Banks and financial institutions are familiar with the current law governing demand for repayment of loans and credit facilities. But does the interpretation of that law change with market conditions precipitated by the COVID-19 crisis?
While loans and credit facilities are often expressed to be "on demand", the common law provides that a reasonable time-period for repayment is required. The length of that time-period will depend upon the facts and circumstances of each case. Generally, pursuant to case law, assessing what length of time is reasonable in a given fact situation is to be determined on the following factors:
- The amount of the loan: A greater loan balance will support a longer notice period;
- The risk to the creditor of losing money or security: Where the security is at risk, a shorter notice period may be reasonable. This has been considered a vital factor in determining reasonable time;
- The length of the relationship between the debtor and the creditor: Often, a longer relationship between the lender and debtor will weigh in favour of a longer notice period;
- The character and reputation of the debtor: A debtor with a good reputation will be entitled to a longer notice period than a debtor who is found to have acted dishonestly;
- The potential ability to raise the money required in a short period: Evidence to suggest the debtor will have difficulty, or is unable to raise the money, could weigh in favour of a shorter notice period;
- The circumstances surrounding the demand for payment: A consideration of the events leading up to the default; and
- Any other relevant factors.
In analyzing the above factors, case law has established that giving a relatively short period to satisfy a demand for payment will constitute reasonable time where:
- the value of the creditor's security is at risk of depreciating rapidly;
- there is a justifiable apprehension of dishonesty on the part of the debtor; or
- the giving of more time would serve no useful purpose because the debtor does not have the means to satisfy the demand.
Circumstances (outside of the lender/debtor relationship) surrounding demand for payment and other relevant factors have less frequently been brought into the analysis.
Nonetheless, courts have considered that prevailing local lending conditions may also affect the assessment of reasonable time, and that commercial realities in the financial sector should not be ignored. Furthermore, courts have considered general economic conditions, including those affecting particular industry sectors, in taking a view on what constitutes a reasonable time for demand. These factors have been considered objectively with respect to market conditions as a whole, rather than on the subjective characteristics of a particular borrower. Thus, a borrower with little hope of raising funds generally should have less likelihood of raising issues regarding a short demand period because of prevailing market conditions. But, based on existing case law, a borrower that could have a prospect of raising further funds might be entitled to a longer demand period where market conditions will make raising funds more difficult.
In addition, the granting of waivers, forbearances and tolerances may be seen as constituting a course of conduct by a lender that is seen to entitle a borrower to greater demand time. The assistance by a lender in providing or assisting with access to additional funds might raise similar considerations. All of this, of course, presumes the reasonable ability of a debtor under demand to raise further funds.
Lenders are now operating in uncharted market territory. At some point, if demands are required, market conditions and prior conduct may become factors in determining the appropriate length of demand periods. The market has been working through waivers, forbearances and assistance to borrowers with obtaining more capital. Access to capital to fulfil a demand may, in the future, become difficult for borrowers to obtain as a general market condition. In addition to the factors which we have traditionally seen as determining the appropriate time period for a demand, these market conditions and recent conduct may suggest longer demand periods.
Kate Yurkovich is an articling student at Gowling WLG (Canada) LLP.
Christopher Alam is the leader of Gowling WLG's Lending National Practice Group.