1 Chapter 15- Real Property: Interests and Leases Interests in land Interest in land o A right that a person can enforce with respect to a particular piece in land o 2 sets of rights and obligations are created: 1. You and I have a contract and are the only ones affected by that agreement. a. I am the only one you can sue in that contract 2. You can exercise the same rights against anyone else who interferes with your property rights. a. Property rights are good against the whole world. Estates In Land o 3 types of estates: Fee Simple Right to exclusive possession during own life o Indefinite duration Right to dispose of property upon death You can maintain property in pristine condition or commit acts of waste o Still subject to expropriation, torts, and regulations i.e. zoning. Life Estate Right to exclusive possession during relevant life o Can be any life No right to dispose property upon death o Property is transferred back to the person with the fee simple Reversion; property goes back to the original person with the fee simple Remainder; property goes back to a 3rd party who was selected to have the fee simple Cannot commit act of waste o Does not need to spend money to maintain condition of property Omitting the degradation of property is allowed Leasehold Estate Right to exclusive possession during a specified period o Shared ownership 2 types of shared ownership: Joint-tenancy o When 2 or more people share exactly the same interest in property (50-50) o Right to survivorship Upon death, a joint-tenants interests automatically passes to remaining jointtenants Co-tenancy o When 2 or more people have different interests in property. (70-30) o No right to survivorship Co-tenant’s interest can be passed on to a 3rd party instead. How can someone avoid the right to survivorship? Severance o Occurs when a joint-tenant deals with the property in a way that is inconsistent with jointownership i.e. joint-tenant sells interest to 3rd party. 3rd party becomes co-tenant. Partition o Occurs when there is a division of either the property or the sale proceeds. o Condominiums Has individual ownership and shared ownership. Individual ownership of particular unity Shared ownership of common areas 2 Non-possessory interests in land o Easements Right to use a neighbour’s land Must show that there is a dominant tenement and servient tenement DT benefits from the land As long as this is met, an easement can run with the land Can be created through: Express Implied o Necessary need to use neighbour’s land Prescription o Created If land is used in a way for a long time (20 years) without secrecy, objection and permission Statutory o Restrictive covenants A promise to use a piece of land in a way that benefits one property and burdens another. Subject to limitations on use and enjoyment of land Requires dominant tenement and servient tenement ST bears burden Can only created by agreement If DT sells land to 3rd party As long as covenants are meant to run with the land, 3rd party can sue ST for any breach o If not run with land, ST can only be sued by original DT. Benefits can be assigned, Burdens cannot be assigned If ST sells land to 3rd party ST may be bound to a negative covenant but not positive covenant if: o ST will be bound if land was received for free o St will be bound if land was bought with notice of the covenant ST will not be bound unless covenants intend to run with the land ST will not be bound if they bought the land without any reason to suspect a covenant. o Mineral leases A right to remove minerals from a piece of land Usually granted by the government Implies access and occupancy rights No DT o Profit a pendre Right to take something valuable away from another person’s property Things do not belong to you until to harvest them Leases Lease o o A property interest created by contract Mutual agreement between landlord and tenant A lease must be evidence in writing unless it is for 3 years or less Oral leases for greater than 3 years are valid but generally unenforceable Duration o Fixed term Expiry date is certain at the outset Specific date or a formula to create certainty At end of fixed term Landlord and tenant may agree to renew or extend term Or tenant may remain and pay rent that landlord accepts o This becomes a periodic tenancy 3 o Periodic Tenancy A fixed period and automatically renews at end of each term unless 1 party gives appropriate prior notice of termination Common monthly tenancy – Notice of termination at least 1 clear month prior to last day of a month Common yearly tenancy – notice of termination given at least 6 clear months prior to end of year o Tenancy at will Has no set term and either party can terminate at any time o Tenancy at sufferance Tenant continues to possess premises at end of lease without landlord’s consent Not really a tenancy Tenant is trespassing Assignment and Subleases o Assignment Tenant transfers all their remaining contractual rights in a lease to a 3 rd party o Sublease Tenant grants a lease to a 3rd party Tenant transfers part of their remaining rights 4 limitations on assignments o Tenant has right to assign unless lease states otherwise Assignments may be prohibited or require landlord’s approval o Assignee may only be bound by real covenants Promises that are directly related to the land, not personal obligations o Assignor is still liable to the landlord unless landlord releases the assignor If assignee did not fulfill lease, landlord can demand relief from assignor o Assignment covers full term Commercial leases o Rented for a business purpose Standard covenants o Tenant must pay rent Express or implied amount The amount can be expressed or a “reasonable amount” Calculation of rent Gross lease o Tenant pays fixed amount Net lease o Tenant pay rent for space + proportionate share of operating costs o Percentage rent Rent review Lease may provide for an adjustment to rent every 5 years Independent Obligation Tenant must pay rent regardless of whether Landlord has honoured its obligations o Landlord’s covenant for quiet possession Landlord shall not interfere with Tenant’s enjoyment of the premises Examples of Landlord breaching quiet possession Premises still occupied by another tenant Allowing carbon monoxide into premise Intolerable amount of noise and vibrations Leasing adjacent premises to an incompatible use o Bowling alley onto of a relaxation clinic Remedies for breach of quiet possession Injunction Discharge lease and get damages 4 Reduction