that MSBs do not conduct credit arrangements and, therefore, should be excluded from this record-keeping requirement.

Standstill Periods in Intercreditor Agreements - What Factors Can Determine Their Length?

Jessica Foster — Tue, 10 Jan 2012 12:56:07 -0500

Intercreditor agreements often include a provision which prevents the junior creditor from taking enforcement action against collateral upon default under the junior debt for a specified period of time after notice of the default has been given to the senior creditor – this is described as the “standstill period”. The purpose of the standstill period is to give the senior creditor an exclusive period of time during which the senior creditor may assess its rights and, if the senior creditor determines that it will enforce its rights against the collateral, to so enforce such rights without interference from the junior creditor.

The length of the standstill period is usually negotiated, as the junior and senior creditors have competing interests. The junior creditor will usually favour a shorter standstill period, as it will be anxious to begin enforcement action upon default. However, the senior creditor will usually favour a longer standstill period, which will allow them more time to implement their own strategy for enforcement against the collateral. While the length of time of standstill periods vary, most are between 90 and 180 days. There are various factors specific to the circumstances of each transaction that can affect the length of time of the standstill period, including:

the type and location of the collateral;
the borrower’s business;
the amounts of the obligations owed to the junior and senior creditors under their respective credit facilities; and
the relative bargaining power of the parties involved in negotiating the standstill period (i.e. the junior and senior creditors).

Regarding the collateral, its type must be considered; specifically, whether it is perishable or could otherwise quickly diminish in value and how liquid and readily marketable it is. Perishable and liquid collateral usually justify a shorter standstill period. The location of the collateral must also be considered. If the collateral is located in multiple jurisdictions, a longer standstill period could be justified. For example, in a situation where the borrower’s collateral consists mainly of perishable inventory in a single warehouse which can easily be sold, the junior creditor can expect that the senior creditor will agree to a relatively shorter standstill period. However, if the collateral is mostly non-perishable equipment located in multiple jurisdictions, the senior creditor can expect that the junior creditor will agree to a relatively longer standstill period.

Licences as Personal Property Under Amendments to the British Columbia PPSA

Joshua Lam — Tue, 03 Jan 2012 16:25:52 -0500

The British Columbia (“BC”) legislature has introduced amendments to expressly identify transferable licences as personal property under the BC Personal Property Security Act (the “BC PPSA”). These amendments (the “Amendments”) received Royal Assent on November 24, 2011 and are expected to come into force by regulation in 2012. As a result of the Amendments, the BC PPSA will expressly permit the creation of security interests in transferable licences. In BC, this will facilitate the provision of credit on the security of licences provided as collateral.

The Amendments will expand the definition of “licence” under the BC PPSA to include any transferrable grant of rights entitling the holder of such rights to deal with or acquire personal property or provide services. The expanded definition is intended to capture transferable licences generally, including liquor, fishing and forestry licences, whether issued under a regulatory regime or by private contract.

By expanding the definition of “licences”, the Amendments will provide outcomes similar to the 2008 Supreme Court of Canada decision in Saulnier v. Royal Bank of Canada (“Saulnier”), in which a licence to participate in the fishery coupled with a proprietary interest in the fish harvested thereunder was ruled to be a “bundle of rights” sufficient to fit within the extended definitions of “personal property” in the Nova Scotia Personal Property Security Act.

The Personal Property Security Acts (“PPSAs”) of most other Canadian provinces and territories (including Ontario) do not have a definition for the term, “licence”; debtors and creditors in those jurisdictions must rely on the applicability of the factors in Saulnier to their particular circumstances in respect of any licences purported to be provided as collateral. The PPSAs of Saskatchewan, the Northwest Territories and Nunavut have definitions of the term, “licence” that are similar to that in the Amendments.

The Amendments will also provide that a licence provided as collateral may be disposed of, retained or held only in accordance with the terms and conditions of such licence and the terms and conditions applicable by law or contract to such licence. The Amendments will require any secured party who wishes to seize a licence on default to provide notice of such seizure to the relevant minister if the licence was granted pursuant to legislation or, in any other case, to the grantor of the licence; notice of seizure to the debtor will continue to be required, as is the case under the current BC PPSA.

It will be interesting to see if the inclusion of the defined term, “licence” in the PPSAs of BC, the Northwest Territories, Nunavut and Saskatchewan leads other Canadian jurisdictions to enact similar legislation.

Why "Record" Security Interests in Intellectual Property at the Canadian Intellectual Property Office?

Charles Zienius — Thu, 22 Dec 2011 10:35:16 -0500

In Canada, security interests in intangible property collateral are perfected (or published, in the case of Québec) by making a registration under the personal property security legislation (“PPSL”) of the province where the debtor is deemed to be located at the time the security interest attaches. Intellectual property, such as trade-marks, patents, industrial designs, or copyrights, whether registered or unregistered, is not treated any differently than other types of intangible property collateral in that regard.

