1. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-1 CANADIAN BUSINESS AND THE LAW Second Edition by Dorothy Duplessis Steven Enman Shannon O’Byrne Sally Gunz Presentation prepared by Allan Elliott, Southern Alberta Institute of Technology

2. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-2 CHAPTER TWENTY-SIX THE LEGAL ASPECTS OF CREDIT OBJECTIVES:  The legal significance of credit transactions in business  The difference between secured and unsecured creditors  The ways that lenders and borrowers are protected  The implications of guaranteeing a debt

3. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-3 LEGAL ASPECTS OF CREDIT OVERVIEW OF CREDIT  collateral – security for a borrower’s promise to repay a loan  default – failure to make required payments on a loan  unsecured credit – debts that are not backed by specific assets of the debtor

4. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-4 INTERNATIONAL PERSPECTIVE CREDIT RISK IN INTERNATIONAL TRADE  use of international bankers and letters of credit  letters of credit – a written promise by a buyer’s bank to a seller’s bank to pay the seller when specified conditions are met

5. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-5 REGULATION OF CREDIT CONSUMER PROTECTION LEGISLATION  applies when borrower is a consumer rather than a business  consumer debt – a loan to an individual for a noncommercial purpose  credit bureau – an agency that compiles credit information on borrowers

6. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-6 REGULATION OF CREDIT REPORTING  credit bureaus compile credit information for lenders  negotiation of terms – lenders are prohibited from making misleading statements  terms of credit – Criminal Code regulates excessive interest rates  provincial legislation prohibits, for example, where there is no substantial benefit to the consumer

7. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-7 REGULATION OF CREDIT DISCLOSURE OF COST OF THE CREDIT  lender must disclose the amount borrowed, amount of the interest, any other charges, and the total balance payable REMEDIES  consumer may file a complaint or apply to court to have the terms of the loan adjusted

8. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-8 REGULATION OF CREDIT DEBT COLLECTION  collection agencies are subject to licensing  cannot harass, threaten, or exert undue pressure on defaulting borrowers  only those with contractual responsibility for the debt can be subject to any efforts to collect

9. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-9 THE CREDIT AGREEMENT THE CREDIT AGREEMENT LETTER OF COMMITMENT  a document that is provided by a bank to a borrower and sets out the terms of a loan, including  amount of the loan ▪ interest  repayment terms ▪ renewal  security  requirements for maintenance of borrower’s financial position  events that constitute default  lender’s remedies

10. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-10 SECURITY SECURITY FOR A LOAN CAN BE  any interest in property that is of value to the lender  either real property or personal property GENERAL SECURITY AGREEMENT  a loan contract that includes all of the assets of a business as collateral

11. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-11 ENVIRONMENTAL PERSPECTIVE CREDIT AND ENVIRONMENT RISK  environmental assurance required as part of credit documentation  review documented contamination, site visits, inventory of hazardous materials, interviews

12. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-12 PRIORITY AMONG CREDITORS COMPREHENSIVE PERSONAL PROPERTY SECURITY ARRANGEMEMT PROVIDE FOR  registration – the process of recording a security interest in a public registry system  financing statement – the document registered as evidence of security against personal property  after-acquired property – assets purchased after a secured loan is granted

13. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-13 REMEDIES STATUS OF THE CREDITOR  secured creditor – a lender who has the right to seize and sell specific assets of a borrower to pay off a loan LENDER’S REMEDIES  acceleration clause – a term of a loan that makes the entire loan due if one payment is missed  deficiency – the shortfall if a secured asset is sold for less than the amount of the outstanding loan

14. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-14 REMEDIES REMEDIES LIMITS ON LENDER’S REMEDIES  receiver – a person appointed by a secured creditor to retrieve the assets and realize the debt  in some provinces, lender is limited to the proceeds from the seized assets and cannot proceed for any deficiency  there is a requirement to give the debtor reasonable notice before calling a loan

15. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-15 REMEDIES REMEDIES BORROWER’S REMEDIES  negotiate flexible terms when the loan is given  entitled to an accounting of the state of the loan  challenge a sale of assets that is improperly conducted or that produces unreasonably low proceeds (an improvident sale)

16. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-16 PERSONAL GUARANTEES RELATIONSHIPS IN PERSONAL GUARANTEES BORROWER/ PRIMARY DEBTOR CREDIT ARRANGEMENT GUARANTORS CONTRACTS OF GUARANTEE BANK GUARANTOR – A PERSON WHO SIGNS A GUARANTEE Figure 26.1

17. Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-17 PERSONAL GUARANTEES GUARANTEE AGREEMENT  must be in written form and signed by the guarantor  in Alberta only the guarantee must be certified by a notary public to be valid AVOIDING GUARANTOR OBLIGATIONS  guarantor has the right of subrogation against the debtor  subrogation – the right of a guarantor to recover from the debtor any payments made to the creditor