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26-1Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
CANADIAN BUSINESS CANADIAN BUSINESS
AND THE LAWAND THE LAWSecond EditionSecond Edition
byby
Dorothy Duplessis
Steven Enman
Shannon O’Byrne
Sally Gunz
Presentation prepared by Presentation prepared by
Allan Elliott, Southern Alberta Institute of TechnologyAllan Elliott, Southern Alberta Institute of Technology
26-2Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
CHAPTER TWENTY-SIXCHAPTER TWENTY-SIXTHE LEGAL ASPECTS OF CREDITTHE 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
26-3Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
LEGAL ASPECTS OF CREDITLEGAL 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
26-4Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
INTERNATIONAL PERSPECTIVEINTERNATIONAL 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
26-5Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
REGULATION OF CREDITREGULATION 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
26-6Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
REGULATION OF CREDITREGULATION 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
26-7Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
REGULATION OF CREDITREGULATION 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
26-8Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
REGULATION OF CREDITREGULATION 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
26-9Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
THE CREDIT AGREEMENTTHE 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
26-10Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
SECURITYSECURITY
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
26-11Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
ENVIRONMENTAL PERSPECTIVEENVIRONMENTAL PERSPECTIVE
CREDIT AND ENVIRONMENT RISK environmental assurance required as part
of credit documentation review documented contamination, site
visits, inventory of hazardous materials, interviews
26-12Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
PRIORITY AMONG CREDITORSPRIORITY 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
26-13Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
REMEDIESREMEDIES
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
26-14Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
REMEDIESREMEDIES
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
26-15Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
REMEDIESREMEDIES
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)
26-16Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
PERSONAL GUARANTEESPERSONAL GUARANTEES
RELATIONSHIPS IN PERSONAL GUARANTEES
BORROWER/PRIMARY DEBTOR
CREDITARRANGEMENT
GUARANTORS
CONTRACTSOF GUARANTEE
BANK
GUARANTOR – A PERSON WHO SIGNS
A GUARANTEE
Figure 26.1
26-17Copyright © 2004 by Nelson, a division of Thomson Canada Limited.
PERSONAL GUARANTEESPERSONAL 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