Rescinded [2009-10-01] - Regulations Governing Security for Debts Due to Her Majesty - TB Circular 1989-2
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CIRCULAR NO.: 1989-2
OUR FILE NO.: 5840/S444
T.B. NO.: 809634
DATE: January 11, 1989
TO: Deputy Heads of Departments and Heads of Agencies and Departmental Corporations
SUBJECT: Regulations Governing Security for Debts Due to Her Majesty
THIS CIRCULAR ESTABLISHES THE POLICY GOVERNING THE VALUATION, ACCEPTANCE, RELEASE AND REALIZATION OF SECURITY FOR DEBTS DUE TO THE CROWN, AND FOR APPLYING THE RELATED REGULATIONS.
1. The policy and the attached Regulations were made to protect the Crown's interests without imposing undue hardship on a debtor or the guarantor of a debt. While existing statutes give Crown claims some general priority over the claims of unsecured debtors, these Regulations allow the government to accept specific guarantees. This policy is intended to encourage the repayment of debt by obtaining specific guarantees; however, neither the Regulations nor this policy oblige a debtor to provide security.
2. Without imposing undue hardship on a debtor or the guarantor of a debt, departments should actively seek security whenever it is consistent with good business practices and would promote more timely repayment of debts owed to the Crown.
3. Departments should take only enough security to ensure the debtor's commitment to discharging the debt.
4. Departments must ensure that any substitution of security does not inadvertently reduce the protection that was originally intended.
5. Departments are to take all reasonable precautions to ensure the future enforceability of Crown's claim to the pledged asset.
6. The security value of assets is to be established in a consistent and fair manner.
7. In case of default, departments should realize on the security only as a last resort when all other collection methods have failed.
8. Departments should charge the debtor for any associated out-of-pocket costs, with interest, and credit any recoveries against these expenditures before reducing the debt(s).
9. As required, departments must obtain legal advice and assistance from their Legal Services, which will confer, if necessary, with the appropriate Civil Litigation section.
10. The regulations and this policy apply to all organizations considered to be departments within the meaning of section 2 of the Financial Administration Act (FAA), (R.S. 1985).
11. The Regulations do not superseded authorities contained in statutes and regulations now in existence; they complement them and provide authority where none exists.
12. As a matter of general policy, and without regarding it as a substitute for establishing a potential debtor's credit-worthiness, security should be sought actively, consistent with good business practices, whenever:
- a debtor's future ability or willingness to discharge a debt in accordance with the payment terms is uncertain;
- a debtor is not discharging a debt in accordance with payment terms, is not in an immediate financial position to pay the amount owing and is unable to borrow the amount from usual sources;
- the normal commercial practice for the type of transaction being considered is to take security, such as a hypothec or a mortgage in the case of the sale of real estate; or
- a debtor has enough real property or other assets to discharge a debt but is temporarily insolvent, and it would be unreasonable to require the debtor to sell assets to pay the amount owing.
13. The Minister responsible for recovering or collecting a particular debt due to Her Majesty may accept as security a charge, such as a pledge, assignment, debenture, mortgage, encumbrance, hypothec or lien, on the assets of a debtor or of a guarantor. Although not specifically mentioned in the Regulations, other forms of security that constitute such a charge may also be accepted. However, this does not mean that security can be accepted in lieu of immediate payment when the duly approved terms and conditions of a sale call for immediate payment.
14. In accordance with the Regulations, only charges
on existing or future personal or real property of a debtor, and
on existing personal or real property of a person who is the surety or guarantor of the debtor
are deemed to be a security for the purposes of paragraph 156(b) of the FAA, (R.S. 1985).
While an assignment or the future wages of a debtor can be accepted as security, a department is not authorized under the Regulations to accept an assignment of the future wages of a guarantor. However, a charge on an asset currently owned by either of these people can be accepted as security.
15. Departments should avoid situations where it becomes more attractive for the debtor to give up the security than to discharge the debt. This is most important when the asset being considered as security is used to generate the revenue from which the debt would be discharged (for example, shares in a privately-held business, or special-purpose buildings or equipment for which, in fact, there is a limited, if any, market). The objective of taking security is to ensure the payment of a debt, not to liquidate or acquire assets.
