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Version of document from 2006-03-22 to 2009-03-31:

Canada Small Business Financing Regulations

SOR/99-141

CANADA SMALL BUSINESS FINANCING ACT

Registration 1999-03-18

Canada Small Business Financing Regulations

P.C. 1999-473  1999-03-18

Whereas, pursuant to subsection 14(3) of the Canada Small Business Financing ActFootnote a, the Minister of Industry had a copy of the proposed Canada Small Business Financing Regulations, substantially in the annexed form, laid before the House of Commons on March 10, 1999 and laid before the Senate on March 11, 1999;

Therefore, His Excellency the Governor General in Council, on the recommendation of the Minister for the purposes of the Atlantic Canada Opportunities Agency Act, the Minister of Western Economic Diversification, the Minister of Industry and the Minister of Finance, pursuant to section 14 of the Canada Small Business Financing Acta, hereby makes the annexed Canada Small Business Financing Regulations.

Interpretation

  •  (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 stock-in-trade or inventory of the small business except stock-in-trade or 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 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 means

    • (a) the manager or assistant manager of the lender or a branch of the lender;

    • (b) the credit committee of the lender or a branch of the lender; and

    • (c) any person duly authorized by the lender to approve the granting of loans. (responsable du prêteur)

  • (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.

Loan Registration

  •  (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.

  •  (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;

    • (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) the separate charges and premiums, if any, referred to in paragraphs 13(1)(a) and (b) that the borrower is required to pay;

    • (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) For the purposes of paragraph (1)(i), a borrower who is related to the borrower means

    • (a) a person who controls or is controlled by the borrower;

    • (b) a corporation that is controlled by the same person who controls the borrower;

    • (c) a person who operates or intends to operate, in partnership with the borrower, the small business in respect of which the loan was made; and

    • (d) a person who operates or intends to operate a small business, not in partnership with the borrower, but who has agreed with the borrower to share management services, administrative services or facilities or overhead expenses for the operation of that small business with those for the operation of the small business in respect of which the loan was made.

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

  • (4) For the purposes of subsection (2), “control” means the direct or indirect holding of shares of a corporation to which are attached more than 50% of the votes that may be cast to elect a majority of its directors.

  • (5) If a person referred to in subsection (2) is operating or intends to operate a small business that is independent of the small business in respect of which the loan was made, any outstanding loan amount attributable to that small business of the person is not included in the outstanding loan amount in relation to the borrower.

  • (6) A small business is independent of another small business if they are located at different premises and neither one derives more than 25% of its actual or projected gross revenues from the other.

Fees

  •  (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.

  • (3) For the year beginning on April 1, 1999 and ending on March 31, 2000, the annual administration fee is payable on or before June 1, 2000.

  • (4) For the year beginning on April 1, 2000 and ending on March 31, 2001, the annual administration fee is payable quarterly within two months after the end of each quarter of the year, and the payments for each quarter except the last quarter of the year may be made on the basis of an estimate of the amount payable.

  • (5) The lender must pay any deficiency or claim any overpayment for the period beginning on April 1, 2000 and ending on March 31, 2001 on or before June 1, 2001.

  • (6) For each year beginning after March 31, 2001, the annual administration fee is payable quarterly, within two months after the end of each quarter.

  • (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, or claim any overpayment for the year, and provide a statement that substantiates 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

  •  (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) may 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 may 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.

 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 may not be longer than a period of 10 years beginning on the date on which the first principal payment is due.

Designation of Lenders

 The Minister is authorized to designate organizations as lenders.

Prescribed Condition

 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) their Canadian Payments Association membership number; and

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

  • SOR/2001-490, s. 1

Due Diligence Requirements

 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

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

Appraisal

  •  (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, where 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 that is an asset 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.

Repayment Terms

  •  (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 on the loan, the repayment terms, the frequency of principal payments and the date on which the first principal payment is due.

  • (2) The repayment terms must provide that

    • (a) the loan is payable by instalments;

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

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

  • (3) If a loan has a loan term of less than the maximum period specified in paragraph 6(b) and the loan is in good standing, the lender may renew it for additional terms, at an interest rate not greater than the maximum rate calculated under section 12 as at the renewal date, to an aggregate maximum term of 10 years, calculated as of the date on which the first principal payment is due.

  • (4) A loan made with an interest rate calculated in accordance with paragraph 12(b) may, with the consent of the borrower, be converted to a loan with an interest rate calculated in accordance with paragraph 12(a) and the lender may impose a charge for the conversion in an amount that does not exceed the greater of

    • (a) three months interest on the outstanding principal balance of the loan, and

    • (b) the amount by which

      • (i) the net present value of the outstanding principal balance of the loan for the remainder of its loan term calculated at the date of the conversion and discounted at the Bank of Canada Bank Rate as of that date

      exceeds

      • (ii) the net present value, calculated and discounted at the Bank of Canada Bank Rate as of the date of the conversion, of a loan for the amount of the outstanding principal balance if it were made on that date for the remainder of the loan term.

  • (5) A loan made with an interest rate calculated in accordance with paragraph 12(a) may, with the consent of the borrower, be converted to a loan with an interest rate calculated in accordance with paragraph 12(b).

