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

Essentials of Canadian Business Law, 1st Canadian EditionSlide 11-1 © 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 EditionSlide 11-2 © 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 EditionSlide 11-3 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Forms of Security for Debt To ensure repayment creditors look to land and goods of the debtor Security 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 EditionSlide 11-4 © 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 EditionSlide 11-5 © 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 EditionSlide 11-6 © 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 EditionSlide 11-7 © 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 EditionSlide 11-8 © 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 EditionSlide 11-9 © 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 EditionSlide © 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 EditionSlide © 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 EditionSlide © 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 EditionSlide © 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 EditionSlide © 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 EditionSlide © 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 EditionSlide © 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 EditionSlide © 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 EditionSlide 1-18 © 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 EditionSlide © 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 EditionSlide 1-20 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved. Bankruptcy and Insolvency— Procedure Figure 11-2

Essentials of Canadian Business Law, 1st Canadian EditionSlide © 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 EditionSlide © 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 creditors Unsecured creditors – pro rata basis 11.5

Essentials of Canadian Business Law, 1st Canadian EditionSlide © 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 EditionSlide © 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 EditionSlide © 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 EditionSlide © 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