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CHAPTER PowerPoint ® Presentation Prepared By Susan McManus, Mount Royal College © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. CHAPTER PowerPoint ® Presentation Prepared By Susan McManus, Mount Royal College 11 The Debtor- Creditor Relationship

CHAPTER PowerPoint ® Presentation Prepared By Susan McManus, Mount Royal College CHAPTER PowerPoint ® Presentation Prepared By Susan McManus, Mount Royal

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CHAPTER

PowerPoint® Presentation Prepared BySusan McManus, Mount Royal College

© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

CHAPTER

PowerPoint® Presentation Prepared BySusan McManus, Mount Royal College

11

The Debtor-Creditor Relationship

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-2 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

LEARNING OBJECTIVES

Outline the many security instruments that are available to creditors to secure the payment of debt

Understand how security instruments protect creditor investments

Outline how public notice of a creditor’s claim is established

Describe creditor rights on default of payment of a debt

Examine the bankruptcy of a debtor and the distribution of a debtor’s assets

CH 11

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-3 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

The Debtor-Creditor Relationship

Businesses rely on some form of credit Credit from bank or financial institution

Credit card: security of payment to businesses for goods or services provided to the holder of the card

security interest: creditor interest in a particular asset of the debtor

Long-term investments by credit instruments are used to raise capital for businesses to acquire assets or expand operations

11.1

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-4 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Forms of Security for Debt

To ensure repayment creditors look to land and goods of the debtorSecurity is subject to legislation Real estate security – mortgages Chattel security – chattel mortgage and conditional

sale agreement Commercial security – assignment of book debts

and inventory Corporations – pledge of real property and chattel

assets by bonds and debentures Lien – special forms of security

11.2

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-5 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Forms of Security for Debt

Mortgage Document that either transfers title of land to the

creditor (mortgagee) or creates an interest or charge in land for the creditor, while the debtor (mortgagor) remains in possession

Mortgage sets out terms Default allows either foreclosure of the interest of

the mortgagor or sale of the property to repay the debt

11.2

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-6 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Form of Security for Debt

Chattel Mortgage Chattels or personal property are security Governed by Personal Property Security Acts Title is transferred to the creditor and the debtor

retains possession Mortgage sets out covenants May be assigned

11.2

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-7 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Forms of Security for Debt

Conditional Sale Agreement Seller retains title to goods sold and the buyer has

possession Buyer receives title upon full payment Registration is required (void without registration)

for the creditor to secure claims against subsequent creditors or purchasers Does not apply to manufacturer / retailer

Assignment according to ordinary rules

11.2

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-8 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Forms of Security for Debt

Assignment of Book Debts Accounts receivable are used as security for a

working capital loan Generally not acted upon until or unless the

business defaults Registration required for creditor to preserve its

claim Proper execution and registration will secure the

creditor over the trustee in bankruptcy

11.2

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-9 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Forms of Security for Debt

Personal Property Security Legislation Uniform registration systems to secure creditors’

interests and priorities in chattels Registration perfects the security interest Information is in a central computer-based system,

which can and should be searched Default by the debtor permits seizure and resale

by the creditor, according to statute requirements (surplus to the debtor)

11.2

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-10 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Forms of Security for Debt

Secured Loans under the Bank Act Section 427 Special provisions for loans to farmers, fishermen,

and forestry products on equipment, goods, crops and products

Special form signed by borrower and delivered to the bank

Registration to perfect the security Failure to register would render the transaction

void against subsequent purchasers and mortgagees for value in good faith

11.2

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-11 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Forms of Security for Debt

Bank Credit Cards Two separate agreements

1. Bank and retailer: bank guarantees payment of bank card amounts and retailer pays % charge to the bank

2. Bank and applicant: cardholder promises to pay bank for card amounts and interest on any unpaid balance; unsecured credit

11.2

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-12 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Forms of Security for Debt

Bonds, Debentures, and Floating Charges Special security instruments used by corporations

to acquire capital using corporate assets as security

Bonds Debt secured by way of a mortgage as a charge on

assets of the corporation

Debenture Unsecured debt or with some rights to assets in

priority over unsecured creditors

11.2

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-13 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Forms of Security for Debt