However, each of the federal Trade-marks Act, Patent Act, Industrial Design Act, and Copyright Act also provide for, or permit, the “recording” (i.e. registration) at the Canadian Intellectual Property Office (the “CIPO”) of assignments or transfers of the types of intellectual property to which those statutes apply. None of them refer specifically to security interests or perfection, and there is no jurisprudence regarding the legal effect of recording a security interest with CIPO. Nevertheless, it is conceivable that a court might someday conclude (contrary to the current generally accepted view) that the PPSL priority rules do not apply to intellectual property applications or registrations maintained at the CIPO as a result of paramount federal legislation, and according that priority disputes in respect of intellectual property collateral are to be determined under common law. The recording at the CIPO of a security interest in registered intellectual property might then enable a secured party to demonstrate that notice of its security interest was properly given to competing secured creditors. Moreover, even outside the context of a common law priority dispute, a recording at the CIPO might help avoid potential litigation risk by putting other interested parties on notice (to the extent such other parties reviewed the applicable CIPO records).

Therefore, where registered intellectual property constitutes a significant part of the collateral, secured parties often record at the CIPO their security interest against the property in question (in addition to making appropriate filings under applicable PPSL). The recording process essentially involves the payment to the CIPO of a prescribed fee, and the filing of a copy of an executed security agreement (identifying in sufficient detail (including reference to application numbers or, where applicable, registration numbers) the intellectual property against which the security is granted) by the CIPO in the appropriate records. Recording may only be done after the security agreement is effective, and for confidentiality reasons secured creditors often prefer to record only an abridged (but fully executed) version of their “main” security document.

Interest Rate Hedging Agreements Linked to Credit Agreements

Richard Borins — Tue, 13 Dec 2011 15:58:46 -0500

We often see banks requiring their borrowers to enter into interest rate hedge agreements in conjunction with their credit agreements. There are a number of reasons why borrowers should take care to ensure that they have the related ISDA Agreements and Schedules considered by experienced counsel. Here are just two of those reasons.

Linkage to the Credit Agreement

ISDA Agreements often include the termination of the Credit Agreement as either an Additional Termination Event or an Event of Default. The result of such an inclusion is that if the Credit Agreement is repaid early (whether upon a sale of the company or otherwise) then the borrower will be responsible for any out of the money payments that are owing at the time of the repayment. These out of the money payments could be significant and borrowers will need to become sufficiently versed in the nature of the ISDA Agreements and the related financial repercussions at the outset of the transaction to avoid surprises down the road.

Assignment by the Lender

For secured hedges, lenders will often include an Additional Termination Event should the lender assign its loan. That opens up the possibility that a lender would have the power to essentially unilaterally cause the termination of an ISDA Agreement by assigning its loan to a third party. If that termination occurs at a point when the borrower is in an out of the money position then it could be a very costly assignment to the borrower. One way to address this issue is to provide in the terms of the Credit Agreement a restriction on the lender’s ability to assign its loan (or its portion thereof for syndicated deals) where the result of such an assignment would be to permit the lender to terminate the related ISDA Agreement.

Further Extension of Exemption from Rule 17g-5(a)(3) for Certain Non-U.S. Transactions

Peter Milligan — Fri, 09 Dec 2011 11:37:34 -0500

On November 16, 2011, the Securities and Exchange Commission (“SEC”) issued an order extending the temporary exemption for rating agencies from the requirements for Rule 17g-5 for certain non-U.S. transactions for a further one-year period, expiring December 2, 2012.

By way of background, Rule 17g-5 is a series of rules designed to deal with conflicts of interest affecting credit rating agencies. A rating agency being hired by the issuer or arranger to determine a credit rating for a structured finance product is such a conflict of interest. It is also the normal, if not universal, circumstance for any issuance of a rated structured finance product. Given that there will be a conflict of interest, Rule 17g-5(a)(3) requires that the retained rating agency must provide to other rating agencies access to an internet website containing all the information provided to the retained rating agency in issuing its rating. It was thought that making the information supporting a credit rating available to other rating agencies would both keep the retained rating agency more diligent and encourage additional rating agencies to issue ratings on the structured finance product.

In the comment period before these new rules became effective on June 2, 2010, serious concerns arose about the extra-territorial affect of these provisions. Any rating agency active in the United States would apparently have to comply with these rules for all structured finance products which it rates whether or not there was any connection between the rated transaction and the United States. In effect, it would apply to all “Canadian” transactions because all rating agencies active in Canada are also active in the United Sates. In response to those concerns, the SEC exempted rating agencies from complying with 17g-5(a)(3) in respect of transactions where the issuer was not a U.S. person and where the rating agency had a reasonable basis to conclude that the structured finance product would not be offered and sold in the United States. The initial exemption order was available until December 2, 2010. It was later extended until December 2, 2011 and now, pursuant to this most recent order of the SEC, to December 2, 2012.

The most recent extension is also framed as a request for comment. While a frequent comment is that this exemption for non-U.S. transactions should be made permanent, apparently the SEC is seeking further comment on the issue.

Proposed Financial System Review Act to Address Priority of Bank Act Security.

Kashif Zaman — Fri, 02 Dec 2011 11:56:33 -0500

The Bank Act (Canada) (the “Act”) and a number of other federal statutes relating to financial institutions must, by law, be reviewed every five years. The most recent review process has culminated in Bill S-5 (the Bill) which is entitled the Financial System Review Act (the FSRA).The Bill had first reading in the Senate on November 23, 2011, and requires second and third readings in the Senate, first through third readings in the House of Commons and then Royal Assent before the FSRA can come into effect.

