Interpretation

• 1 (1) The definitions in this subsection apply in these Regulations.

  Act

  Act means the Canada Small Business Financing Act. (Loi)

  borrower

  borrower means a person who carries on or is about to carry on a small business to whom a loan has been made under the Act. It does not include Her Majesty or an agent of Her Majesty in right of Canada or a province, a municipality or a municipal or other public body that performs a function of government. (emprunteur)

  conventional loan

  conventional loan means a loan that is not subject to the Act. (prêt ordinaire)

  equipment

  equipment means equipment that is used or to be used in the course of carrying on a small business, and includes computer software, any ship, boat or other vessel used or to be used in navigation and water supply systems. It does not include inventory of the small business except inventory that is leased by the borrower to the borrower’s customers. (matériel)

  going concern

  going concern means a small business that has carried on operations at any time within 60 days prior to purchase or, in the case of a small business that operates on a seasonal basis, during the season prior to purchase. (entreprise en exploitation)

  health care industry

  health care industry means a small business classified under the heading Major Group 86 - Health and Social Service Industries, of the Standard Industrial Classification, 1980 published by Statistics Canada. (industrie des soins médicaux)

  hospitality industry

  hospitality industry means a small business classified under the headings Major Group 91 - Accommodation Service Industries, and Major Group 92 - Food and Beverage Service Industries, of the Standard Industrial Classification, 1980 published by Statistics Canada. (industrie hôtelière)

  improvement

  improvement includes construction, renovation and modernization and, with respect to equipment, installation. (amélioration)

  loan agreement

  loan agreement means any document described in section 10. (contrat de prêt)

  loan term

  loan term means the period set out in a loan agreement for repayment of the total amount of the loan. (durée du prêt)

  mini-storage industry

  mini-storage industry means a small business classified under the heading 479 - Other Storage and Warehousing Industries, of the Standard Industrial Classification, 1980 published by Statistics Canada. (industrie du mini-entreposage)

  responsible officer of the lender

  responsible officer of the lender[Repealed, SOR/2009-102, s. 1]

• (2) Whether persons are at arm’s length from each other must, for the purposes of these Regulations, be determined in accordance with the Income Tax Act.

• (3) For the purposes of these Regulations, a loan is considered to have been made on the day on which the first disbursement of funds is made by the lender.

• 1.1 (1) For the purposes of subsections 4(3) and 7(2) of the Act, borrowers are related when one borrower

  • (a) controls, directly or indirectly in any manner, the other borrower;

  • (b) is controlled, directly or indirectly in any manner, by the same person or group of persons as the other borrower;

  • (c) carries on their small business in partnership with the other borrower, which carries on another small business; or

  • (d) shares management services, administrative services, equipment, facilities or overhead expenses of the business with the other borrower, but is not in partnership with that borrower.

• (2) For the purpose of subsection (1), “borrower” includes a person to whom a guaranteed business improvement loan was made under the Small Business Loans Act, if that loan is outstanding.

• (3) For the purpose of subsection (1), control means to hold shares of a corporation to which are attached more than 50% of the votes that are necessary to elect a majority of its directors.

• (4) Despite subsection (1), borrowers whose businesses are located at different premises are not related if neither borrower derives more than 25% of their actual or projected gross revenues from the other.

Loan Registration

• 2 (1) A loan must be registered, subject to subsection (2), within three months after the day on which the loan is made.

• (2) If subsection (1) is not complied with and the non-compliance is inadvertent, the Minister must extend the period within which that subsection must be complied with by a period of three months.

• 3 (1) A loan registration form must be signed by the borrower and the lender and contain the following information:

  • (a) the borrower’s name and the civic address and telephone number of the small business;

  • (a.1) the names of the borrower’s shareholders and the names of the guarantors or suretyships referred to in sections 19 and 20;

  • (b) the day on which the loan was made;

  • (c) a statement setting out separately

    • (i) the total amount of the loan,

    • (ii) the estimated amount of the loan allocated to each class of loans referred to in paragraphs 5(1)(a) to (c), and

    • (iii) the amount of the loan allocated to the class of loan referred to in paragraph 5(1)(d);

  • (d) the total estimated cost of the purchase or improvement to be financed by the loan;

  • (e) [Repealed, SOR/2009-102, s. 3]

  • (f) the lender’s acknowledgement that the lender has not charged the borrower any fees or charges other than those authorized by the Act and these Regulations;

