Anonymised, illustrative composite. Nobody had granted competing security to a stranger. The obstacle was the buyer’s own bank, holding its own general security agreement over its own customer.
At a glance
The target was a twenty-six-employee precision machine shop in the Fraser Valley, sold on an asset basis at $1,340,000. The buyer, a former operations manager backed by a silent investor, incorporated in March, opened a $75,000 conventional operating line with his own bank for pre-closing costs and a small unrelated contract-machining business, then applied to the same bank in April for a $500,000 programme term loan: equipment $330,000, leaseholds $80,000, intangible assets $90,000. Under section 6.1(a) of the Regulations that is exactly the $500,000 maximum for purposes other than real property. Within the equipment allocation, one five-axis machining centre at $268,000 was to be co-financed — $168,000 from the programme loan and $100,000 from a specialist equipment financier.
The security opinion came back three days before funding with three problems in it, none about a stranger’s claim. The bank’s own general security agreement securing the March line covered all present and after-acquired personal property, so it would attach to the financed equipment on delivery — and it had been registered a month before the programme loan existed. The intercreditor draft gave the bank a first charge on the machining centre and the financier a second. And nobody had noticed that the two facilities fell within thirty days of each other. See the general security agreement glossary entry and PPSA registration search.
The exposure was not the whole $500,000, which is why the class boundaries mattered more than the total. The equipment allocation of $330,000 carried the first-ranking obligation — except for $34,000 of computer-aided design and machine-control licences inside it, which the Regulations route to a softer rule despite sitting in the equipment class for eligibility. The leasehold improvements of $80,000 and the intangible assets of $90,000 were never subject to a ranking requirement. So the ranking problem was worth $296,000, and on that portion it was the Minister’s 85% share of an eligible loss that stood to be trimmed.
On the co-financed machining centre the split was $168,000 of programme money against $100,000 from the equipment financier — 62.7% and 37.3% of $268,000, which became the sharing formula, because the waterfall the parties had drafted was unavailable.
Section 14 of the Regulations is where all three problems live, and its obligations are class-specific rather than general.
Subsection (1) requires a lender, “when making a loan referred to in paragraph 5(1)(a) or (c)” — real property or equipment — to “take valid and enforceable first-ranking security in the assets of the small business whose purchase or improvement is to be financed by the loan”. Subsection (3) deals with everything else: “In the case of a loan referred to in paragraph 5(1)(b), (d) or (e), or a loan referred to in paragraph 5(1)(c) for the financing of computer software”, the lender “must take security in any assets of the small business in respect of which the loan is made”. Security, yes; a rank, no. Note where software lands: section 1(1) defines equipment as “equipment that is used or to be used in the course of carrying on a small business, and includes computer software”, so software is equipment for eligibility and subsection (3) carves it back out for security. Treating the first-ranking duty as a flat rule across a facility is the commonest misreading of this section.
Subsection (5) decided the incumbent general security agreement, and it is not the provision usually cited. Where there is existing security in a financed asset, “the security taken by the lender in that asset must be of the highest available rank, but if the existing security is the result of the application of a provision respecting subsequently acquired property, the lender must obtain all necessary postponements to ensure that the security in the asset is a first ranking charge”. An after-acquired-property clause is exactly “a provision respecting subsequently acquired property”, so the general rule — take the best rank available — is displaced by a mandatory one. Highest available rank is not good enough here.
Subsection (2) closed off the intercreditor draft: where financed assets are funded by the programme loan and another source, “the security taken by the lender in those assets must be equal in rank to that taken in those assets in relation to the other source of financing”. Not first, not second — equal. The senior/junior split the parties assumed is simply unavailable on a co-financed asset, which is why the intercreditor had to become pro-rata. See intercreditor arrangements between two lenders.
Subsection (4) dealt with the thirty-day overlap. Where the same lender makes conventional loans to the same borrower within thirty days either side of the programme loan to finance something that would itself have been eligible, the lender “must, in addition to any security otherwise required by this section to be taken, take security in the same assets and equal in rank to that taken to secure the conventional loan or loans”. The bank could not quietly prefer its own uninsured line.
Funding moved by eleven days. The bank executed a partial postponement of its March general security agreement in favour of its own programme-loan security, limited to the serial-numbered machinery and the balance of the financed equipment, and registered a specific-collateral financing statement against those goods. The intercreditor was redrafted from first-and-second to equal ranking, proceeds shared 62.7/37.3. The operating line kept its blanket coverage over everything else and was made equal-ranking in the financed assets, as subsection (4) required.
The Regulations forgive an inadvertent security failure only partly. Section 25 provides that where the non-compliance was inadvertent — including where “the requirements with respect to security set out in these Regulations were not satisfied in respect of the loan” — the Minister pays “on the portion of the amount of principal outstanding on the loan to which the non-compliance does not relate”. That would have carved the equipment slice out of the guarantee.
Section 25.3 goes further where primary security turns out to be unenforceable, but its conditions are demanding: section 14’s ranking requirements must still have been met, and the lender must document a visit “during the period beginning 30 days before the day on which the loan was approved and ending 90 days after the final disbursement under the loan agreement”. Neither provision is a plan; both are what you fall back on after the postponement you should have taken.
The tell was the date on the buyer’s own registration. The financing statement securing the March line predated the programme loan by a month and named the same debtor and the same secured party. A search in the buyer’s name would have shown it on day one.
Almost all pre-closing search effort on an asset purchase points at the vendor, as an undischarged lien from a repaid equipment loan shows. This is the mirror image: a buyer who had already encumbered assets it did not yet own.
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