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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