  • (g) the borrower’s consent to

    • (i) the Minister’s audit of the loan approval and administration file held by the lender in respect of the loan, and

    • (ii) the release, by the Minister, of information with respect to the borrower’s outstanding loans, to another lender to whom the borrower applies for a loan;

  • (h) the lender’s acknowledgement that, before making the loan, it verified within the branch where the loan was to be made, or if it has no branches, within itself, that the outstanding loan amount in relation to the borrower does not exceed the amount provided for in paragraph 4(2)(b) of the Act;

  • (i) the borrower’s acknowledgement that the outstanding loan amount in relation to the borrower does not exceed the amount provided for in paragraph 4(2)(b) of the Act;

  • (j) the borrower’s acknowledgement that the making of the loan is not prohibited by any of subsections 5(2) to (4) or (6);

  • (k) the lender’s acknowledgement that, before approving the loan, the lender acted in accordance with the due diligence requirements referred to in section 8; and

  • (l) the borrower’s acknowledgement, for the purposes of subsection 14(6), as to whether or not the borrower is at arm’s length from the landlord.

• (2) to (6) [Repealed, SOR/2009-102, s. 3]

Fees

• 4 (1) The registration fee in respect of a loan referred to in any of paragraphs 5(1)(a) to (c) is 2% of the amount of the loan.

• (2) The annual administration fee for a loan for a year is the amount calculated at the annual rate of 1.25% applied to the end-of-month balances of the loan during the year, and is payable quarterly within two months after the end of each quarter.

• (3) to (6) [Repealed, SOR/2009-102, s. 4]

• (7) With each payment made under subsection (6), the lender must submit a statement that substantiates the basis on which the payment was calculated.

• (8) Notwithstanding subsection (7), if the lender is unable to provide the statements required by that subsection in respect of a year, the Minister must notify the lender

  • (a) that for that year, the lender may make the payments under subsection (6), except the payment for the last quarter of the year, on the basis of estimates of the amounts payable; and

  • (b) that the lender must submit for that year a statement under subsection (9) rather than the statements required by subsection (7).

• (9) On or before June 1 following a year in respect of which a lender makes payments under subsection (8), the lender must pay any deficiency for the year and provide a statement that indicates the basis on which the amount of the annual administration fee for the year was calculated.

• (10) On application by a lender, made within one year after the loan is made, the Minister must

  • (a) where the lender has disbursed less than the full amount of the loan registered, refund to the lender that portion of the registration fee that is attributable to the portion of the loan that was not disbursed and subtract the amount of the undisbursed portion from the amount of the loan registered; or

  • (b) where the lender determines that the loan is not in compliance with the requirements of the Act and these Regulations, refund to the lender the registration fee and the annual administration fee and delete the entire amount of the loan registered.

Loan Classes and Conditions

• 5 (1) A loan must fall within one of the following prescribed classes:

  • (a) loans to finance the purchase or improvement of real property or immovables of which the borrower is or will become the owner, if the purchase or improvement is necessary for the operation of the borrower’s small business;

  • (b) loans to finance the purchase of leasehold improvements to real property or immovables of which the borrower is or will become the tenant or the improvement of such real property or immovables, if the purchase or improvement is necessary for the operation of the borrower’s small business;

  • (c) loans to finance the purchase or improvement of equipment necessary for the operation of the borrower’s small business; or

  • (d) loans to finance the payment by the borrower of registration fees payable in respect of a loan referred to in any of paragraphs (a) to (c).

• (2) A loan referred to in paragraph (1)(a) may not be made for the purchase of real property or immovables unless, at the time the loan is approved by the lender,

  • (a) at least 50% of the area of the real property or immovables is used for the operation of the small business or is intended to be so used within 90 days after the final disbursement under the loan agreement; and

  • (b) that portion of the area is not intended to be used within three years after the day on which the loan is made for

    • (i) resale, or

    • (ii) leasing or subleasing, except in the case of a small business in the health care industry, hospitality industry or mini-storage industry.

• (3) A loan referred to in paragraph (1)(a) for the purchase of real property or immovables may include the cost of decontamination of real property or immovables if

  • (a) the decontamination is required under a federal or provincial law, and the decontamination plan is disclosed to the lender on or before the day on which the loan is made; and

  • (b) the loan is secured by a first mortgage on the real property or immovables.

• (4) A loan referred to in paragraph (1)(b) may not be made if the real property or immovables are intended to be used within three years after the day on which the loan is made for subleasing except in the case of a small business in the health care industry, hospitality industry or mini-storage industry.