Bank Act Security and the Impact of Recent Judgments

Part VIII of the Act provides banks listed under Schedules I and II of the Act, and authorized foreign banks, the right to advance funds on the security of certain collateral listed in section 427 of the Act.

Last year the Supreme Court of Canada (SCC) issued two decisions in which it determined that an unperfected Personal Property Security Act (PPSA) security interest had priority over a subsequent but perfected security interest under section 427 of the Act. The result of these SCC decisions undermined the utility of the Act security and has resulted in its non-use by Canadian banks.

Proposed Amendments

The Bill includes proposed amendments to the Act security regime addressing the priority of the Act security in light of these SCC decisions. In summary, the Act, when amended, will include a statement that security properly taken under the Act has priority over a PPSA security interest (or any other security interest) that was unperfected at the time the Act security was taken except if the relevant bank, when it acquires the Act security, has knowledge of such unperfected security interest. It remains to be seen whether Canadian banks are satisfied with the legal effect of such proposed amendments such that Act security will once again be used.

This entry is based on content from the Osler Update “Canadian Government Introduces Amendments to Back Act” authored by Stephen D.A. Clark, Kashif Zaman and Victoria Graham.

Quebec Bill 24 Proposes New Requirements for Consumer Contracts of Credit

Nathalie Beauregard — Thu, 10 Nov 2011 14:33:12 -0500

This entry is based on a recently published E-Review on www.osler.com.

On June 7th, 2011, An act to combat consumer debt overload and modernize consumer credit rules (Bill 24) was tabled in the National Assembly of Québec.

If enacted in its current form, Bill 24 will affect a broad scope of businesses, but predominantly those which provide consumers with contracts of credit such as contracts for: money loans, open credit, instalment sales, and debit cards.

General Measures Counteracting Consumer Debt Overload

Bill 24 introduces a new obligation for merchants to provide a consumer not only with a copy of the contract that is executed by the consumer but also with a duplicate of any other documents signed by the consumer.

A consumer will then have seven days following the day on which the consumer is in possession of a duplicate of a contract of credit to cancel it and 30 days to cancel any accessory contract not required as a condition to obtain a contract of credit (unless shorter notice is provided in the accessory contract). In the later case, the consumer will be entitled to a refund of any amount paid for any portion of the services that has not been provided at the time of the cancellation.

Merchants will also have:

the obligation to deliver a discharge and to return any object or document received as an acknowledgement of, or security for, the said discharged obligation; and
if applicable, to request the cancellation of the registration of any right or hypothec securing the performance of the consumer’s obligation.

Court Intervention

According to Bill 24, as long as a consumer is not in default, such consumer will have the right i) to ask the court to modify the terms and conditions of payment under a contract of credit if such consumer cannot meet those terms and conditions by reason of a superior force and ii) to request the court to order suspension of repayment of outstanding balance until final judgement is rendered.

Verification of Consumer’s Capacity to Repay

If Bill 24 is adopted, merchants will have the obligation to verify a consumer’s capacity to repay the credit requested or any increase of credit requested before entering into a contract of credit or extension of credit. A merchant who fails to fulfill that obligation will lose its right to the credit charges and will have to refund all credit charges already paid by the consumer.

Bill 24, as it is written now, does not provide merchants with any insight on how the obligation to verify consumer’s capacity can be fulfilled.

Open Credit Contract

If Bill 24 is enacted, merchants will be prohibited from:

granting a consumer with a higher credit limit than what he or she requested or increase the credit limit already granted except if requested by the consumer; and
increasing the credit rate of a credit card issued at a promotional rate before the expiry of a period of six months.

Merchant’s Disclosure Obligations

Bill 24 lists all the information that merchants will have to disclose in various types of contracts including contract with a variable credit rate, contract for the loan of money, open credit contract and its application form or the accompanying documents, instalment sale contract and any other contract involving credit.

Liability in the Event of an Unauthorized use of a Credit and/or Debit Card

Pursuant to Bill 24, debit card contracts will be regulated by the CPA. Consumers will be liable for losses resulting from the use of their credit/debit card by a third person before the card issuer is given notice of the loss, theft and fraudulent or unauthorized use of the card. However, in any case such liability will be limited to $50.

Business Practices

If Bill 24 is enacted, new prohibitions will be established in relation to common business practices. Among others, it will be prohibited (i) for any person and by any mean, to represent to consumers that credit may improve their financial situation; or (ii) to state or imply that “no credit charges are payable during a certain period following a transaction, unless the applicable credit rate at the end of that period, if the net capital has not been completely repaid, is clearly specified”. It will also be prohibited to offer a premium to incite consumers to apply for a credit card or to enter into an open credit contract with a non emancipated minor without the written authorization of a person having parental authority.

Digital Payment Systems in Canada - Expect More Regulations

Kashif Zaman — Wed, 19 Oct 2011 16:32:55 -0500

This post by Stephen D.A. Clark and Kashif Zaman was originally published as an E-Review available at www.osler.com.

