Canada Small Business Financing (Establishment and Operation of Capital Leasing Pilot Project) Regulations (SOR/2001-527)

41 If the lessor does not provide a report in accordance with section 40, the Minister is not liable after the day on which the report was due, for any loss sustained as a result of a lessee’s default on a capital lease for which the information specified in any of paragraphs 40(a) to (c) was not provided.

Default

42 For the purposes of these Regulations and subject to section 21, the outstanding balance of a capital lease becomes due and payable and the lessee is in default as of the day on which the lessee fails to comply with any material condition of the capital lease.

Procedure on Default

• 43 (1) If a lessee is in default under section 42, and the default has not been corrected to the satisfaction of the lessor, the lessor shall give the lessee notice of the default in writing and demand that the lessee comply with the condition of the capital lease within the period specified in the notice.

• (2) If the lessee fails to comply with the condition within the period specified, the lessor shall formally demand payment of the outstanding balance of a capital lease within the period specified in the demand.

• (3) If the outstanding balance of a capital lease is not paid within the period specified, the lessor shall take any of the following measures to minimize the loss sustained as a result of a lessee’s default on the capital lease or that will maximize the amount recovered:

  • (a) collect the outstanding balance of the capital lease;

  • (b) fully realize any security, guarantee or suretyship;

  • (c) realize on any insurance policy under which the lessor is the beneficiary;

  • (d) fully implement a compromise settlement with the lessee or with a guarantor or surety or any other person on behalf of the lessee, guarantor or surety; and

  • (e) subject to subsection (4), take legal proceedings, including the enforcement of any resulting judgment, if the estimated cost of the proceedings does not exceed the estimated amount that may be recovered.

• (4) If the lessee is a sole proprietor or a partnership, the lessor may execute a judgment by realizing on the assets of the sole proprietor or partners, other than the assets of the small business in respect of which the capital lease is entered into, in an amount no greater than the aggregate of

  • (a) 25% of the total financing amount of the capital lease,

  • (b) interest on the judgment,

  • (c) taxed costs for, or incidental to, the legal proceedings against the lessee, and

  • (d) legal fees and disbursements, other than costs referred to in paragraph (c), and other costs incurred by the lessor for services rendered by persons other than the lessor’s employees for the purpose of legal proceedings against the lessee.

Claims Procedure

• 44 (1) A lessor shall take all of the measures described in subsection 43(3) that are applicable before submitting a claim to the Minister for loss sustained as a result of a lessee’s default on a capital lease.

• (2) Subject to subsection (3), a lessor shall submit a claim for loss within 36 months after the expiry of the period specified in the notice referred to in subsection 43(1).

• (3) The Minister is authorized to extend the period referred to in subsection (2) if the lessor so requests before the expiry of the period.

• (4) A claim for loss shall be certified by the lessor and shall be accompanied by

  • (a) a copy of the capital lease, any amendments to the capital lease as a result of improvements to the equipment and other documentation substantiating the total financing amount of the capital lease;

  • (b) a copy of any document in respect of the net amount received by the lessor from any disposition of the equipment under subparagraph (7)(b)(i);

  • (c) a copy of a statement of account in respect of the capital lease; and

  • (d) a copy of the capital lease approval and administration files held by the lessor, if requested by the Minister.

• (5) A claim for loss shall include the lessor’s acknowledgement that the lessor has acted in accordance with the due diligence requirements referred to in section 19 when entering into and administering the capital lease and has taken the measures against the lessee required by subsection (1).

• (6) A claim for loss shall include all documents that evidence the registration or publication of any rights or interests in respect of the capital lease.

• (7) An eligible loss sustained by a lessor shall be calculated as follows:

  • (a) by determining the aggregate of the following amounts, namely,

    • (i) the outstanding balance of the capital lease on the expiry of the period specified in the notice referred to in subsection 43(1),

    • (ii) the amount of interest calculated in accordance with subsection (10),

    • (iii) uncollected taxed costs for, or incidental to, any legal proceedings in respect of the capital lease, and

    • (iv) legal fees and disbursements, other than costs referred to in subparagraph (iii), and other costs incurred by the lessor for services rendered by persons other than the lessor’s employees, for the purpose of collecting the outstanding balance of the capital lease from the lessee or the guarantor or surety; and

  • (b) by deducting from the aggregate amount the aggregate of the following amounts, namely,

    • (i) the greater of the residual value of the equipment set out in the registration form referred to in subsection 12(1), or the net amount received by the lessor on any sale or other disposition or on any capital lease of the equipment,

    • (ii) any other proceeds realized from the taking of any measures described in subsection 43(3), and

    • (iii) any amount paid by the lessor to a secured creditor, if the secured creditor has any security interest or rights in the equipment financed by the capital lease, and the security interest or rights rank ahead of the lessor’s security interest or rights.

• (8) If a lessor enters into a new capital lease with another lessee, of equipment that was already the subject of a capital lease, the net amount received by the lessor referred to in subparagraph (7)(b)(i) shall be calculated by determining the aggregate of the following amounts, namely,

  • (a) any down payment made by the lessee, and

  • (b) the present value of the outstanding balance of the new capital lease, calculated in accordance with subsection (9).