• (5) A loan referred to in any of paragraphs (1)(a) to (c) must not be made in an amount exceeding 90% of the cost of purchasing or improving the equipment, real property, immovables or leasehold improvements, which cost must not include the cost of labour provided by the borrower.

• (6) A loan referred to in any of paragraphs (1)(a) to (c) may not be used to finance the payment of any incidental costs other than non-refundable taxes and customs duties.

6 A loan, other than a loan made under section 30, is subject to the following conditions:

• (a) it may not be made to finance an expenditure or commitment that arose more than 180 days before the day on which the loan is approved or that was previously financed by a term loan; and

• (b) the loan term shall not be longer than a period of 10 years beginning on the day on which the first payment of principal and interest is due.

Designation of Lenders

7 The Minister is authorized to designate organizations as lenders.

Prescribed Condition

7.1 For the purpose of subparagraph (a)(ii) of the definition “lender” in section 2 of the Act, the member shall provide the Minister with the following:

• (a) the number assigned to them by the Canadian Payments Association; and

• (b) their external auditor’s certificate stating that the member has been a commercial lender for the past five years.

Due Diligence Requirements

8 In making and administering a loan, the lender must apply the same procedures as those that would be applied in respect of a conventional loan in the same amount, including, before making the loan,

• (a) obtaining credit references or conducting a credit check on the borrower and any persons who are legally or financially responsible for the borrower; and

• (b) completing an assessment of the repayment ability of the borrower, taking into account all other financial obligations of the borrower.

Appraisal

• 9 (1) The borrower must, before the loan is approved, provide to the lender from, subject to subsection (2), an appraiser who is a member of any professional association that is recognized under a federal or provincial law and who is at arm’s length from the borrower, and, in the case of assets described in paragraph (c), from the lender, an appraisal, made at any time within 180 days before the loan is approved, of the value of the assets if a borrower uses, or intends to use, all or part of a loan to purchase

  • (a) assets from a person who is not at arm’s length from the borrower;

  • (b) all or substantially all of the assets of a going concern; or

  • (c) assets from the lender or its representative that, at the time of purchase, are being or had been used to secure a conventional loan of the lender.

• (2) In the case of a loan to purchase equipment or leasehold improvements, if there is no professional association referred to in subsection (1) whose members are qualified to conduct such an appraisal, the appraisal must be made by an appraiser who is at arm’s length from the borrower and, in the case of equipment or leasehold improvements that are assets referred to in paragraph (1)(c), the lender.

• (3) The borrower must, before the loan is approved, provide to the lender from an appraiser who is a member of any professional association referred to in subsection (1) and who is at arm’s length from the borrower, an appraisal, made at any time within 180 days before the loan is approved, of the estimated value of the improved asset if

  • (a) the borrower uses, or intends to use, all or part of the loan to improve an asset;

  • (b) the estimated cost of the services required to improve the asset represents all or substantially all of the estimated value of the improved asset; and

  • (c) the services are to be provided by a person who is not at arm’s length from the borrower.

• (4) If an appraisal is required, the amount of the loan must be based on the lesser of

  • (a) the cost of purchasing or improving the asset or both, and

  • (b) the appraised value of the asset or improved asset.

Terms of the Loan

• 10 (1) On or before the day on which a loan is made, the lender and borrower must sign a document that sets out the principal amount of the loan, the rate of interest payable in respect of the loan, the repayment terms, the frequency of payments of principal and interest and the day on which the first payment of principal and interest is due.

• (2) The lender and the borrower may, at any time, agree to amend the terms of the loan or, at the end of a loan term, to renew the loan, to an aggregate maximum term of 10 years, beginning on the day on which the first payment of principal and interest is due.

• (3) On or before the day on which a loan is renewed or its terms are amended, the lender and borrower must sign a document that sets out the terms of the renewal or amendment.

• (4) For greater certainty, the terms described in subsections (1) and (3) may be set out in more than one document, as long as each document is signed by the lender and the borrower.

• (5) The repayment terms must provide that

  • (a) the loan is payable by instalments;

  • (b) at least one instalment of principal and interest is payable annually; and

  • (c) the first instalment of principal and interest is payable no later than one year after the day on which the loan is made.

