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Canada Small Business Financing Regulations (SOR/99-141)

Regulations are current to 2023-01-11 and last amended on 2022-07-04. Previous Versions

Amalgamation of Lenders and other Actions Relating to Lending (continued)

 [Repealed, SOR/2014-7, s. 20]

Transfer of Loans Between Borrowers

  •  (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 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 applicable limit referred to in any of paragraphs 4(2)(b) to (e) of the Act or in section 6.1;

    • (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 applicable limit referred to in any of paragraphs 4(2)(b) to (e) of the Act or in section 6.1;

    • (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 applicable limit referred to in any of paragraphs 4(2)(b) to (e) of the Act or in section 6.1;

    • (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

 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.

  • SOR/2009-102, s. 20

 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

 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.

  • SOR/2014-7, s. 22

Procedure on Default

[
  • SOR/2009-102, s. 21(F)
]
  •  (1) [Repealed, SOR/2022-157, s. 20]

  • (2) If a borrower is in default under section 36, the lender must demand repayment of the outstanding amount of the loan within the period specified in the demand before submitting a claim for loss sustained as a result of a loan under section 38.

  • (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) in the case of a loan made before April 1, 2014, 25% of the original amount of the loan and in the case of a loan made after March 31, 2014, 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

  •  (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) Regardless of the nature of the default, a lender must submit a claim for loss within 60 months after the day on which the last payment on the loan is received.

  • (3) The Minister is authorized to extend the 60-month period if the lender requests the extension before that period expires.

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

    • (a) in the case of a loan referred to in any of paragraphs 5(1)(a) to (d), documentation that substantiates

      • (i) the cost and proof of payment of the purchase or improvement that was financed by the loan in an amount equal to or greater than 75% of the principal outstanding on the loan, and

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

    • (a.1) in the case of a loan referred to in paragraph 5(1)(e),

      • (i) an attestation signed by the borrower stating that

        • (A) the line of credit will only be used to pay for working capital costs, and

        • (B) the working capital costs paid through the line of credit were not incurred more than 365 days before the line of credit was authorized, and

      • (ii) documentation that substantiates the amount provided 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%.

Additional Claims Procedure

  •  (1) If the Minister has paid the lender the amount of any loss, calculated in accordance with subsection 38(7), the lender may, within the applicable period set out below, submit an additional claim for part of the previously unclaimed loss if the failure to respect the deadline for claiming that part of the loss was inadvertent:

    • (a) in the case where the lender has notified the Minister of recovery of 100% of the compromise settlement, guarantee or suretyship under subsection 39(4), within 12 months after the day of notification;

    • (b) in the case where the lender has submitted a final claim under subsection 39(5) after an interim claim, within 12 months after the day on which the claim was made final; and

    • (c) in any other case, within 12 months after the date of expiry of the period specified in subsection 38(2) or (3), as the case may be.

  • (2) An additional claim for part of the loss arising from any amount paid as a result of a claim submitted under a deemed trust by the Canada Revenue Agency or by any provincial department of revenue may be submitted after the period specified in subsection (1).

  • (3) An additional claim for part of the loss must be certified by the lender and be accompanied

    • (a) in the case of an additional claim submitted under subsection (1) in respect of a loan referred to in any of paragraphs 5(1)(a) to (d), by documentation that substantiates

      • (i) the cost and proof of payment of the purchase or improvement that was financed by the loan in an amount equal to or greater than 75% of the principal outstanding on the loan, and

      • (ii) if appropriate, the costs referred to in paragraphs 38(7)(c) and (d) that were not previously claimed;

    • (a.1) in the case of an additional claim submitted under subsection (1) in respect of a loan referred to in paragraph 5(1)(e),

      • (i) by an attestation signed by the borrower stating that

        • (A) the line of credit will only be used to pay for working capital costs, and

        • (B) the working capital costs paid through the line of credit were not incurred more than 365 days before the line of credit was authorized, and

      • (ii) if appropriate, by documentation that substantiates the costs referred to in paragraphs 38(7)(c) and (d) that were not previously claimed; and

    • (b) in the case of an additional claim submitted under subsection (2), by documentation that substantiates

      • (i) the amount paid as a result of a claim submitted under a deemed trust by the Canada Revenue Agency or by any provincial department of revenue, and

      • (ii) if appropriate, the costs referred to in paragraphs 38(7)(c) and (d) that were not previously claimed.

Interim Claims Procedure

  •  (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 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 submitted.

  • (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 submit a final claim under section 38 for the difference.

Subrogation

  •  (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%.

  • (3) The payment made to the Minister under subsection (2) is to be taken into account in determining the losses sustained by the lender on loans made after March 31, 2009 when calculating the Minister’s limit of liability with respect to the lender under subsection 6(2) of the Act.

  • SOR/2009-102, s. 23
  • SOR/2014-7, s. 27

Coming into Force

 These Regulations come into force on April 1, 1999.

 
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