Bonds, Debentures, and Floating Charges May be single instrument or shorter instruments

through a trust indenture Floating Charge

Assets are pledged, but not charged until default - then security attaches to the particular assets

Legislation requires filing with the government to perfect security

11.2

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-14 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Statutory Protection of Creditor Security

Mechanics’ Lien Statutory right by a worker, contractor or material

supplier against property to ensure payment for labour or materials applied to land and chattels

“Owner” is subject to right, and includes anyone with an interest in the property

Stipulated time frame to register a claim and commence action on the claim

Hold-back - % of price withheld for payment to any potential claimants

Chattel lien - allows sale by repair person

11.3

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-15 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Bankruptcy and Insolvency: Introducction

Bankruptcy legislation Procedure to distribute the assets of an insolvent

debtor (business and individual) in a fair and orderly way among the creditors – secured and unsecured

Designed to release honest and unfortunate debtors, with provisions for deliberate misuse

11.4

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-16 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Bankruptcy Legislation in Canada

Bankruptcy and Insolvency Act Federal legislation Purpose

Release for honest but unfortunate debtors Eliminate creditor preference and provide fair

distribution of assets by priorities Punish debtors who default creditors Promote the survival of business Enhance the rights of certain unsecured creditors

Administered by the Superintendent of Bankruptcy – supervises trustees

11.5

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-17 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Bankruptcy Legislation in Canada

Companies’ Creditors Arrangement Act Applies to corporations in financial difficulties

which have outstanding issues of bonds and debentures

Court may grant reorganization which must be approved by the creditors

Rescheduled debt payment arrangements are then binding

11.5

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-18 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Bankruptcy Legislation in Canada

Acts of Bankruptcy Bankruptcy is the legal condition arising when a

person has debts exceeding $1,000 and has committed an act of bankruptcy (10 acts stipulated) within six months prior to the creditor filing for a petition in bankruptcy against the debtor

11.5

Essentials of Canadian Business Law, 1st Canadian Edition Slide 1-19 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Bankruptcy and Insolvency—Initiation of Bankruptcy Proceedings

Figure 11-1

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-20 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Bankruptcy Legislation in Canada

Bankruptcy Proceedings 1. Proposal to creditors

Debtor files the proposal and presents it to the creditors for approval. If approved it binds all parties

2. Voluntary Assignment Debtor files an assignment of property and a trustee

is selected to proceed with the bankruptcy

11.5

Essentials of Canadian Business Law, 1st Canadian Edition Slide 1-21 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Bankruptcy and Insolvency

—Procedure

Figure 11-2

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-22 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Bankruptcy Legislation in Canada

Bankruptcy Proceedings 3. Creditors petition for a receiving order

Debtor objects then court decides Debtor does not object then trustee is appointed Meeting of creditors, who examine the debtor and

may appoint inspectors Provision for unpaid suppliers and other special

groups to claim goods or interest

11.5

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-23 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Bankruptcy Legislation in Canada

Bankruptcy Proceedings Trustee collects all assets and converts them to

cash Subject to secured creditors who take security assets Distributed according to priorities

Preferred creditorsUnsecured creditors – pro rata basis

11.5

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-24 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Bankruptcy Legislation in Canada

Discharge (not to corporations) Release by the court through the trustee Limitations on debtor until discharged Court may impose conditions Releases the bankrupt from all debts and

obligations except those arising from wrongdoing and marital obligations

11.5

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-25 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Bankruptcy Legislation in Canada

Consumer Bankruptcy Summary Proceedings Consumer-debtor applies to an administrator for a

proposal to creditors If approved the administrator receives and

distributes all moneys Upon performance a certificate is issued to the

consumer-debtor

11.5

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-26 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Bankruptcy Legislation in Canada

Bankruptcy Offences Superintendent has wide powers to investigate

fraud, wrongdoing and improper actions by the bankrupt

Provision for withholding of discharge, fines and imprisonment

11.5

Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-27 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

SUMMARY

Security instruments by creditors Mortgages – land and chattels Conditional sale agreement – chattels Corporation – bonds, debentures, assignment of

book debts Bank loans under the Bank Act Mechanics’ lien – special security for workers,

contractors and suppliers Bankruptcy Act – procedure for release of honest

debtors with fair distribution of assets by a trustee; penalties for persons guilty of bankruptcy offences

CH 11