11 [Repealed, SOR/2009-102, s. 11]

Interest Rate

12 The maximum annual rate of interest payable in respect of a loan on the day on which the loan is made or renewed or on which the loan term is amended, or on which a document is signed that sets out the terms of the loan that is made or renewed or that sets out the amended loan term, must not exceed

• (a) in the case of a floating rate loan, the aggregate of 3% and the prime lending rate that is in effect at that lender on each day of the loan term, beginning on the day on which the loan is made; and

• (b) in the case of a fixed rate loan, the aggregate of 3% and

  • (i) the single family residential mortgage or hypothec rate in effect at that lender for the loan term, or

  • (ii) in the case of a loan term of more than five years if there is no single family residential mortgage or hypothec rate for that loan term, the five-year single family residential mortgage or hypothec rate.

Additional Amounts Payable by Borrowers

• 13 (1) A lender may require the borrower to pay to the lender, in addition to the registration fee referred to in section 11 of the Act,

  • (a) any charge that would be charged by the lender for taking security in respect of a conventional loan of the same amount;

  • (b) any premium under a life or disability insurance policy that provides that a benefit is or may become payable to the lender, if the lender pays the premium under the loan agreement; and

  • (c) any charge for the conversion of a conventional fixed rate loan to a conventional floating rate loan of the same amount, or a conventional floating rate loan to a conventional fixed rate loan of the same amount, or any charge for the prepayment of all or part of a loan that would be charged by the lender in respect of a conventional loan of the same amount.

• (2) If a charge referred to in paragraph (1)(a) or a premium referred to in paragraph (1)(b) is expressed as a percentage of the outstanding amount of the loan, the charge or premium must not be combined with the rate of interest payable in respect of the loan unless the percentage that is attributable to the charge or premium is clearly set out in the loan agreement.

• (3) [Repealed, SOR/2009-102, s. 13]

Security

Primary Security

• 14 (1) A lender must, when making a loan referred to in any of paragraphs 5(1)(a) to (c), take valid and enforceable first-ranking security in the assets of the small business whose purchase or improvement is to be financed by the loan.

• (2) If the purchase or improvement of the assets of the small business is to be financed by a loan and another source of financing, the security taken by the lender in those assets must be equal in rank to that taken in those assets in relation to the other source of financing.

• (3) In the case of a loan referred to in paragraph 5(1)(b), or a loan referred to in paragraph 5(1)(c) for the financing of computer software, the lender may take security in any assets of the small business in respect of which the loan is made.

• (4) If, within 30 days before or after the day on which a loan is made, the lender makes one or more conventional loans that are term loans to the same borrower to finance a purchase or improvement that would be eligible for a loan, the lender

  • (a) must, in addition to any security otherwise required by this section to be taken, take security in the same assets and equal in rank to that taken to secure the conventional loan or loans; and

  • (b) may take security to secure the conventional loan or loans on the same assets and equal in rank to that taken to secure the loan.

• (5) If there is existing security in an asset whose purchase or improvement is to be financed by a loan, the security taken by the lender in that asset must be of the highest available rank, but if the existing security is the result of the application of a provision respecting subsequently acquired property, the lender must obtain all necessary postponements to ensure that the security in the asset is a first ranking charge.

• (6) If, in the case of a loan referred to in paragraph 5(1)(b), the borrower and landlord are not at arm’s length, the loan must be secured by a mortgage on the real property or immovable that is the subject of the leasehold improvement.

Substitution of Assets

15 Primary security must not be replaced by a different type of security, but an asset that is the object of a primary security may be substituted at any time for another asset of the small business in respect of which a loan is made that is of equal or greater value at the time of replacement.

Release of Primary Security

• 16 (1) The lender may, in respect of a loan, release primary security in an asset if

  • (a) the loan is in good standing; and

  • (b) the outstanding amount of the loan has been reduced by the amount of the original cost of the asset that is to be released.

• (2) The lender may also release primary security in an asset at any time if

  • (a) the asset is sold by the borrower to a person at arm’s length from the borrower and all of the proceeds of sale are applied to reduce the outstanding amount of the loan; or

  • (b) the asset is sold by the borrower to a person not at arm’s length from the borrower and

    • (i) the borrower provides to the lender an appraisal of the value of the asset made at any time within 180 days before the date of the sale by an appraiser who at that time met the professional qualifications and arm’s length requirements of subsection 9(1) or (2), as the case may be, and

    • (ii) the outstanding amount of the loan is reduced by the greater of the proceeds of the sale and the appraised value of the asset.

Additional Security

17 A lender, in addition to any primary security required by section 14 to be taken, may take additional security in any other assets of the small business in respect of which the loan is made.