Digital Payments in Canada

Although Canada is one of the most advanced economies of the world, it is surprising (at least to some) that Canadian consumers are not very frequent users of mobile payment systems when compared to consumers in the U.K., Germany, Japan and a number of other developed and developing countries. At the same time, Canada is one of the fastest growing smartphone nations (over 70% of Canadians have mobile phones; 35% of these are smartphones). Canadians are therefore poised to take advantage of the mobile payment systems that are expected to grow in importance and usage in the near future (some of the mobile payments systems currently being used by Canadians include Zoompass and Presto). Perhaps recognizing this trend, on June 18, 2010, the Minister of Finance announced the formation of the Task Force for the Payments System Review (Task Force). The recommendations that will be made by the Task Force will have implications for a broad range of players in the payments industry, including financial institutions, Interac, Amex, MasterCard, Visa, Canadian Payments Association, issuers of gift cards or prepaid cards such as Starbucks, and issuers of digital or eWallets such as PayPal and Zoompass.

Mandate of Task Force for the Payments System Review

The Task Force was mandated to:

identify public policy objectives to be pursued in the operation and regulation of the payments systems;
identify and assess the regulatory and institutional structures best suited to achieving these public policy objectives;
assess and report on the safety and soundness of the Canadian payments system;
assess the competitive landscape by identifying any potential barriers for new entrants and mechanisms to improve the competitive landscape of the domestic payments system;
assess the degree of innovation in the domestic payments system, and report on the challenges and opportunities to bring new and innovative products to market in Canada; and
assess and report on whether consumers and merchants are well served by the domestic payments system.

Discussion Paper Issued by the Task Force

In the summer of 2011, the Task Force released a discussion paper (Paper) in which it shared its views on the current Canadian payments system and identified certain challenges that need to be addressed.

Some of the interesting observations made by the Task Force in the Paper include:

Canada is falling behind, especially in mobile payments and electronic invoicing and payments;
the ongoing reliance on cheques is problematic: cheques are a slow way to pay, leaving payors and payees uncertain when funds will be available; and, for governments and businesses, delays mean productivity lost and opportunities missed;
even online bill payments are hindered by legacy payments systems designed for paper (for example, according to the Task Force, Canadian banks still support online payments with batch-based processing, which means that it can take more than 24 hours to clear a payment).

In the Paper, the Task Force has identified four challenges:

increasing fairness in credit and debit card networks;
updating the regulatory and governance structure of these networks;
improving online authentication, security and privacy; and
transitioning to a digital economy.

The Paper focuses on the second challenge: updating the regulatory and governance structure. The Task Force expects to address the other three challenges in separate discussion papers later this year.

Updating the Regulatory and Governance Structure for Digital Payments

To update the regulatory and governance structure, the Task Force’s initial proposal has four components:

payment-specific legislation, which would be inclusive and functional and would recognize the specific roles of players within the payments system (the Task Force notes that the current legislative framework tends to focus on financial institutions, given their traditional role in payments, rather than on the function of payments);
creation of an industry self-governing organization, which would involve mandatory membership for industry participants;
upgrades to the current payments infrastructure to support a modern digital economy. The aims of the upgrades would include: reducing concentration of ownership and control of payments networks; providing open access and a platform offering secure clearing and settlement of payments and competition among payment service providers; facilitating funding of investment in infrastructure; and developing a fair user-pay model to sustain and promote the infrastructure; and
creation of an independent payments oversight body which would monitor the proposed governance framework and report to the Minister of Finance.

The Task Force notes that currently payments in Canada are governed by a patchwork of legislation. The current legislative framework addresses a number of different concerns: (i) payments rules and standards (e.g., Canadian Payments Act, Bank Act, Payments Clearing and Settlement Act, provincial credit union acts, Bills of Exchange Act); (ii) prudential oversight (e.g., Bank Act, provincial financial institutions acts); (iii) consumer protection (e.g., provincial consumer protection legislation, privacy legislation, Competition Act); and (iv) safety and security (e.g., anti-money laundering legislation). At this time, it is not clear whether the Task Force’s final recommendations will result in consolidation of some of the current statutory obligations or rather amendments to the current statutes.

Comments to the Discussion Paper

The Task Force’s Paper has received a number of comments from various players in the payments system. At a high level, most commentators support the Task Force’s position that the current payments system needs to be updated. However, the commentators have divergent views and interests concerning how the system should be updated (the full text of the Paper and the comments can be viewed at http://paymentsystemreview.ca/). Although it is too early to tell which of the components of the Task Force’s initial proposal will make it to the final recommendations of the Task Force, it is likely that some of the players in the payments industry who so far have been largely unregulated (or very lightly regulated) will become subject to new regulations. We expect to see more clarity in this area early next year. Stay tuned.

Take Care When Dealing With Letters of Credit - A Recent Case from Ontario

Andrea Lockhart — Thu, 13 Oct 2011 10:41:42 -0500

This piece was authored by Steven Golick and Andrea Lockhart.

The Ontario Superior Court of Justice recently considered an application by Piaggio & C.S.p.A. (“Piaggio”), an Italian manufacturer of motorcycles and scooters, arising from a dispute in connection with a refusal of payment by the Bank of Nova Scotia (the “Bank”) under three letters of credit (the “LCs”). The case (2011 ONSC 2567) is instructive of the care required when taking letters of credit and presenting them for payment.