16. When considering offers of security, departments should give preference first to security deposits or guarantees provided by banks or other financial institutions, and then to unencumbered assets that are expected to maintain their value or appreciate in value. Although less desirable, a second or subordinate charge on an asset may be accepted as security when the sum of this charge and all other charges with higher priority does not exceed the estimated realizable value of the asset, net of realization costs.
17. Notwithstanding the acceptance of security pursuant to this policy, departments are expected to take normal collection action consistent with good receivables management without imposing under hardship on a debtor or a guarantor.
Amount of security
18. Subject to other applicable regulations, policies and guidelines, and in the light of the particular circumstances, departments should require only enough security to ensure the debtor's commitment to discharge the debt. When establishing security requirements, departments should determine whether insurance must be maintained, at the debtor's expense, on the asset given as security and whether the insurance should be made payable to Her Majesty.
19. Security that currently covers only part of the debt may be accepted when no other security is available or less than full security is required. Such action may be appropriate, for example, when:
- existing higher priority charges will be reduced in due course, thereby providing the security sought by the government, or
- registering a right is warranted in order to prevent subsequent creditors from gaining a higher-ranking claim.
20. When the Crown has authority to substitute one asset held in security for another, the net realizable value of the replacement asset must at least equal:
- the security value originally provided by the asset that it replaces, or
- the outstanding debt(s), whichever is less.
21. Legal advice should be obtained to ensure the validity and future enforceability of the Crown's claim to the security being accepted and, when security has been accepted, to register the Crown's interest in accordance with the applicable provincial or territorial laws. Special attention must be given to ensuring that:
- the asset offered as security is assignable and transferable to the Crown (Canada Savings Bonds, for instance, are currently not transferable to a third party and Registered Retirement Saving Plans are subject to limitations);
- the asset offered as security actually belongs to the person offering it; and
- this person, or anyone acting on behalf of this person, has the authority to act in this capacity.
These considerations are particularly important where "family" assets are involved and giving security may require the consent of both spouses.
22. When considering whether to accept security from a surety or guarantor, particularly a spouse or an elderly relative of the debtor, departments should obtain evidence that the persons has received independent legal advice before providing security. Defences based on the premise that such a person was unduly taken advantage of could preclude enforcing the Crown's claim.
Valuation of security
23. To take into account the risk of future devaluations, the maximum security value of any asset must be established in accordance with the attached schedule. The valuation should be based on the lowest value of the asset. For example, the current value of a piece of real estate must be used, not an appreciated future value. If there is reason to expect that the asset may depreciate to less than the attached schedule provides, its security value should be discounted accordingly.
24. Departments should obtain a valuation from a qualified appraiser when:
- the security being considered is real property intended to cover a debt of more than $100,000; or
- there is greater than usual doubt about the purported value, especially
about the future realizable value of the asset. This would usually apply to
precious metals and gems and, often, to equipment, other goods and chattels.
When the asset is precious metals and gems, at least two appraisals are advised. They should be averaged to obtain the best estimate of the current market value.
25. To ensure that the security they hold continues to provide the required protection, departments should assess their portfolios at least once a year and take prompt corrective action. As specified in note 2 of the attached schedule, however, certain types of security require more stringent control.
Release or discharge of security
26. In accordance with paragraphs 3(a) and (b) of the Regulations, the Minister responsible for recovering or collecting a debt due to Her Majesty may execute and deliver any instrument that will effectively release or discharge any security, either:
- in full, on total payment of the debt due to Her Majesty, or
- in part, on payment of the portion of the debt covered by security accepted to cover the portion paid.
27. For greater certainty and clarity when the need for releasing part of the security is anticipated, departments should include, after obtaining appropriate legal advice, specific provisions in the security instrument(s) to address the release or discharge of a portion of the security accepted. This could be done, for example, by relating specific assets to specific portions of the debt(s). From a legal perspective, it may also be preferable to execute a separate security instrument for each portion of the debt.