Release and Substitution of Additional Security

18 The lender may release any additional security at any time if the loan is in good standing.

Guarantees and Suretyships

Personal Guarantees and Suretyships

• 19 (1) A lender, in addition to the primary security referred to in section 14, may take one or more unsecured personal guarantees or suretyships for an amount of not more than the aggregate of

  • (a) 25% of the original amount of the loan,

  • (b) interest on any judgment against the guarantor or surety,

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

  • (d) legal fees and disbursements — other than costs referred to in paragraph (c) — and other costs incurred by the lender for services rendered to it by persons other than its employees for the purpose of the legal proceedings against the guarantor or surety.

• (2) If a lender takes more than one personal guarantee or suretyship, the guarantees or suretyships must state that the aggregate liability of the guarantors or sureties may not exceed the aggregate amount referred to in subsection (1).

Corporate Guarantees and Suretyships

20 A lender, in addition to the primary security referred to in section 14, may take one or more secured or unsecured corporate guarantees or suretyships.

Release of Guarantors and Sureties

21 A lender may release a guarantor or surety from a guarantee or suretyship only if the loan is in good standing and the borrower has repaid to the lender at least 50% of the principal amount of the loan.

Substitution of Guarantees and Suretyships

22 A borrower may, at any time with the consent of the lender, replace a guarantee or suretyship with security in any assets of the small business in respect of which the loan is made or with another guarantee or suretyship, and the value of the replacement security, guarantee or suretyship must be equal to or greater than the value of the original one.

Non-Compliance

23 Notwithstanding that a lender has not paid the annual administration fee in accordance with section 4, the Minister must pay to the lender the amount of any loss, calculated in accordance with subsection 38(7), sustained, despite subsection 9(2) of the Act, in respect of all loans made by the lender if

• (a) the non-compliance was inadvertent; and

• (b) the annual administration fee is paid within 90 days after the day on which notice of the non-compliance is received at the head office of the lender.

24 Notwithstanding that a loan was made contrary to a prohibition set out in any of subsections 5(2) to (4) and (6), the Minister must pay to the lender the amount of any loss, calculated in accordance with subsection 38(7), sustained in respect of the loan if

• (a) the non-compliance was inadvertent; and

• (b) the non-compliance was due to inaccurate information having been provided by the borrower to the lender.

25 If the non-compliance as described in any of paragraphs (a) to (e) was inadvertent, the Minister must pay to the lender the amount of any loss, calculated in accordance with subsection 38(7), on the portion of the loan amount to which the non-compliance does not relate:

• (a) the loan was made to finance a purchase or improvement that does not fall within the scope of a class of loan referred to in subsection 5(1) or that is not permitted by paragraph 6(a);

• (b) the conditions set out in subsection 5(3) were not satisfied in respect of a loan that included the cost of decontamination of real property or immovables;

• (c) [Repealed, SOR/2009-102, s. 15]

• (d) the requirements with respect to security set out in these Regulations were not satisfied in respect of the loan; or

• (e) the lender has not provided all of the documentation described in subsection 38(4) in respect of a claim for the loss.

• 25.1 (1) Despite the fact that a lender has not satisfied the requirements with respect to appraisals set out in section 9 or subsection 16(2), the Minister must pay the lender the amount of any loss, calculated in accordance with subsection 38(7), sustained in respect of the loan if

  • (a) the non-compliance was inadvertent; and

  • (b) the lender provides the Minister with documentation that substantiates the value of the assets during the period of 180 days before the loan was approved by the lender or on the day the loan was approved.

• (2) Subsection (1) does not apply to appraisals of real property or immovables.

• (3) Despite the fact that the lender has not provided the documentation referred to in paragraph (1)(b), the Minister must pay the lender the amount of any loss, calculated in accordance with subsection 38(7), on the portion of the loan amount to which non-compliance does not relate.

25.2 Despite the fact that a loan agreement does not contain all of the terms described in section 10, the Minister must pay the lender the amount of any loss, calculated in accordance with subsection 38(7), sustained in respect of the loan if

• (a) the non-compliance was inadvertent; and

• (b) the lender provides the Minister with documentation substantiating the missing terms.

