My name is Stephanie Harvey and I am a corporate/commercial lending lawyer with Gowling WLG. You are watching video two of our 'Types of Security' video series.
You will recall that a lender takes security in order to have some recourse to seize and sell the borrower's assets if the borrower defaults in the repayment of a loan, or the performance of its other covenants.
Although there are a number of general principles a lender needs to keep in mind when it comes to taking security, let's focus on three main points:
- Ownership of Asset
- Aligning the Security to the Assets
- Identifying Other Interests in the Borrower's Collateral
Ownership of the asset may seem very obvious, but it is not uncommon for a borrower to hold assets, such as machinery, shares or real property as available to support its financing, but the borrower may have forgotten to tell the lender that for tax purposes or for other corporate reasons, a particular asset is actually held in the name of a subsidiary or other related party.
Although in most jurisdictions ownership to land can be determined through a search, the same is not true for most types of personal property where there are no public registers identifying. So in those situations, you need to dig a little deeper to ascertain ownership of the asset and the proper party to grant the security interest.
At the end of the day, to have effective security, a lender needs to ensure that the entity that actually owns title to the machine, shares or real property is the entity granting the security interest and signing the security document. If the grantor is not the owner of the asset, the security document is basically of no value and will not be of any use to the lender in acquiring a security interest in or any rights to the asset.
Matching the ownership of the asset to the party providing the security is key.
Taking effective security also depends upon the types of assets your borrower has to offer as security and using the proper documentary tool on the menu to create the security interest.
Although we do have something known as a general security agreement or GSA that purports to create a security interest in all assets of a borrower, it is important to note that one size does not fit all. If the borrower owns real property, intellectual property, shares or other equitable securities, cash collateral, bank accounts with other institutions, quota, or other types of specialty property, additional documents and steps are required to obtain effective security over those assets. The same is true for assets located in another province, or in the United States or other foreign jurisdictions.
So you will want to drill down in your review of the borrower to identify the types of assets it holds and their locations in order to determine what other documents may be needed.
Taking a GSA is not an instant cure to all secured lending problems.
Another consideration when taking security is to identify if the Borrower's assets are free and clear, or if other creditors have a prior ranking security interest in the assets or collateral being offered as security.
If your security interest is not a first priority interest, the lending value you attribute to the underlying asset will of course be significantly lower depending upon the amount of that prior ranking interest.
So you will need to quiz your prospective borrower about the identity of its other creditors and the security they hold. Searches will of course be done later to confirm the existence of other secured parties, but your Credit submission will need to include as much information from your borrower as possible as to the identity of other interests in the collateral.
If there are other creditors, the arrangements between the creditors will need to be addressed in a priority arrangement whether it be documented through an inter-creditor agreement, acknowledgement, no interest letter and postponement in order for you to obtain effective security with the required ranking.
A lender needs clarity as to the relationship between creditors to have confidence in its security. There is no point taking security in assets that are fully leveraged in favour of other creditors.
Adhering to these general principles will go a long way to ensure the documents chosen for the security package have some real value attached to them.