1. CHAPTER Microsoft ® PowerPoint ® Presentation Prepared By Gail McKay, LLB, Thompson Rivers University © 2008 McGraw-Hill Ryerson Ltd., All Rights Reserved. © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved. 11 Law of Credit and Finance

2. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-1 OBJECTIVES 1.To identify the types of instruments available to creditors to secure the payment of a debt 2.To understand how a security instrument protects the investment of a creditor, and how public notice of a claim is established 3.To determine creditor’s rights after default 4.To survey bankruptcy legislation and the distribution of a debtor’s assets

3. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-2 INTRODUCTION Most businesses rely to some extent on credit, having a line of credit with a bank or issuing bonds or debentures to investors Credit cards provide businesses with a secure method of payment for their services or goods When the purchased chattel is itself used as security for a debt, registration in the provincial or territorial Personal Property Security Act registry occurs, providing public notice of the creditor’s interest in the chattel

4. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-3 FORMS OF SECURITY FOR DEBT A mortgage of real property secures the interest of the mortgagee by registration of it as a charge on title at the land titles registry, but allows the mortgagor to remain in possession of the land A chattel mortgage secures the interest of a lender against moveable property by transferring title to the chattel to the lender, and registering the chattel mortgage at the Personal Property Security Act registry

5. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-4 CONDITIONAL SALE AGREEMENT A conditional sale involves an actual sale Like a chattel mortgage debt agreement, the conditional purchaser of goods has possession but not title Registration of the document is again required at the PPSA registry so that the public has notice of the seller’s interest When the debt is paid in full, title is given to the purchaser

6. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-5 ASSIGNMENT OF BOOK DEBTS The assignment of accounts receivable or book debts of a company allows the creditor of a company to take an assignment of the accounts receivable as security for a working capital loan Registration of the assignment at the Personal Property Security Act registry has the advantage of giving the assignee priority in a secured claim to the book debts over a trustee in bankruptcy, in the event that there is a later insolvency by the company

7. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-6 PERSONAL PROPERTY SECURITY ACTS Personal property which has a security interest attached to it is called collateral Careful registration of the financing statement by the creditor perfects this statutory security interest A default in payment generally allows the creditor to seize the collateral and, after giving the debtor notice of the forthcoming sale, to resell it with any surplus going to the debtor

8. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-7 SECURED LOAN: BANK ACT, SECTION 427 Farmers, fishermen and forestry producers may use their crops, their equipment and their products as security for a section 427 loan A special bank form vests in the bank a first and preferential lien on the collateral; the security is perfected by the bank’s filing a notice of intention to take the goods as security at the Bank of Canada within three years prior to the date on which the security interest is given

9. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-8 BANK CREDIT CARDS A contract between a retailer and a bank guarantees the retailer of prompt payment of cardholder purchases In a contract between the cardholder and the bank, the cardholder promises to pay the bank for all debt arising from use of the card Interest rates for unpaid balances are high because there is no security held by the bank, as there would be in a conditional sale contract or a chattel mortgage agreement

10. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-9 BONDS, DEBENTURES,FLOATING CHARGES Bonds and debentures represent a pledge either of the company’s assets or of its earning power as security for a debt A mortgage bond is secured by a mortgage documented as a charge against the business’s assets; a debenture is unsecured, or may have some rights against unsecured creditors A floating charge will not affect company stock in trade so long as payments are met, but the floating charge descends upon default

11. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-10 LIEN CLAIMS A lien is the claim of a creditor against a debtor’s real property or chattels, and is intended to prevent the debtor from obtaining a benefit without paying for it; for example, a repairer is entitled to sell property when work carried out on it is not paid for A mechanic’s lien is exercisable by a worker, contractor, or supplier against property upon which the work or materials were expended An owner includes a property owner and anyone else with an interest in the property

12. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-11 LIEN CLAIMANTS, TIMING & HOLDBACKS There are specific time frames within which to institute a lien, varying among jurisdictions To preserve the right of lien, it must be registered against the owner’s land at the land titles registry, and notice of the lien must be given to the owner A holdback is a percentage of the contract value that must be withheld from the general contractor in order to ensure payment of the contractor’s workers and sub trades

13. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-12 BANKRUPTCY AND INSOLVENCY ACT Bankruptcy is a statutory procedure used to distribute the assets of an insolvent debtor to his or her creditors It involves the collection of the debtor’s assets, their conversion to cash and then distribution of it in a fair and orderly way The first purpose of the legislation is to give honest but unfortunate debtors a means to end their indebtedness upon the surrender of all assets

14. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-13 PURPOSES OF LEGISLATION The second purpose is to try to eliminate the tendency to give preferences to certain creditors, and instead follow the legislation A third purpose is to locate and punish debtors who defraud creditors The Bankruptcy and Insolvency Act also attempts to preserve the business of the debtor, and tries to protect unsecured creditors by giving them a role in the bankruptcy process

15. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-14 COMPANIES’ CREDITORS ARRANGEMENT Companies’ Creditors Arrangement Act is a federal statute whose broad wording allows the courts much discretion in dealing with corporate debt difficulties, especially the debts of large companies This legislation applies only to corporations with outstanding issues of bonds or debentures and gives the company time to draft a plan to restructure its debt obligations which, if accepted, becomes binding on all creditors

16. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-15 ACTS OF BANKRUPTCY Insolvency usually precedes bankruptcy and is defined as a condition in which a person or company is unable to pay debts as they come due Bankruptcy is defined as a condition in which a person or company has debts exceeding $1000 and, further, has committed one of ten acts of bankruptcy specified in section 42(1) of the Act over the six-month period prior to a creditor filing a petition in bankruptcy against the debtor

17. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-16 BANKRUPTCY PROCEEDINGS 1.A proposal to creditors: debtor files a proposal within 30 days and presents it to creditors for approval; binding if approved 2.A voluntary assignment in bankruptcy: debtor files a voluntary assignment of property; a trustee then proceeds with the distribution of the bankrupt’s estate 3.Creditors are permitted to petition for a receiving order: debtor either does not object and a trustee is appointed, or objects and a court decides

18. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-17

19. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-18 BANKRUPTCY PROCEEDINGS, continued An interim receiver may be appointed if necessary to preserve the debtor’s assets, and he or she may then become the trustee of the estate if the court grants the receiving order The creditors must be called together by the trustee, given an opportunity to examine the debtor, and given the option of requesting inspectors The trustee reports on the total assets and calculates the amount of the creditors’ claims

20. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-19 BANKRUPTCY PROCEEDINGS, continued After collecting the debtor’s assets, the trustee converts them to cash, subject to the taking of secured creditors’ security interests such as mortgages conditional sales agreements, or assignments of book debts Finally the proceeds are distributed to preferred creditors according to a list in section 136(1) of the statute, and then to unsecured creditors on a pro rata basis

21. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-20 DISCHARGE A bankrupt person has limitations imposed on him or her, such as not purchasing goods on credit except for necessaries, until he or she is discharged – which is usually 3 to 6 months after proceedings begin, and not later than 12 Until discharged, the bankrupt must disclose his or her undischarged bankrupt status to engage in business and may not become a director of a limited liability corporation Marital obligations or debts arising from fraud or wrongdoing are not discharged

22. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-21

23. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-22 CONSUMER BANKRUPTCY Summary proceedings are available for consumer bankruptcy if the total debt (excluding the debt for a principal residence) is less than $75,000 The debtor works with the assistance of an administrator to draft a proposal in which creditors will be paid in not more than 5 years If approved, payments are made through the administrator, who will award a certificate to the debtor when performance is complete

24. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-23 BANKRUPTCY OFFENCES The Bankruptcy and Insolvency Act also fines or imprisons debtors who take advantage of creditors by fraud or other criminal acts The superintendent has broad investigative powers where there are allegations of fraudulent practices such as those listed in section 198 of the statute If it is suspected that a debtor plans to flee Canada with assets to avoid paying creditors, he or she can be arrested

25. Fundamentals of Canadian Business Law, Second Edition © 2008 McGraw-Hill Ryerson Ltd. All Rights Reserved11-24 SUMMARY Types of security instruments include mortgages, chattel mortgages, and conditional sales agreements Corporations may use bonds and debentures to raise capital on the security of company assets Liens on real or personal property create a right of payment against the owner Bankruptcy allows a debtor to reorganize debts or begin afresh after discharge