The Bank's Refusal

The Bank’s refusal to pay funds to Piaggio pursuant to the LC’s was on the basis that the named beneficiary of the LC’s did not conform to the name on the draw documents in a material respect. The Bank also refused to honour one of the LC’s on the basis that Piaggio did not provide all of the original amendments to the first LC. Piaggio sought an order from the Court requiring the Bank to honour the LCs and pay the face amount of each with interest.

The Beneficiary Description Issue

The Bank’s Position

Piaggio and the Bank disputed the materiality of the differences between the named beneficiary on all three of the LCs versus the presentation documents provided to the Bank. The Bank took the position that it could not honour the LCs on the basis that there were material discrepancies between the named beneficiary in the LCs (“PIAGGIO AND C.S.P.A./APRILIA” or “PIAGGIO AND C.S.P.A. (APRILIA)”) and Piaggio’s name as set out in the presentation documents (“Piaggio & C.S.p.A.”), which was Piaggio’s proper legal name.

Piaggio’s Position

Piaggio argued that the discrepancies between the LCs and the presentation documentation were minor and that, given the documents passing between itself and the Bank, there was no question that Piaggio was the only entity that could possibly be the proper beneficiary under the LCs. Piaggio pointed to a number of factors supporting this argument, including the following: (i) the Bank, by way of letter to Piaggio, confirmed it was issuing a letter of credit to “Piaggio & C.S.P.A.” as beneficiary; (ii) the Bank’s SWIFT communications that confirmed the LC amendments described the beneficiary of the LCs as “Piaggio & C.S.P.A.”; (iii) the address of the beneficiary was identical on all three LCs and related amendments; and (iv) there was no legal entity called either “Piaggio & C.S.p.A/Aprilia” or “Piaggio & C.S.p.A.(Aprilia)”, therefore, the Bank was not at risk by paying the funds to Piaggio.

The Court’s Reasoning

The Court noted that letters of credit are generally strictly construed according to their terms. Since the Bank had a strict obligation to pay under the LCs, the beneficiary of such LCs had an obligation to strictly comply with the terms and conditions of the LCs. However, the bank noted that minor discrepancies between the LCs and the presentation documents were not fatal. Accordingly, the Court proceeded to consider whether the discrepancies in the beneficiary’s name were minor.

In evaluating the evidence, the Court considered the decision of the Supreme Court of Canada (“SCC”) in Bank of Nova Scotia v. Angelica-Whitewear Ltd., wherein the SCC stated that when the parties involved are dealing in documents, not goods, the documents are of paramount importance. However, the SCC also stated that there was latitude for minor variations of discrepancies that were not sufficiently material to justify a refusal for payment under a letter of credit, including: (i) the use of words in the singular, rather than plural; (ii) superfluous adjectives descriptive of the goods; (iii) numbers in sets rather than in totals; and (iv) obvious typographical errors either in the letter of credit or the documents.

In this case, the Court determined that the correct name of the beneficiary was fundamental. In order to determine if “Piaggio & C.S.p.A.” was the same legal entity as the beneficiaries named in the LCs, the Bank would have had to look beyond the presentation documents themselves. Therefore, the Court concluded that the addition of the word “Aprilia” was more than a typographical error and was material. In addition, in this case the Canadian customer, not the Bank, named the beneficiary in the LCs. As such, it was not the Bank’s responsibility to determine the true name of the beneficiary. Rather, it was up to the Canadian customer or Piaggio to correct the mistake. Had Piaggio insisted on amending the LCs to reflect its proper legal name, Piaggio would have avoided this problem. On these bases, the Bank was justified in refusing to pay Piaggio under the LCs.

Loss of Original LC Documentation

The Court noted that even if the misnamed beneficiary was a minor discrepancy, the Bank would still have been justified in refusing to pay the first LC due to the failure of Piaggio to produce all of the original amendments relating thereto or, in lieu thereof, to provide the Bank with an affidavit deposing that the original LC amendment could not be found and had not been sold, assigned or transferred together with a comprehensive indemnity and a bond.

Conclusion

While the result may come as no surprise to commercial parties that regularly deal in letters of credit, this case highlights one of the risks associated therewith. The beneficiary must strictly meet the draw conditions in order to obtain payment from the financial institution issuing the letter of credit. Letters of credit should be carefully reviewed prior to acceptance, and any conditions negotiated in advance. Errors on the face of the letters of credit should not be accepted.

Beneficiaries of letters of credit are cautioned to review their existing letters of credit for any errors, and at the time of presentation to ensure that the letters of credit and presenting documentation match. Further, the beneficiary should take care in the custody of the letter of credit.

On presentation, all documentation required by the letter of credit, along with the original letter of credit, should be presented at the place specified in the letter of credit. In the event of loss of the original letter of credit, it may be possible in some cases to draw on the letter of credit by presenting the bank with a copy of the letter of credit, an affidavit relating to its loss, together with an indemnity and bond.

