This will have lenders worried

One of the consequences of having experience is that you can remember when things had been brutal when a company was going through financial problems. Back in the 1980s, the secured lenders were rather cavalier about how they went in to scoop assets from a debtor in collecting on their collateral, and they didn't care if anyone got stuck with remaining debts afterwards. There were too many stories I knew of back then, and I actually had to go in and work at one company that had been on the brink of shutting down before it was saved by an acquirer.

One of the more abrupt scenarios was if you were in business in Québec, where the Code of Civil Procedure allowed seizures to be undertaken by secured lenders without notice. This only changed when the federal Bankruptcy and Insolvency Act was amended in 1992 to provide a ten-day notice period before such action, which brought that province into line with the rule already in place in the common-law provinces.

Other examples of bad behaviour exist to the present day. The most egregious I've seen is when a secured lender seizes collateral before a debtor collapses, and realizes, at any price, quick proceeds by power of sale. It was standard practice that the creditor would just scoop the proceeds, and that was that.

According to the courts, that is not acceptable behaviour in the following circumstances:

• The creditor is now required to take reasonable precautions to obtain a fair market value on the property, and, should the proceeds exceed the amount due, return the difference to the debtor.
• It the debtor has unremitted balances of Tax/CPP/EI source deductions and/or GST/HST, and the debtor does not have sufficient funds to pay them, the CRA will now go after the lender for any amounts owing

 The first principle arose from the English case of Cuckmere Brick Co Ltd v Mutual Finance Ltd, where Salmon LJ stated:

I accordingly conclude, both on principle and authority, that a mortgagee in exercising his power of sale does owe a duty to take reasonable precaution to obtain the true market value of the mortgaged property at the date on which he decides to sell it. No doubt in deciding whether he has fallen short of that duty, the facts must be looked at broadly and he will not be adjudged to be in default unless he is plainly on the wrong side of the line.

Canadian courts have adopted a similar approach.

The latter is a consequence of jurisprudence that has only arisen in recent years, and is neatly summarized in a case decided by the Federal Court of Appeal this past summer. While such debts may (with the exception of source deductions) rank only with other unsecured creditors at the time of bankruptcy, any move to realize upon security before that point will have massive consequences, as noted here:

• A creditor is obliged to pay proceeds from a tax debtor’s assets to the Crown whether or not that creditor is aware the debtor hasn’t remitted its taxes.
• The creditor can be personally liable for the debtor’s GST/HST arrears
• The Crown will now be more aggressively inclined to pursue creditors post-bankruptcy to recover amounts obtained from the debtor’s assets in pre-bankruptcy actions.
• This will not be available with respect to certain "prescribed security interests" (generally involving real estate), but the amount of the interest must be reduced by any collateral being held as well as any payments that have been made, and the exemption will not apply where a deemed trust amount has arisen before an interest has been registered.

This will force lenders to get more documentation and assurance that debtors do not have issues that may complicated efforts to protect their security. It appears accountants will have a bit more on their plate to work on.