28. Security may also be released or discharged when, as a result of another form of settlement such as forgiveness, remission, or a duly authorized compromise, the debt has, in the opinion of legal counsel, been extinguished.
29. When releasing or discharging a portion of the security, departments should ensure that the Crown's claim to the remaining security is not impaired in any way or the priority of its claim reduced.
Realization on security
30. Before realizing on a security, departments must first reasonably and diligently exhaust all the other available recovery possibilities, which must include set-off actions where possible and appropriate.
31. If all recovery actions are unsuccessful, the department responsible for recovery or collection should try to realize on the security promptly under appropriate legal advice. Departments must first ensure that this action will not subject the debtor or, as the case may be, the surety or guarantor to undue hardship. Departments should not therefore try to realize on security in cases which, for legislative, administrative, humanitarian, or other special reasons, are deemed by senior departmental officials, after close scrutiny, to be unsuitable for such action.
32. Subject to paragraph 33, if a debtor commits an act of bankruptcy, but has neither filed for nor been petitioned into bankruptcy, the department responsible for the recovery or collection of the debt should, after obtaining appropriate legal advice and with the written authority of its Deputy Head or of a person authorized by the Deputy Head in writing for this purpose, pursue its recovery responsibilities in accordance with the provisions of the Bankruptcy Act in a manner consistent with this policy and the objectives of the program under which the debt was incurred.
33. Unless counselled otherwise, a department should not seek to file a petition for a receiving order against a debtor when it holds adequate security unless:
- the action is expected to increase the chances of collecting the debt; and
- the amount of the debt is significant.
In circumstances like these, however, prompt action may prevent the disappearance of other assets that are required either to retire the debt or to reduce the subsequent loss.
34. If the court has already issued a receiving order against a debtor, a department should, after obtaining legal advice, consider executing its right to realize on its security independently of other creditors and file with the trustee a priority claim for any shortfall.
Cost of security
35. Except where legal counsel advises that it is prohibited by law, the appraisal, registration, realization and any associated legal costs should be charged, with interest, to the debtor. The interest must be calculated from the time the costs are incurred until they have been recovered. Whatever proceeds are received should be applied:
- first: to recovering the above costs, paying first the interests on the costs and then the costs proper; and
- then: to the original debt or debts, first paying any interest due on the debt.
36. To provide authority for charging such interest and to avoid disputes and litigation, departments, under the guidance of legal counsel, must ensure that the above considerations are reflected in the documents that establish the debt and the security.
37. The attached regulations were made by the Governor in Council on 14 August 1987, on the recommendation of the President of the Treasury Board and the Minister of Finance, in accordance with section 156 of the FAA, R.S. 1985. They were registered with the Clerk of the Privy council on 14 August 1987 as SOR/87-505 and published in Part II of the Canada Gazette on 2 September 1987.
38. This policy is effective immediately. It will be published in the Guide on Financial Administration in a future amendment, at which time this circular will expire.