Loans to U.S. Borrowers - Deemed Dividend Problem with Credit Support from Non-U.S. Subsidiaries

William Corcoran — Tue, 04 Oct 2011 11:44:01 -0500

When non-U.S. subsidiaries of a U.S. borrower provide credit support for loans made to their U.S. parent, unexpected and often significant U.S. tax costs can result. When structuring lending and credit support arrangements that involve U.S. borrowers and non-U.S. credit support, both borrowers and lenders should consider how to avoid unintentionally giving rise to these potential costs.

The Deemed Dividend Problem

Under U.S. federal income tax rules, certain credit support provided by non-U.S. subsidiaries of a U.S. borrower can cause the U.S. parent to be deemed, for U.S. tax purposes, to receive an annual dividend from the non-U.S. subsidiary to the extent of that subsidiary’s earnings (generally up to the amount of the loan). Such deemed dividends can have significant adverse tax consequences for the U.S. parent, since they can cause non-U.S. earnings that might not otherwise be subject to U.S. tax to become subject to U.S. tax prior to those earnings actually being repatriated to the United States. In addition, because no actual distribution of cash occurs under these deemed dividend rules, the U.S. parent may be required to pay U.S. tax on these dividends without necessarily having the cash on hand to satisfy the resulting U.S. tax liability.

To avoid creating an unnecessary U.S. tax bill (money that could otherwise be used to fund operations or service the debt), lenders and borrowers often agree to limit the amount of credit support provided by non-U.S. subsidiaries of U.S. borrowers in order to avoid creating a deemed dividend problem.

What to Avoid

The following types of credit-support scenarios commonly give rise to a deemed dividend problem:

a non-U.S. subsidiary guarantees a U.S. parent borrower’s debt obligations;
a non-U.S. subsidiary directly or indirectly pledges its assets to secure the repayment of the U.S. borrower’s debt obligations;
a U.S. borrower pledges stock representing 66 2/3% or more of the total combined voting power of its non-U.S. subsidiary and agrees (as is common in credit agreements) to limit the non-U.S. subsidiary’s ability to dispose of its assets or incur liabilities outside the ordinary course of business; or
where there are multiple tiers of non-U.S. subsidiaries (eg. USCo owns ForCo1, which owns ForCo2), the U.S. borrower pledges stock in a lower-tier non-U.S. subsidiary (ie. causes stock of ForCo2 to be pledged).

As a result, market practice in the United States often finds U.S. borrowers providing credit support from all their U.S. subsidiaries, but limiting credit support from non-U.S. subsidiaries to 65% of the voting stock of the U.S. borrower’s first-tier non-U.S. subsidiaries.

Mitigating Circumstances

A U.S. borrower may be persuaded to provide additional credit support from its non-U.S. subsidiaries if any of the following facts (which diminish deemed dividend concerns) are present:

the non-U.S. subsidiary has very little or no accumulated earnings and little prospect for future earnings (since the amount of any deemed dividend in any given taxable year is limited under these rules to the amount of the subsidiary’s earnings);
the U.S. borrower would already be required to pay U.S. tax on the earnings of its non-U.S. subsidiary, which may be the case if, for example, the subsidiary is expected to make actual current distributions of its earnings to the U.S. parent (e.g., to service the loan) or the subsidiary generates income that is already taxable to the U.S. parent on a current basis under other U.S. tax rules (such as the U.S. “Subpart F” regime); or
the U.S. borrower is expected to receive U.S. tax credits for non-U.S. taxes paid on the subsidiary’s earnings or has other tax attributes available (such as net operating loss carryforwards) that are sufficient to offset any U.S. tax payable on the deemed dividend inclusions.

Structural Solutions

Where a deemed dividend problem is expected but additional non-U.S. credit support is desired or required, structural alternatives may also sometimes be available. For example, it may be possible for a lender to advance separate loans to the U.S. borrower and to its non-U.S. subsidiaries. In such a separate-stream financing arrangement, the U.S. borrower often provides a downstream guaranty or pledge of its own assets to secure the obligations of its non-U.S. subsidiaries, while the non-U.S. subsidiaries secure their own loans by granting liens on their assets. The non-U.S. subsidiaries generally do not, however, provide guarantees or pledge assets to support the U.S. borrower’s loans. Because no impermissible credit support is provided by non-U.S. subsidiaries on the U.S. parent’s debt, no deemed dividend problem generally results. However, depending on the nature of the transaction, other withholding tax and foreign currency exchange considerations and costs may be implicated. In addition, if the non-U.S. subsidiaries do not actually use or repay the separately borrowed funds, the separate financing streams may not be respected for U.S. tax purposes.

Alternatively, because non-voting stock in non-U.S. subsidiaries can be pledged without restriction under these deemed dividend rules, it may occasionally be possible to recapitalize the U.S. borrower’s non-U.S. subsidiary with non-voting stock that represents a significant proportion of the subsidiary’s value. That non-voting stock (and, in addition, up to 65% of the voting stock) could then be pledged to secure the U.S. borrower’s obligations. However, there is a risk that the IRS will not respect the recapitalization transaction, particularly if the transaction is motivated by a desire to avoid the application of the deemed dividend rules.

Please contact any member of the Osler New York Tax Department for further advice on this subject.