• (9) The present value of the outstanding balance of the new capital lease referred to in paragraph 8(b) shall be calculated at an annual imputed rate of interest and be determined by the formula

  (A - B) - C + D

  where

  A

  is equal to the annual imputed rate of interest used in the calculation of the scheduled payments in respect of the original capital lease;

  B

  is equal to the rate of interest on Government of Canada bonds in effect on the day the original capital lease was entered into;

  C

  is equal to 1.25%, being the rate of the administration fee referred to in subsection 14(2); and

  D

  is equal to the rate of interest on Government of Canada bonds in effect on the day the new capital lease is entered into.

• (10) The amount of interest referred to in subparagraph (7)(a)(ii) shall be calculated on the outstanding balance, taking into consideration any proceeds realized from the taking of any measures described in subsection 43(3), as follows:

  • (a) in respect of the period beginning on the day of default and ending on the expiry of the period specified in the notice referred to in subsection 43(1), at the annual imputed rate of interest used to calculate the scheduled payments in respect of a capital lease;

  • (b) in respect of the six-month period immediately after the period referred to in paragraph (a), at the annual imputed rate of interest used to calculate the scheduled payments in respect of a capital lease on the first day of the six-month period;

  • (c) in respect of the six-month period immediately after the period referred to in paragraph (b), at a rate of interest equal to one half of the rate of interest referred to in that paragraph; and

  • (d) in respect of the 24-month period immediately after the period referred to in paragraph (c), at a rate of interest of 0%.

• (11) If the total financing amount of a capital lease referred to in subparagraph 12(1)(d)(i) is not equal to the total financing amount set out in the capital lease, the eligible loss calculated in accordance with subsection (7) shall be calculated on the portion of the capital lease that was registered with the Minister in accordance with these Regulations.

Interim Claims Procedure

• 45 (1) A lessor may make an interim claim to the Minister for loss, calculated in accordance with subsection 44(7), sustained as a result of a lessee’s default on a capital lease, if the lessor has taken all of the measures described in subsection 43(3) that are applicable and either

  • (a) paragraph 43(3)(b) applies but the guarantee or suretyship has not been fully realized; or

  • (b) paragraph 43(3)(d) applies but the compromise settlement has not been fully implemented.

• (2) The Minister shall pay the interim claim as if the lessor had fully realized the guarantee or suretyship at the time the interim claim was made or fully implemented the compromise settlement.

• (3) Subsections 44(2) to (11) apply, with such modifications as the circumstances require, to an interim claim.

• (4) If, after the interim claim is paid, the lessor, by realizing the guarantee or suretyship or fully implementing the compromise settlement, recovers 100% of the guarantee or suretyship or compromise settlement, the lessor shall so notify the Minister and the interim claim is deemed to be a final claim.

• (5) If, after the interim claim is paid, the lessor, by realizing the guarantee or suretyship or fully implementing the compromise settlement, recovers less than 100% of the guarantee or suretyship or compromise settlement, the lessor may make a final claim under section 44 for the difference.

Subrogation

46 If the Minister pays a lessor for loss sustained as a result of a lessee’s default on a capital lease, Her Majesty is subrogated, from the payment of the final claim, to the rights of the lessor, up to the amount paid by the Minister.

Audit or Examination

• 47 (1) The Minister may, after giving at least 21 days notice in writing to a lessor, conduct an audit or examination of the lessor’s documents, records and books of account to verify that these Regulations are being complied with in respect of a capital lease, including that the lessor has acted in accordance with the due diligence requirements referred to in section 19 in respect of the approval and administration of the capital lease and that the documents submitted to the Minister in respect of the lessor are accurate and complete.

• (2) The Minister is authorized to designate persons to carry out audits or examinations under these Regulations. A person designated by the Minister may, at any reasonable time, consult the lessor’s documents, records and books of account in respect of a capital lease.

• (3) Every lessor shall, for the purpose of an audit or examination under these Regulations, give all reasonable assistance to any person designated by the Minister to carry out the audit or examination, provide access to all relevant sites, answer, orally or in writing, all questions relating to the subject-matter of the audit or examination and provide all information and documents in their possession and all copies required for the purpose of the audit or examination. The designated person shall not remove the documents or copies from the relevant sites without the permission of the lessor.

• (4) The Minister shall provide the lessor with a copy of the report of the audit or examination within 21 days after the report is completed.

• (5) If a lessor refuses or intentionally fails to comply with any requirement of this section, the Minister may notify the lessor in writing that the Minister is not liable under these Regulations to make any payment to the lessor for any loss sustained as a result of a lessee’s default on any capital lease entered into by the lessor.

Evaluation of Regulations

48 The Minister may request the lessor or the lessee to provide any information or documentation related to the capital lease for the purpose of evaluating these Regulations.

Cessation of Effect

49 These Regulations shall cease to have effect on April 1, 2007.

Coming into Force

• 50 (1) Subject to subsection (2), these Regulations come into force on April 1, 2002.

• (2) The definition lessor in subsection 1(1), and sections 17 and 18 come into force on the day on which these Regulations are registered.