Enforcing Promises To Grant Future Security: The Limits On Obtaining An Equitable Charge From The Court

Lenders often advance funds to borrowers, with the understanding that the borrowers may, in turn, advance money to other entities, subsidiaries, or assignees that have not yet been identified or do not yet exist. Such entities are therefore not in a position to grant security at the time the initial loan is established. This can leave a lender in a precarious position. To protect themselves, lenders often include a provision in term sheets or credit agreements requiring subsequent recipients of these funds to provide security. Unfortunately, imprecise wording or a lack of diligence can render such a provision ineffective and fail to provide a court with the tools it needs to order an equitable charge over the applicable assets.

This was the unfortunate situation facing a group of creditors (the Noteholders) in the case of League Assets Corp (Re)1. The Petitioners, known as the League Assets Group, were principally involved in real estate development. In 2012, League Opportunity Fund Ltd. (LOF) issued an offering of convertible promissory notes. The Noteholders that subscribed were provided with security in the form of a general security agreement with LOF, as well as a subscription agreement that outlined a form of future security: LOF would enter into loan agreements "with all investee companies, with any loans advanced by [LOF] secured by security agreements over the assets of the investee companies."

LOF subsequently transferred money to various League Assets entities, such as League Assets Corp. (LAC) and League Capital Markets Ltd. (LCM). To further complicate matters, LAC also advanced funds to various other entities (the Tier 2 Entities). None of the various League Assets entities ever provided any security to LOF. Only LAC provided loan documentation.

Business did not go well for LOF and the other League Assets entities. Eventually they obtained protection under the Companies' Creditors Arrangement Act2. The CCAA proceeding was not enough to prevent a complete liquidation process. In that proceeding the Noteholders sought 1) a declaration that certain League Assets entities were indebted to LOF, and 2) an equitable charge on the assets of those League Assets entities for the amount of indebtedness.

On the first issue, the BC Supreme Court held that there was little or no evidence that the money transferred by LOF to LCM and the Tier 2 Entities were "loans" as described in the subscription agreement. There were other plausible...