Minimizing Risk for Creditors' Nominee Directors

Richard Borins — Tue, 26 Jul 2011 11:23:30 -0500

A nominee director of a corporation appointed by one of its creditors may encounter risk of liability where that creditor is engaged with the corporation in efforts to restructure its debt. Steps can be taken to minimize the risk of such liability.

Nominee Directors in Canada

Canadian law relating to corporate directors’ duties differs from U.S. law. In particular, the directors’ fiduciary duty requires a director to act in the best interests of the corporation. This duty does not change when the corporation is in the “vicinity of insolvency”. In particular, the directors’ duty remains with the corporation and does not shift to creditors. Further, a director has a positive obligation to share third party information, including confidential information, with the corporation if the information affects the corporation in a vital aspect of its business. Nominee directors are subject to the same fiduciary duty as any other director. They may not prefer the interests of their nominators and their duties to the corporation are not attenuated in any way. We also note that a number of federal and provincial statutes impose personal liability on directors to pay certain amounts if a corporation becomes insolvent and cannot pay the amounts.

Minimizing the Risk

Resign - In the context of a creditor appointed director in a debt restructuring, resignation may be more readily considered than in other circumstances. Resignation as a director will avoid allegations of misuse of confidential information, non-disclosure and conflict of interest based on subsequent events. However, resignation will not excuse the nominee from obligations incurred as a director before resignation.
Don’t Participate in the Restructuring (Place a “Cone” Over the Nominee) - If nominee directors do not resign, the creditor should consider placing a “cone” over its nominees to provide insulation from information and decision-making relating to the creditor’s restructuring efforts. The objective of the cone is to facilitate the nominee directors complying with their fiduciary obligations. If the director is not involved in the restructuring efforts, the director will not be sharing information with or acquiring information from the creditor in a manner that could be criticized as inconsistent with their duties as a corporate director. Nor will the nominee be making decisions about the restructuring that could be perceived as conflicting with the interests of the corporate borrower.
If the Nominees Participate, Demonstrate Compliance - If nominee directors do not resign and participate in the creditor’s restructuring efforts, the directors should take care to act in a way that demonstrates compliance with their duties as directors. It is not possible to produce an exhaustive list of behaviours because the situation would be an evolving one. However, examples of the types of behaviour the director should exhibit include the following:
- Nominee directors should always be clear about whether they are acting in their capacity as a director of the corporation or as an employee of the creditor. In particular, restructuring discussions among a nominee and the corporation should clearly be conducted in the nominee’s capacity as an employee of the creditor.
- Nominee directors should clarify their authority to share information regarding the corporate borrower with the creditor, even where such sharing is authorized in the applicable loan documentation
- If the board of the borrower is addressing issues relating to the loan, Canadian business corporations statutes require nominees to disclose a conflict of interest and to refrain from attending at board discussions about, or voting on, the issues. Depending on the nature of more general restructuring discussions, it may also be prudent for the nominee director to simply recuse themselves.
- The nominee director should continue to seek legal advice about their duties throughout the process. Some business corporations statutes do not recognize an expert reliance defence in connection with breach of a director’s fiduciary duty, but expert advice may nevertheless help a director avoid an obvious misstep.

Please note that each circumstance will have its own particular facts and issues and that counsel should be conducted before proceeding. We would be happy to assist you in this regard. Also, the above summary focuses on laws in the Province of Ontario. Different rules may apply in some of the other Provinces

Canada's Federal Department of Finance Issues Covered Bonds Consultation Paper

Richard Fullerton — Tue, 05 Jul 2011 10:39:50 -0500

Covered bonds are debt instruments that are generally issued by financial institutions and secured by a cover pool of high-quality assets held by a special purpose vehicle (SPV) which guarantees repayment of the covered bonds if the issuer defaults on the bond payments. Covered bonds are common internationally and have also become a significant funding source for Canadian banks, with all the Schedule I banks establishing a covered bond program and issuing one or more series under such program. To date, total issuances of covered bonds by Canadian financial institutions exceed $30 billion.

At this time, there is no legislative framework governing the issuance of covered bonds in Canada, and each of the current Canadian programs has been established under a contractual framework. This non-legislative, contractual approach suffers from two drawbacks: i) it makes the Canadian covered bond market less robust compared to those jurisdictions in which a legislative framework exists, as it reduces the ability of Canadian financial institutions to diversify their funding sources since many investors are restricted from purchasing covered bonds for which no legislative framework exists; and ii) the assurance by an issuer of repayment in the event of default is not as robust as if that assurance is enshrined in legislation.

