Designing a solid security package: Bank Act security

My name is Stephanie Harvey and I am a corporate/commercial lending lawyer with Gowling WLG. You are watching video four of our 'Types of Security' video series. In this video we will discuss Bank Act security.

Bank Act Security refers to a special set of four security documents that is only available to certain lenders, certain types of borrowers and to secure certain types of assets.

It has been around for over 100 years as one means of inventory financing, and was originally established to assist farmers, manufacturers and others to obtain loans from banks regulated under the federal Bank Act. The general usage of this form of security has been declining over time on the account of the broader scope and flexibility of personal property security acquired by way of a general security agreement.

Bank Act security is registered by filing a Notice of Intention signed by the borrower with the Bank of Canada in the appropriate agency, which Notice must be registered before the other three documents in the set are signed. The security is acquired by having the borrower subsequently execute a separate Special Security Assignment that acts as a form of an assignment of the relevant assets to the bank.

The borrower retains possession of the assets while title to the assets technically vests in the bank (subject to the borrower's right of redemption on repayment of the debt) by virtue of Section 427.

This notion of title transfer is one aspect that makes Bank Act security attractive to some banks. It may be helpful to have Bank Act security to defeat a landlord's rights of distraint against a borrower's assets when the bank does not have a landlord waiver.

Technically a bank might argue that after granting Bank Act Security, the borrower retains no title to the assets for the landlord's rights of distraint to attach to, at least insofar as rental arrears arising after the registration of the Notice of Intention and the grant of the Special Security Assignment.

Nevertheless, Bank Act security is alive and well and still in use and currently available under Section 427 of the Bank Act, but it is subject to a number of important restrictions and limitations you must keep in mind.

As the name "Bank Act Security" suggests, it is only available to banks subject to the Bank Act. Other types of lenders (trust companies, credit unions, life insurance companies and private lenders) cannot receive it or take an assignment of it from another bank.

Section 427 Security is unusual insofar as it specifies in detail the types of borrowers that can grant the security. Potential grantors or borrowers are limited to the list of persons set out in Section 427(1) of the Bank Act and consist primarily of farmers, fishermen, lumbermen and manufacturers to whom the bank may make loans. Your prospective borrower has to fit on that list in order for the security to be effective.

The most common group of borrowers we see granting Bank Act security is set out in Section 427(1)(b):

"any person engaged in business as a manufacturer, on the security of goods, wares and merchandise manufactured or produced by that person or procured for such manufacture or production and of goods, wares and merchandise used in or procured for the packing of goods, wares and merchandise so manufactured or produced".

Section 427 Security is also unusual insofar as it specifies in detail the types of assets which can be subject to it based upon the different types of borrowers.

Intangible assets like intellectual property simply do not fall within the permitted basket, so Bank Act Security will not be effective to charge those types of assets.

Section 427(1) only permits a bank to "lend money and make advances" to the permitted class of grantors on the basis of Bank Act security.

Thus, the security can only be granted to secure such direct debts, and the security cannot be taken as collateral security for a guarantee.

There is no point in a holding company ever granting Section 427 Security as it does not typically own any assets to which Section 427 Security could attach. Shares and other equity securities do not fall within any of the permitted classes.

The Bank Act is fairly primitive legislation and contains no mechanism for Bank Act Security to be assigned by one bank to another. There is also no mechanism to amend a registered Notice of Intention to reflect a name change of the borrower.

So to the extent you choose to add Bank Act Security to your security package, be wary of the above limitations on its use and effectiveness.