Secured Transactions – Winter 2013 Professor: Yael Emerich Summary
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- Definition of Secured Creditor under the BIA
- Rights of Secured Creditors in Bankruptcy
Secured Creditors Under the BIASecured creditors can seize property during a bankruptcy, unless the bankrupt obtains a court order staying secured creditors as well. However, if the bankrupt individual or company uses a proposal in bankruptcy, secured creditors will be stayed along with everyone else. Definition of Secured Creditor under the BIAThe definition of secured creditor is given in section 2 of the BIA (below). This is a two-part definition. It begins with a general definition “a person holding a mortgage, hypothec, pledge, charge or lien on or against the property of the debtor…, or a person whose claim is based on, or secured by, a negotiable instrument held as collateral security and on which the debtor is only indirectly or secondarily liable.” Then there is a supplementary Québec-only portion that adds several proprietary-security mechanisms, rights of retention, plus priorities that are real rights. “Secured creditor” means a person holding a mortgage, hypothec, pledge, charge or lien on or against the property of the debtor or any part of that property as security for a debt due or accruing due to the person from the debtor, or a person whose claim is based on, or secured by, a negotiable instrument held as collateral security and on which the debtor is only indirectly or secondarily liable, and includes (a) a person who has a right of retention or a prior claim constituting a real right, within the meaning of the Civil Code of Québec or any other statute of the Province of Quebec, on or against the property of the debtor or any part of that property, or (b) any of (i) the vendor of any property sold to the debtor under a conditional or instalment sale, (ii) the purchaser of any property from the debtor subject to a right of redemption, or (iii) the trustee of a trust constituted by the debtor to secure the performance of an obligation, if the exercise of the person’s rights is subject to the provisions of Book Six of the Civil Code of Québec entitled Prior Claims and Hypothecs that deal with the exercise of hypothecary rights; Civil Law Paragraph (a) allows holders of certain rights of retention and prior claims to qualify as secured creditors. Note that the right of retention doesn’t need to constitute a real right, but the priority must. This means most priorities will not apply, except for the municipal taxes/schoolboard taxes priority, since it is a real right (CCQ 2654.1). However, some priorities, deemed trusts, and statutory hypothecs can be registered as legal hypothecs, and this will have the effect of preserving them in bankruptcy. Paragraph (b) includes most proprietary-security mechanisms, plus conditional/instalment sales. These would otherwise fall outside of the definition of secured creditor. Keep in mind the requirement that the transaction be one of those listed in paragraph (b), and also that it be subject to the hypothecary remedies of book six (which most of them are). Common Law The most important thing to note is that the definition does not say “security interest.” It instead lists various specific forms of common-law security (mortgage, lien, etc). One of the reasons for this is that the BIA does not want to include deemed secured creditors like lessors as secured creditors. One might wonder whether a “security agreement” that only uses the term “security interest” (and not charge, hypothec, lien, etc) would qualify someone as a secured creditor. I think the answer is yes, and the way of getting there would be to say that a security interest is in the nature of a charge or hypothec, much like the Walsh text argues. The common law definition has not been updated to catch proprietary securities, unlike the Québec definitions. Most obviously, a security trust creates a secured creditor in Québec, but not in Ontario. That means a common law security trust beneficiary is not subject to the stay of proceedings that affects secured creditors, and can take possession of trust property under 67(1)(a) BIA. Nor will trust property be subject to BIA super-priorities. Rights of Secured Creditors in BankruptcySecured creditors are not affected by the general bankruptcy stay of proceedings (69.3(2)). However, on application by the debtor, a court can delay realization on security by up to six months (69.3(2)(a-b)). This stay is usually easy to get. The stay created by a bankruptcy proposal (69, 69.1) will affect secured creditors. Regardless of whether there is a stay, the trustee must also be given a reasonable opportunity to inspect the property subject to security and exercise the right of redemption if desired (79). All secured creditors have to provide reasonable notice at common law before exercising their security. There are additional conditions for secured creditors planning to realize on a security that comprises all or substantially all of the debtor’s property which apply regardless of whether there is a bankruptcy or not (244). Speaking of 244, often when a secured creditor gives the required ten day notice, this often results in an NOI being filed and an automatic stay of proceedings coming into place (69). Secured creditors must prove their security and estimate value of asset (128(1)) failure to do so results in loss of security (128(1.1)). Trustees can also redeem the asset for the estimated value if they wish (128(3)). Secured creditors can also apply to have stays lifted 69(4). BIA Provisions 69.1 On filing proposal a similar stay of proceedings comes into effect. Lasts until trustee discharged or person becomes bankrupt. 69.1(5-6) Secured creditors can avoid the proposal stay if the proposal does not include them or if they vote against it. 69.3(2) Subject to subsection (3), sections 79 and 127 to 135 and subsection 248(1), the bankruptcy of a debtor does not prevent a secured creditor from realizing or otherwise dealing with his or her security in the same manner as he or she would have been entitled to realize or deal with it if this section had not been passed, unless the court otherwise orders, but in so ordering the court shall not postpone the right of the secured creditor to realize or otherwise deal with his or her security, except as follows: (a) in the case of a security for a debt that is due at the date the bankrupt became bankrupt or that becomes due not later than six months thereafter, that right shall not be postponed for more than six months from that date; and (b) in the case of a security for a debt that does not become due until more than six months after the date the bankrupt became bankrupt, that right shall not be postponed for more than six months from that date, unless all instalments of interest that are more than six months in arrears are paid and all other defaults of more than six months standing are cured, and then only so long as no instalment of interest remains in arrears or defaults remain uncured for more than six months, but, in any event, not beyond the date at which the debt secured by the security becomes payable under the instrument or law creating the security.
(a) the inventory, (b) the accounts receivable, or (c) the other property of an insolvent person that was acquired for, or is used in relation to, a business carried on by the insolvent person shall send to that insolvent person, in the prescribed form and manner, a notice of that intention. (2) Where a notice is required to be sent under subsection (1), the secured creditor shall not enforce the security in respect of which the notice is required until the expiry of ten days after sending that notice, unless the insolvent person consents to an earlier enforcement of the security. (2.1) Can’t obtain consent to a shorter notice period/waiver of notice prior to sending the notice itself. (3) This section does not apply to secured creditors: (a) whose right to realize or otherwise deal with his security is protected by subsection 69.1(5) or (6); or (b) in respect of whom a stay under sections 69 to 69.2 has been lifted pursuant to section 69.4. (4) This section does not apply where there is a receiver in respect of the insolvent person.
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