Guideline on Security for Debts

6.1 As a matter of general practice, and without regarding it as a substitute for establishing a debtor's potential credit-worthiness, security should be actively sought, 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 the 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 has temporary cash flow problems, and it would be unreasonable to require the debtor to sell assets to pay the amount owing.

6.2 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 (see Appendix B). This does not mean, however, that security should be accepted in lieu of immediate payment when the duly approved terms and conditions of a sale call for immediate payment.

6.3 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 under paragraph 156(b) of the Financial Administration Act.

6.4 While an assignment of 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 a debtor or a guarantor can be accepted as security.

6.5 Situations should be avoided where it becomes more attractive for the debtor to give up the security than to discharge the debt. This is especially important when the asset being considered as security is used to generate the revenue that would discharge the debt (for example, shares in a privately held business or special-purpose buildings or equipment for which, in fact, there is a limited market, if any). The objective of taking security is to ensure the payment of a debt, not to liquidate or acquire assets.

6.6 When considering offers of security, security deposits or guarantees provided by banks or other financial institutions are preferable, followed by 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 higher-priority charges does not exceed the estimated realizable value of the asset, net of realization costs.

6.7 Only enough security to commit the debtor to discharge the debt should be taken. When establishing security requirements, a determination should be made concerning whether insurance should be maintained, at the debtor's expense, on the asset given as security and whether the insurance should be made payable to the Crown.

6.8 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
• a right is warranted to prevent subsequent creditors from gaining a higher-ranking claim.

6.9 When the Crown has authority to substitute one asset held in security for another, the net realizable value of the replacement asset should at least equal

• the security value of the original asset that it replaces or
• the outstanding debt(s), whichever is less.

6.10 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. Consideration should be given to the following:

• 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);
• local laws outside of Canada where the security may reside;
• 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.

6.11 The above considerations (section 5.10, 3^rd and 4^th bullets) are particularly important where family assets are involved and giving security may require the consent of both spouses.

6.12 When considering whether to accept security from a surety or guarantor who is the spouse or an elderly relative of the debtor, evidence should be obtained that the person has received independent legal advice before providing security. Defences based on the premise that the person was unduly taken advantage of could preclude enforcing the Crown's claim.

6.13 To take into account the risk of future devaluations, the maximum value of any asset should be established in accordance with Appendix B. The valuation should be based on the lowest value of the asset. For example, the current value of a piece of real estate should be used, not an appreciated future value. If there is reason to expect that the asset may depreciate to less than the attached schedule indicates, its security value should be discounted accordingly.

6.14 A valuation from an accredited appraiser should be obtained when:

• the security being considered is real property intended to cover a debt of more than $100,000;
• doubt about the purported market value or the net realizable value of the asset is greater than usual, which is usually the case with precious metals and gems and often with goods and equipment (for precious metals and gems, the average of at least two appraisals should be used as the best estimate of their market value); and
• bonds are not rated and shares are not listed on a stock exchange (an appraiser's consideration should be given to the future devaluation of these assets over the life of the debt).

6.15 To ensure that the security they hold continues to provide the required protection, portfolios should be assessed at least once a year and the appropriate action taken. As specified in Note 2 of the Appendix B, certain types of security, however, require more stringent control.

6.16 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

• in full, on total payment of the debt due to Her Majesty, or
• in part, on payment of the portion of the debt for which security was accepted.

6.17 Appropriate legal advice should be sought when the release of part of the security is anticipated. In addition, specific provisions should be made 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.

6.18 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.

6.19 When releasing or discharging a portion of the security, the Crown's claim to the remaining security should not be impaired in any way or the priority of its claim reduced.

6.20 All reasonable actions should be carried out and all available recovery possibilities exhausted before realizing on a security, including, where possible and appropriate, set-off actions as outlined in the Directive on Receivables Management.

6.21 When all collection and recovery actions are unsuccessful, a prompt attempt to realize on the security should be made, under legal advice. All actions taken should be based on principles of fairness to the debtor or guarantor. Attempts to realize on the security should not be made if, after close scrutiny, senior departmental officials determine that legislative, administrative, humanitarian, or other special circumstances make it unsuitable for such action.

6.22 Subject to subsection 5.23 of these guidelines, if a debtor commits an act of bankruptcy without having filed for bankruptcy or been petitioned into bankruptcy, under legal advice and with the written authority of the deputy head or of a person authorized by the deputy head in writing for this purpose, recovery responsibilities should be pursued in accordance with the provisions of the Bankruptcy and Insolvency Act and in a manner consistent with these guidelines and the objectives of the program under which the debt was incurred.

6.23 Except where legal counsel advises otherwise, filing a petition for a receiving order against a debtor should not be sought when a department 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 such circumstances, however, prompt action may prevent the disappearance of other assets that are required either to retire the debt or reduce the subsequent loss.

6.24 If the court has already issued a receiving order against a debtor, consideration should be given, after obtaining legal advice, to executing the department's right to realize on its security independently of other creditors and to file with the trustee a priority claim for any shortfalls.

6.25 Unless 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 pursuant to the Interest and Administrative Charges Regulations. The interest should be calculated from the time the costs are incurred until they have been recovered. Any proceeds received should be applied as follows:

• first-to recovering the above costs, by first paying the interest on the costs and then the costs proper; and
• second-to the original debt(s), by first paying any interest due on the debt.

6.26 To provide authority for charging interest and to avoid disputes and litigation, the guidance of legal counsel should be sought to ensure that these considerations are reflected in the documents that establish the debt and the security. Also, refer to the Interest and Administrative Charges Regulations.

• Financial Administration Act, sections 2, 7 and 156
• Bankruptcy and Insolvency Act
• Security For Debts Due to Her Majesty Regulations
• Interest and Administrative Charges Regulations
• Income Tax Act
• Excise Tax Act

• Policy on Internal Control
• Directive on Receivables Management