26 Notwithstanding that the requirements with respect to guarantees and suretyships set out in sections 19 to 22 were not satisfied in respect of a loan, the Minister must pay to the lender the amount of any loss, calculated in accordance with subsection 38(7), sustained in respect of the loan if

• (a) the loss was not affected by the non-compliance and the non-compliance was inadvertent; and

• (b) the aggregate amount recovered from the realization of personal guarantees and suretyships, if any, is not greater than the sum of

  • (i) 25% of the original amount of the loan,

  • (ii) interest on any judgment against the guarantor or surety,

  • (iii) taxed costs for, or incidental to, the legal proceedings against the guarantor or surety, and

  • (iv) legal fees and disbursements — other than costs referred to in subparagraph (iii) — and other costs incurred by the lender for services rendered to it by persons other than its employees for the purpose of the legal proceedings against the guarantor or surety.

• 27 (1) If the conditions set out in subsection (2) have been met, the Minister must pay the lender the amount of any loss, calculated in accordance with subsection 38(7), sustained in respect of a loan despite any of the following non-compliances:

  • (a) [Repealed, SOR/2009-102, s. 17]

  • (b) a fee or charge is payable, other than a fee or charge referred to in section 10 of the Act;

  • (c) the rate of interest payable in respect of the loan is greater than the rate provided by section 12; or

  • (d) a charge or premium referred to in section 13 is combined with the rate of interest payable in respect of the loan, when the charge or premium is expressed as a percentage of the outstanding amount of the loan and when the percentage that is attributable to the charge or premium is not clearly set out in the loan agreement.

• (2) The Minister must make a payment to a lender under subsection (1) if

  • (a) the loss was not affected by the non-compliance and the non-compliance was inadvertent;

  • (b) the lender has reimbursed the borrower for any resultant overcharges, unless the lender has provided the Minister with documentation that substantiates the fact that it is unable to locate the borrower; and

  • (c) the lender has otherwise remedied the non-compliance.

28 Notwithstanding section 35, if a lender does not provide a report as required by section 34 until after the time required by that section and the non-compliance was inadvertent, the Minister, after receiving the report, must pay to the lender the amount of any loss, calculated in accordance with subsection 38(7), sustained in respect of the loan or loans to which the report relates.

28.1 When the loan term is longer than the maximum period specified in paragraph 6(b), the Minister must pay the lender the amount of any loss calculated in accordance with subsection 38(7) if the default referred to in section 36 occurs before the expiry of 10 years after the day on which the first payment of principal and interest is due.

Transfer of Loans Between Lenders

• 29 (1) A lender may assign a loan to another lender at the request of the borrower if

  • (a) the Minister’s liability under subsection 6(2) of the Act in relation to the remaining loans of the transferor does not, as a result of the transfer, exceed the amount already paid by the Minister to the transferor; and

  • (b) the total number of loans transferred by the transferor under this section, during the period beginning at the start of the current five-year period referred to in subsection 6(1) of the Act and ending on the date of the transfer, does not exceed the greater of 20 and 1% of the number of loans made by the transferor during that period.

• (2) The transferee must notify the Minister of the transfer in the form referred to in subsection (3). The Minister must determine whether the requirements set out in subsection (1) have been met and must notify both lenders of the determination.

• (3) A form must be signed by the borrower and by both lenders and must include the loan registration number and the borrower’s acknowledgement that it has requested the transfer.

• (4) The Minister’s liability under the Act continues in respect of any loss sustained by the transferee in respect of the loan.

• 30 (1) A lender, on the request of the borrower, may make a loan for the purpose of repaying a loan made by another lender in an amount not greater than the outstanding amount of the loan of the other lender if

  • (a) the loan term is not longer than the maximum period specified in paragraph 6(b); and

  • (b) security of the same rank is maintained or taken by the lender on the assets that were used to secure the loan of the other lender.

• (2) For the purposes of the Act and these Regulations, a loan that is made under subsection (1) is considered to be a loan of the same class as the loan of the other lender.

• (3) For the purpose of paragraph (1)(a), the loan term is the period beginning on the day on which the first payment of principal and interest is due in respect of the loan of the other lender and ending on the day on which the last payment of principal and interest is due in respect of the new loan.

• (4) A lender that makes a loan under subsection (1) must notify the Minister of the making of the loan in the form referred to in subsection 29(3). The Minister must determine whether the requirements set out in subsection 29(1) have been met and must notify both lenders of the determination.

• (5) Subsections 29(3) and (4) apply, with any modifications that the circumstances require, in respect of a loan made under this section.

