Copyright © 2004 by Nelson, a division of Thomson Canada Limited CANADIAN BUSINESS AND THE LAW Second Edition by Dorothy Duplessis Steven Enman Shannon O’Byrne Sally Gunz Presentation prepared by Allan Elliott, Southern Alberta Institute of Technology

Copyright © 2004 by Nelson, a division of Thomson Canada Limited CHAPTER TWENTY-SIX THE 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

Copyright © 2004 by Nelson, a division of Thomson Canada Limited LEGAL 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

Copyright © 2004 by Nelson, a division of Thomson Canada Limited INTERNATIONAL 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

Copyright © 2004 by Nelson, a division of Thomson Canada Limited REGULATION 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

Copyright © 2004 by Nelson, a division of Thomson Canada Limited REGULATION 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

Copyright © 2004 by Nelson, a division of Thomson Canada Limited REGULATION 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

Copyright © 2004 by Nelson, a division of Thomson Canada Limited REGULATION 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

Copyright © 2004 by Nelson, a division of Thomson Canada Limited THE CREDIT AGREEMENT THE 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

Copyright © 2004 by Nelson, a division of Thomson Canada Limited SECURITY 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

Copyright © 2004 by Nelson, a division of Thomson Canada Limited ENVIRONMENTAL PERSPECTIVE CREDIT AND ENVIRONMENT RISK  environmental assurance required as part of credit documentation  review documented contamination, site visits, inventory of hazardous materials, interviews

Copyright © 2004 by Nelson, a division of Thomson Canada Limited PRIORITY 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

Copyright © 2004 by Nelson, a division of Thomson Canada Limited REMEDIES 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

Copyright © 2004 by Nelson, a division of Thomson Canada Limited REMEDIES REMEDIES 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

Copyright © 2004 by Nelson, a division of Thomson Canada Limited REMEDIES REMEDIES 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)

Copyright © 2004 by Nelson, a division of Thomson Canada Limited PERSONAL GUARANTEES RELATIONSHIPS IN PERSONAL GUARANTEES BORROWER/ PRIMARY DEBTOR CREDIT ARRANGEMENT GUARANTORS CONTRACTS OF GUARANTEE BANK GUARANTOR – A PERSON WHO SIGNS A GUARANTEE Figure 26.1

Copyright © 2004 by Nelson, a division of Thomson Canada Limited PERSONAL 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