A recent decision of the Tax Court of Canada highlights the benefits of a broadly drafted general security agreement (GSA) in relation to a secured creditor’s realization on a bankrupt borrower’s intangible assets in the form of GST input tax credits (ITCs).

If Peter Morton and Cinitel Corp. had their way, every lender would have a distinct duty to a guarantor to permit the sale of a defaulting borrower’s assets as a going concern. In their view, a lender should be required to maximize its recovery from the borrower and to minimize any claim made on a guarantee. Fulfilling that duty would also obligate a lender to keep funding a borrower while that asset sale was negotiated and completed. It is enough to make any lender cringe.

Fortunately, the Ontario Court of Appeal disagreed with Morton and Cinitel’s view of the lending world.

The Supreme Court of Canada, in a decision that has implications for borrowers and lenders alike, particularly where pension funds are involved, has raised some new hurdles for the country’s banks and their business customers and, at the same time, has bolstered protection for lenders of last resort who finance insolvent companies.

The court’s decision in Sun Indalex Finance, LLC v. United Steelworkers, issued earlier this year, addresses critical questions in insolvency law regarding pension funds and DIP financing. 

In an earlier edition of Fully Secured (June 27, 2012 – Volume 3, Number 2), we reported on the Ontario Court of Justice decision in Snoek ⁷ where security granted by a borrower (“HSLP”) to a group of individual creditors (“B”) was held to constitute an improper preference and declared invalid following a challenge by the trustee in bankruptcy. B had been one victim of a Ponzi scheme involving numerous unsecured creditors of HSLP.

Having enforceable security over all of a borrower’s assets is obviously of primary importance to a lender.  However, where a borrower occupies leased premises, ensuring the lender has quick and reliable access to the collateral is equally important, especially if the landlord proves to be unco-operative after a borrower’s default.  Although court-ordered access to a borrower’s leased premises can be sought after a borrower’s loan default, a landlord waiver obtained prior to an initial advance of a loan can bring some added certainty to the realization process outside of a bankrup