The Federal Department of Finance (the Government) has issued a consultation paper regarding a proposed legislative framework for covered bonds in Canada. Some of the key elements are as follows:

Insolvency Protection - The Government proposes the legislative framework clarify that in the event of issuer insolvency, the covered bondholders have priority of claim over the assets held by the SPV. The Government also proposes to protect the priority of service providers in the event of the insolvency of the SPV. While the current programs have been structured in a manner that is meant to ensure such priorities, the certainty afforded by a statutory regime is desirable to many of the participants in the programs.
Permitted Assets - The Government proposes that the legislative framework will only permit loans made on the security of a residential property located in Canada to be included in the cover pool, unlike in other jurisdictions in which a broad range of assets may form the collateral for covered bonds. To date, all Canadian covered bond programs include only Canadian residential mortgages in their collateral pool.
Permitted Issuers - The Government proposes that the legislative framework be available to federally regulated financial institutions (FRFI) only. Non-FRFIs would be able to benefit from the framework by selling eligible assets to FRFIs.
Overcollateralization - Overcollateralization is the amount by which the value of cover pool assets is required to exceed the value of the covered bonds issued. A higher level of overcollateralization serves as a credit-enhancement for the covered bonds, but diminishes the amount of assets available to other creditors and depositors of the issuer. Under current Canadian practice, issuers generally set the maximum overcollateralization at 10 percent. The Government proposes that the legislative framework standardize current Canadian practice and set a maximum level of overcollateralization.
What happens to existing issuances? - The Government proposes that, subject to the approval of the proposed covered bond registrar, existing covered bonds programs could become registered programs if the issuer becomes a registered issuer and the program otherwise complies with the legislation.

Supreme Court of Canada ruling in fraud case provides comfort to lenders

Benjamin Leith — Mon, 20 Jun 2011 15:55:18 -0500

In a contest between two innocent creditors over the proceeds of shares credited to an investment account which were traceable to fraudulently obtained funds, the Supreme Court of Canada held in favour of the Bank of Montreal (“BMO”), a secured creditor. The decision should provide lenders with a degree of comfort where it is later uncovered that the assets subject to their security interest were purchased with funds obtained through fraud.

In i Trade Finance Inc. v. Bank of Montreal, the Court had to determine whether the pledge of fraudulently obtained shares granted to BMO made it bona fide purchaser for value without notice of fraud. Otherwise, i Trade Finance Inc. (“i Trade”), which had lent the defrauding party (the “Fraudster”) the funds used to purchase the shares in question, could rely on an order obtained through a civil proceeding entitling i Trade to obtain any assets traceable to the funds of which it is was defrauded (excluding assets in the hands of a bona fide purchaser for value without notice).

The Court’s reasoning that the Fraudster had rights in the shares sufficient to support the granting of a security interest to BMO hinged on the principle of contract law that fraud does not render a contract void automatically, but rather a contract tainted by fraud is voidable at the election of the party defrauded. The fraud had not yet been uncovered at the time of the pledge, so BMO was able to fit itself into the exception to the tracing order as a bona fide purchaser for value without notice as a pledgee.

The reasoning in this case should be helpful where a secured creditor’s interest is challenged on the basis that the collateral was obtained through fraud. However, lenders should remain diligent. The reasoning may not extend where the fraud is uncovered before the lender’s security interest attaches to the fraudulently obtained collateral as the Fraudster must have rights in the collateral for a security interest to attach.

Canadian Federal Government Reintroduces March 22, 2011 Budget Measures

Alex Pankratz — Wed, 08 Jun 2011 16:07:24 -0500

“Today I am presenting the essential commitments our Government made on March 22.”

The Honourable Jim Flaherty
Minister of Finance

On June 6, 2011, the Honourable Jim Flaherty, Minister of Finance, tabled the first federal budget of the Conservative majority government. The Budget includes all of the measures that were introduced in the March 22, 2011 budget. The March 22, 2011 budget was not adopted by Parliament before its dissolution on March 26, 2011.

The Budget provides an update of the government’s projected budgetary deficits. The government now projects that the deficit in 2010-11 will be $36.2 billion (as compared to $40.5 projected in the March 22, 2011 budget) and that the deficit in 2011-12 will be $32.3 billion (as compared to $29.6 billion projected in the March 22, 2011 budget). The government now projects that by reducing expenses, a surplus will be achieved in 2014-15, one year earlier than was projected in the March 22, 2011 budget.

The Budget includes a provision in 2011-12 for $2.2 billion in support of a satisfactory agreement between Canada and Quebec on sales tax harmonization. It also provides for the gradual elimination of the per vote allowance paid to political parties by 2015-16.

The Budget reintroduces all of the tax measures announced in the March 22, 2011 budget, and does not introduce any additional tax measures. For a detailed discussion of the March 22, 2011 budget measures, see our Budget Briefing 2011. The Budget provides that all of the measures in the March 22, 2011 budget that were to be effective on the “Budget Date” are to be effective on March 22, 2011.

To access the Budget and related documents, click here.

If you have any questions or require additional analysis of the Budget’s tax measures, please contact any member of our Tax Department.

Ontario Court of Appeal Grants Retirees Priority over Secured Creditors

Rupert Chartrand — Mon, 18 Apr 2011 15:24:26 -0500

Rupert Chartrand, Marc Wasserman and Andrea Lockhart have published an Osler Update: Ontario Court of Appeal Grants Retirees Priority over Secured Creditors. The Update describes the Court's decision in Re Indalex Limited from restructuring proceedings under the Companies Creditors' Arrangement Act (Canada).

This case is of particular interest to lenders due to the outcome of the priority contest over a reserve fund consisting of proceeds from a sale of the business assets of the debtor and its affiliates. The Court found that payments for the full deficiency of underfunded defined benefit pension plans had priority over the holder of a court ordered debtor-in-possession charge (ie. a secured creditor).

See the Update for a full discussion.