39. Enquiries about this circular should be directed to the:
Accounting and Costing Policy Branch
Office of the Comptroller General
West Tower, 8th Floor,
300 Laurier Avenue
Tel: (613) 957-9671
Deputy Comptroller General
Accounting and Costing Policy Branch
Maximum Security Value Assigned to an Asset Accepted as Security for Debts Due to Her Majesty (pursuant to paragraph 23 of the circular and subject to the notes herein)
|Type of Asset||Canadian Dollar Equivalent Maximum Security Value (per cent of current market value)|
|Unconditional Documentary Credit|
|(i.e. letter of credit)||100%|
|Cash (e.g. Certified Bill of Exchange or 100% Cheque) or Collateral Deposit in a||100%|
|Government Debt or Government Guaranteed Debt (i.e. of any country)|
|Treasury Bill and other short-term paper||95%|
|maturity less than 5 years||95%|
|maturity from 5 years to 10 years||90%|
|maturity greater than 10 years||85%|
|Short term paper:|
|rated at least A-2, P-2 (or equivalent)||90%|
|rated A-3, F-3 (or equivalent)||85%|
|rated below A-3, P-3||55%|
|Bond rated AA or higher:|
|maturity less than 5 years||95%|
|maturity from 5 years to 10 years||90%|
|maturity greater than 10 years||85%|
|Bond rated A to BBB|
|maturity less than 5 years||80%|
|maturity from 5 years to 10 years||75%|
|maturity greater than 10 years||70%|
|Bond rated below BBB||50%|
|Unrated bond||(see note 4)|
|Listed and worth more than prescribed minimum value (see note 3)||50%|
|Not listed or below prescribed maximum value||(see notes 3 and 4)|
|Precious metals and gems|
|agricultural land and buildings, undeveloped land, principal residence,commercial rental, or industrial - general purpose||75%|
|industrial - special purpose||60%|
|other residence (e.g. cottage)||50%|
|Equipment, other goods and chattels|
|general purpose item||75%|
|special purpose item (other than collector's item)||50%|
|recognized generally as a collector's items||75%|
|Net cash surrender value||100%|
An insurance policy that covers risks that could reduce the value of property being accepted as security does not constitute a security. The same applies to an insurance policy on the life of the debtor. Only the net cash surrender value can be considered as security. Any such policies should be made appropriately payable to Her Majesty.
Subject to the restriction on accepting future assets as security imposed by the attached Regulations and the guidelines on determining a debtor's ability to pay (see Chapter 10.6 of the Guide on Financial Administration for Departments and Agencies of the Government of Canada under the heading "Normal Collection Process") an assignment of (future) wages by the debtor can be accepted as security. The maximum security value of future wages, however, must be assessed in relation to the degree that periodic wages will cover future periodic payments. Therefore, only the debtor's current net income above the Senate Committee Poverty Line, less the sum of the payments the debtor is currently expected to make to all other creditors, should be considered as security, and only up to the following percentages of the debtor's gross income:
|if debtor has a record of stable revenue from employment||35%|
|if debtor shows a record of uncertain revenue from employment||20%|
The sole purpose of the schedule is to determine the maximum security value of an asset being accepted as security. It does not determine an asset's suitability as security. Preferred forms of security are discussed in paragraph 16 of the circular.
To maintain the expected security value, security based on types of assets that are subject to frequent changes in value, because of market or exchange rate fluctuations, need to be monitored at least monthly (and more frequently when financial markets are volatile) and must be subject to calls for additional security if the shortfall is equal to or exceeds 15 per cent.
Shares denominated in Canadian dollars must be listed on a Canadian stock exchange and have been quoted at a minimum of Cdn $3.00 per share 90 per cent of the time during the previous 3 months. Shares denominated in other currencies must be listed on a stock exchange of the same country as the currency and have been quoted at a minimum equivalent to Cdn. $4.00 per share 90 per cent of the time during the past 6 months.
The current market value of bonds and shares that are not rated and/or quoted on any market shall be subject to the advice of a qualified appraiser, who shall be asked to consider particularly the risk of their devaluation over the life of the debt. The maximum security value shall not exceed 50 per cent of their current market value.
Credit ratings shall be from or consistent with those of Dominion Bond Rate Service, Canadian Bond Rating Service, Moody's Investors Service or Standard and Poor's. Where more than one rating is obtained, the lowest rating shall apply.
Except where the debt to Her Majesty is payable in the same currency as the security is valued, in which case no conversion is required, the maximum security value of any asset not valued in Canadian dollars shall apply after current market value has been converted to Canadian dollars.
DM 100,000, 4-year, non-government bond rated BBB by Moody's Investor Service. (DM = West Germany's Deutsche Mark)
Determine current market value, say: DM 99,417 (source may be Globe & Mail, broker, etc.)
Convert to Canadian dollars: DM 99,417 X 0.72940 = Cdn $72,515 (1 DM = Cdn $0.7294; based on Bank of Canada exchange rate on the day of valuation).
Establish maximum security value: Cdn. $72,515 x 89% = Cdn $58,012 (80% = corresponding per cent of current market value as per schedule, i.e. rated A to BBB, maturity less than 5 years)