  • (6) A loan made with an interest rate calculated in accordance with paragraph 12(b) may, with the consent of the borrower, be converted to a loan with another interest rate calculated in accordance with that paragraph and the lender may impose a charge for the conversion in an amount that does not exceed the greater of

    • (a) three months interest on the outstanding principal balance of the loan, and

    • (b) the amount by which

      • (i) the net present value of the outstanding principal balance of the loan for the remainder of its loan term calculated at the date of the conversion and discounted at the Bank of Canada Bank Rate as of that date

      exceeds

      • (ii) the net present value, calculated and discounted at the Bank of Canada Bank Rate as of the date of the conversion, of a loan for the amount of the outstanding principal balance if it were made on that date for the remainder of the loan term.

  • (7) A borrower may prepay up to 10% of the original loan amount each year on the anniversary of the day on which the loan was made and on a non-cumulative basis without penalty.

  • (8) If, on the anniversary of the day on which a loan was made, the borrower prepays more than 10% of the original loan amount, the lender may charge a penalty, on any amount in excess of that 10% that is prepaid, in an amount that does not exceed the greater of

    • (a) three months interest on the excess amount, and

    • (b) the amount by which

      • (i) the net present value of the excess amount for the remainder of the loan term calculated at the date of the prepayment and discounted at the Bank of Canada Bank Rate as of that date

      exceeds

      • (ii) the net present value, calculated and discounted at the Bank of Canada Bank Rate as of the date of the prepayment, of a loan for the excess amount if it were made on that date for the remainder of the loan term.

  • (9) If, at any time other than on the anniversary of the day on which a loan was made, the borrower prepays the whole or any part of the original loan amount, the lender may charge a penalty, on the amount that is prepaid, in an amount that does not exceed the greater of

    • (a) three months interest on the prepaid amount, and

    • (b) the amount by which

      • (i) the net present value of the prepaid amount for the remainder of the loan term calculated at the date of the prepayment and discounted at the Bank of Canada Bank Rate as of that date

      exceeds

      • (ii) the net present value, calculated and discounted at the Bank of Canada Bank Rate as of the date of the prepayment, of a loan for the prepaid amount if it were made on that date for the remainder of the loan term.

Revision of Repayment Terms

  •  (1) The lender and the borrower may, at any time, agree to revise the repayment terms of a loan.

  • (2) Where the lender and the borrower agree to revise the repayment terms of a loan by extending the loan term beyond the maximum period specified in paragraph 6(b), it is a condition of the Minister’s liability under the Act that the approval of the Minister must be obtained in writing prior to the extension. The Minister must give approval if the extension is likely to decrease the risk of default on the loan.

Interest Rate

 The maximum annual rate of interest payable in respect of a loan as set out in the document referred to in subsection 10(1), on the day on which the loan is made or, if the document must be registered, on the day on which it is signed, 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 residential mortgage rate in effect at that lender for the loan term, or

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

Additional Amounts Payable by Borrowers

  •  (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; and

    • (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.

  • (2) A charge referred to in paragraph (1)(a) may not be expressed as a percentage of the outstanding amount of the loan.

  • (3) If a premium referred to in paragraph (1)(b) is expressed as a percentage of the outstanding amount of the loan, the premium may not be combined with the rate of interest payable in respect of the loan.

Security

Primary Security

  •  (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

 Primary security may 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 the loan is made that is of equal or greater value.

Release of Primary Security

  •  (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

 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

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

Guarantees and Suretyships

Personal Guarantees and Suretyships

  •  (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

 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

 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

 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

 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.

 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.

 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) the requirements with respect to appraisals set out in section 9 or subsection 16(2) were not satisfied in respect of the loan;

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

  • (e) the lender provided some but not all of the documentation required by subparagraph 38(4)(a)(i) in respect of a claim for the loss.

 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.

  •  (1) If the conditions set out in paragraphs (2)(a) and (b) have been met, the Minister must pay to a 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) the loan term is longer than the maximum period specified in paragraph 6(b);

    • (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.

  • (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; and

    • (b) the lender has reimbursed the borrower for any resultant overcharges and has otherwise remedied the non-compliance.

 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.

Transfer of Loans Between Lenders

  •  (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.

  •  (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 date on which the first principal payment is due in respect of the loan of the other lender and ending on the date on which the last principal payment 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

 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

 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

  •  (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

  •  (1) A lender must provide to the Minister, before June 1, 2002, and before every June 1 thereafter, 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.

  • (2) A lender must provide to the Minister, before June 1, 2001, a detailed report including the information specified in paragraphs (1)(a) to (d) with respect to each loan outstanding with that lender

    • (a) as at March 31, 2000; and

    • (b) as at March 31, 2001.

  • (3) A lender must report to the Minister, before June 1, 2000, the total amount of principal that is outstanding as at March 31, 2000 with respect to all loans of that lender.

 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

 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

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

  • (2) If the borrower fails to comply with the condition within the period specified, the lender must demand repayment of the outstanding amount of the loan within the period that is 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

  •  (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 expiration of the period specified in the notice referred to in subsection 37(1).

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

  • (4) A claim for loss must be certified by a responsible officer of the lender and must 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 in accordance with the due diligence requirements referred to in section 8 in making and administering the loan and has taken the measures required by subsection (1) in respect of the loan.

  • (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):

    • (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

  •  (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

 When the Minister pays a lender for 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.

Coming into Force

 These Regulations come into force on April 1, 1999.

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