Amalgamation of Lenders

31 When two or more lenders intend to amalgamate to form a new lender, they must notify the Minister in writing of the intention to amalgamate and of the day on which the amalgamation is proposed to take effect. On amalgamation, the Minister’s liability under the Act in respect of losses sustained by the amalgamating lenders as a result of loans made by them continues in respect of losses sustained by the new lender as a result of those loans and

• (a) the loans made by the amalgamating lenders are considered to have been made by the new lender;

• (b) claims for loss sustained in respect of a loan that have been paid by the Minister to each of the amalgamating lenders are considered to have been paid to the new lender; and

• (c) if, as a result of the amalgamation, the amount already paid by the Minister to the amalgamating lenders as a result of the Minister’s liability under subsection 6(2) of the Act is greater than the Minister’s liability with respect to the new lender, the Minister’s liability is deemed to be equal to the amount already paid.

Discontinuance of Lending Business

32 A lender that discontinues its commercial lending business and sells all of its outstanding loans to another lender must notify the Minister in writing of the sale of the outstanding loans. The Minister’s liability under the Act in respect of losses sustained by the lender as a result of the outstanding loans continues in respect of losses sustained by the other lender as a result of those loans, and other loans of the other lender must not be taken into account in determining that liability.

Transfer of Loans Between Borrowers

• 33 (1) On the sale of all assets of a small business whose purchase or improvement is being financed by a loan, the borrower may be released by the lender from, and the purchaser may assume, liability in respect of the loan if

  • (a) the purchaser is approved as the borrower by the lender in accordance with the due diligence requirements referred to in section 8 and the outstanding loan amount is not greater than the amount referred to in paragraph 4(2)(b) of the Act;

  • (b) security of the same rank is maintained or taken by the lender on the assets that were used to secure the loan; and

  • (c) a guarantee or suretyship referred to in section 19 taken with respect to the loan is replaced with another guarantee or suretyship in accordance with that section of an equal or greater value.

• (2) On a change of partners in a partnership, an outgoing partner may be released from, and a new partner may assume, liability in respect of a loan if

  • (a) the new partner is approved by the lender as a borrower in accordance with the due diligence requirements referred to in section 8 and the outstanding loan amount is not greater than the amount referred to in paragraph 4(2)(b) of the Act;

  • (b) security of the same rank is maintained or taken by the lender on the assets that were used to secure the loan; and

  • (c) a guarantee or suretyship referred to in section 19 given with respect to the loan is replaced with another guarantee or suretyship in accordance with that section for an equal or greater value.

• (3) On leaving a partnership, an outgoing partner who is not being replaced with a new partner may be released from liability in respect of a loan if

  • (a) the remaining partners are approved by the lender as borrowers in accordance with the due diligence requirements referred to in section 8 and the outstanding loan amount is not greater than the amount referred to in paragraph 4(2)(b) of the Act;

  • (b) security of the same rank is maintained or taken by the lender on the assets that were used to secure the loan; and

  • (c) a guarantee or suretyship referred to in section 19 given with respect to the loan is replaced with another guarantee or suretyship in accordance with that section for an equal or greater value.

Reporting Requirements

34 A lender must provide the Minister, before every June 1, with a detailed report on all loans outstanding with that lender as at March 31 in the year of the report, including the following information with respect to each loan:

• (a) the registration number;

• (b) the borrower’s name;

• (c) the amount of principal that is outstanding and not yet due and payable as at March 31 in that year; and

• (d) the amounts, if any, of principal and interest that are due and payable as at March 31 in that year.

35 If the lender does not provide a report in accordance with section 34, the Minister is not liable after the day on which the report was due for any loss sustained by the lender as a result of a loan in respect of which the information specified in any of paragraphs 34(1)(a) to (d) was not provided.

Default

36 Subject to section 11, the outstanding amount of the loan becomes due and payable and the borrower is in default as of the day on which the borrower fails to comply with a material condition of the loan agreement.

Procedure on Default

• 37 (1) If a borrower is in default under section 36, the lender may give the borrower notice of default and demand that the borrower comply with a material condition within the period specified in the notice.

• (2) Before submitting a claim for loss sustained as a result of a loan under section 38, the lender must demand repayment of the outstanding amount of the loan within the period specified in the demand.

• (3) If the outstanding amount of the loan is not repaid within the period specified, the lender must take any of the following measures that will minimize the loss sustained by it in respect of the loan or that will maximize the amount recovered:

  • (a) collect the principal and interest outstanding on the loan;

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

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

  • (d) fully implement a compromise settlement with the borrower or with a guarantor or surety or any other person on behalf of the borrower, 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 is not greater than the estimated amount that may be recovered.

• (4) If the borrower is a partnership or a sole proprietor, the lender may not execute a judgment by realizing on the assets (other than the assets of the small business in respect of which the loan is made) of the partners or sole proprietor, in an amount greater than the sum of

  • (a) 25% of the original amount of the loan,

  • (b) interest on the judgment,

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

  • (d) legal fees and disbursements — other than costs referred to in paragraph (c) — and other costs incurred by the lender for services rendered to it by persons other than its employees for the purpose of the legal proceedings against the borrower.

Claims Procedure

• 38 (1) A lender must take all of the measures described in subsection 37(3) that are applicable before submitting a claim to the Minister for loss sustained as a result of a loan.

• (2) Subject to subsection (3), a lender must submit a claim for loss within 36 months after the expiry of the period specified in the notice referred to in subsection 37(1) or, if the lender has given no notice of default, within 36 months after the day on which the last payment is received.

• (3) The Minister is authorized to extend the 36-month period for submission of the claim referred to in subsection (2) if the lender requests the extension before the period expires.

• (4) A claim for loss must be certified by the lender and be accompanied by

  • (a) documentation that substantiates

    • (i) the cost and proof of payment of the purchase or improvement that was financed by the loan, and

    • (ii) the amount disbursed by the lender under the loan agreement;

  • (b) a copy of the loan record; and

  • (c) the loan approval and administration file, if requested by the Minister.

• (5) A claim for loss must include the lender’s acknowledgement that it has acted with due diligence in applying the procedures referred to in section 8 and has taken the measures described in subsection 37(3).

• (6) A claim for loss must include all documents that evidence the security taken by the lender in respect of the loan and all guarantees and suretyships taken by the lender in respect of the loan.

• (7) A loss sustained by a lender in respect of a loan must be calculated by determining the aggregate of the following amounts and deducting from that aggregate amount the proceeds realized from the taking of any measures described in subsection 37(3) and any overcharges referred to in paragraph 27(2)(b) that have not been reimbursed to the borrower:

  • (a) the amount of principal outstanding on the loan;

  • (b) the amount of interest due and not paid pursuant to the loan agreement, calculated in accordance with subsection (8);

  • (c) uncollected taxed costs for, or incidental to, any legal proceedings in respect of the loan; and

  • (d) legal fees and disbursements, other than the costs referred to in paragraph (c), and other costs incurred by the lender for services rendered to it by persons other than its employees, for the purpose of collecting, or attempting to collect, the loan from the borrower or the guarantor or surety.

• (8) The amount of interest referred to in paragraph (7)(b) is calculated as follows:

  • (a) in respect of the period beginning on the day after the last day on which interest is current and ending on the day of the first scheduled payment date after that day, at the rate of interest in effect under the loan agreement on the last day on which interest is current,

  • (b) in respect of the 12-month period immediately following the period referred to in paragraph (a), at the rate of interest in effect under the loan agreement on the first day of the 12-month period,

  • (c) in respect of the 12-month period immediately following 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 12-month period immediately following the period referred to in paragraph (c), at a rate of interest of 0%.

Interim Claims Procedure

• 39 (1) A lender may make an interim claim to the Minister in accordance with this section for loss sustained as a result of a loan or guaranteed business improvement loan made under the Small Business Loans Act where the lender has taken all of the measures described in subsection 37(3) that are applicable and

  • (a) paragraph 37(3)(b) applies but the guarantee or suretyship has not been fully realized; or

  • (b) paragraph 37(3)(d) applies but the compromise settlement has not been fully implemented.

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

• (3) Subsections 38(2) to (8) apply, with any modifications that the circumstances require, in respect of the submission of an interim claim.

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

• (5) If, after the interim claim is paid, the lender, by fully implementing the compromise settlement or fully realizing the guarantee or suretyship, recovers less than 100% of the compromise settlement, guarantee or suretyship, the lender may make a final claim under section 38 for the difference.

Subrogation

• 40 (1) When the Minister pays a lender for a loss sustained by it as a result of a loan, Her Majesty is subrogated from the payment of the final claim for the loss to the rights of the lender up to the amount paid by the Minister.

• (2) If, after the Minister makes the payment, additional proceeds are realized from the taking of any measures by the lender described in subsection 37(3), the Minister must be paid an amount equal to 85% of the proceeds and the lender must be paid an amount equal to 15%.

Coming into Force

41 These Regulations come into force on April 1, 1999.