in rent Remedies o Eviction Allows landlord to resume possession of premises Tenant loses interest in premises (forfeiture) o Distress Landlord seizes Tenants assets and sells them to pay rent Provided that landlord has not evicted the tenant o Expectation damages are usually reduced if a plaintiff does not reasonably mitigate their losses Mitigation may not apply to commercial leases Landlord may leave a premise empty and not try to find a new tenant and recover rent for entire lease term Residential leases o Provides a place to live o Differences between residential and commercial leases Termination Rental Rates Distress Repair/maintenance Mitigation Commercial Leases Give notice equal to length of 1 lease term to terminate Price can be what ever Entitled to seize and sell tenant’s belongings if rent is not paid Landlord is not responsible Not required to mitigate Residential Leases * Notice periods tend to be longer. (60 or 90 days for a monthly lease) A periodic tenancy may automatically arise at the end of a fixed term unless notice was given Rent is governed by rent control mechanisms to stop exploitation That right is not available against a residential tenant Landlord is responsible to maintain and repaid property Required to mitigate 5 Chapter 16 – Real Property: Sales and Mortgages Registration systems Difference interests may exist at the same time in a single parcel of land o i.e. fee simple, easement, restrictive covenants, lease etc. Registration system o Documents the existence of interests in land 2 types of registration systems o Registry system Older system Inspect and evaluate documents that may affect real property Only necessary to go back to 40 years Search until you satisfy yourself to a good chain of title Series of transactions in which ownership was validly passed from one to the next Provides access to documents but not guaranteed accuracy Priority of interests determined by time of registration If I buy the property first, but someone else who bought the land later registers the land first, the second person gets to have the land. o Lands title system Superior to registry system Generates certificate of title that virtually guarantee the validity of the interests that are listed The validity is subject to certain exceptions The key to the lands title system is indefeasibility With few exceptions, interests in the certificate of title cannot be defeated Priority of interests determined by time of registration Lands Title System is based upon 3 principles: o Mirror principle All the interests listed in a certificate of title generally are valid o Curtain Principle Only valid interests are listed in the certificate of title Unnecessary to look behind the curtain o Insurance Principle A person who suffers a loss as a result of an error in the certificate of title is entitled to compensation Assurance fund Exceptions to Lands Title System’s Indefeasibility o Fraud From fraud, the court adopted a new concept called deferred indefeasibility Indefeasibility is deferred until an interest is registered in favour of a person who did not deal with the seller committing fraud. Interest registered in favour of person who did deal directly with the rogue is defeasible o Unregistered Instruments Short term leases (less than 3 ye Prescription and adverse possession Public easements Unpaid taxes Unpaid creditors – writs of executions o Statutory interests Land Sales A sale occurs when ownership is transferred in exchange for consideration Risk Management o General rule for purchase of land is caveat emptor Let the buyer beware 6 A seller does not have to disclose defects to a buyer Exceptions to caveat emptor A vendor cannot hide or cover up a defect Vendor must actually tell purchaser about a hidden defect that could cause property to be dangerous or unfit as a home o How can purchaser reduce their risk? Real estate agent Search market for appropriate properties Appraiser Independent opinion as to value of property Surveyor Depict size of land and location of: o Structures o Easements o Encroachments Building Inspector Inspect and identify defects in the structures Environmental Auditor Inspect and identify environment issues Lawyer Search title at Land Registry Office Non-title searches o Municipal tax arrears o Municipal utility arrears o Zoning and building department compliance o Outstanding judgements (writs of execution) Review Survey Review Mortgage Documents Obtaining Property and Liability Insurance Title Insurance Register Transfer of Land, Mortgage Agreement of Purchase and Sale o Contract for sale of land Must be in writing and signed (statue of frauds) Electronic Commerce Act allows for electronic agreement of purchase and sale o Often contains conditions/conditions precedent A requirement that must be satisfied before the transaction can be completed A contract is created, but transaction may not be completed if conditions are not fulfilled or waived o Subsidiary Obligation Express or implied obligation to make reasonable efforts to satisfy condition Lack of effort on a subsidiary obligation results in other party entitled to damages Closing/Completion o Once all conditions attached to the sale have been satisfied, the transaction is closed. o Adjustments can occur at the time of closing If vendor have paid annual property tax, the price will increase to reflect the fact that the purchaser will enjoy the benefit of that payment for the remainder of the year. o Update title search o Registration of deed/transfer of land o Give notice of change of ownership Remedies o Expectation Damages o Specific Performance Semelhago v Paramadevan (1996) Supreme Court of Canada held not every piece of land is unique o 7 o o o SP only available if plaintiff has legitimate grounds for saying that money would not be an adequate remedy Purchaser’s Lien Generally created whenever purchaser pays money to vendor If agreement of purchase and sale is not completed due to vendor, the purchaser will have lien for refund of deposit Allows the purchaser to sell land to recover refund and outstanding debt Vendor’s Lien Agreement of purchase and sale is completed but purchaser has not paid full price Vendor has lien for balance of price if not paid Allows Vendor to sell land to pay balance of price A lien should be registered as an interest in property. If not, it can be defeated if a person buys the land from the purchaser without notice of vendor’s claim. Mortgages A Loan secured by land as collateral Mortgage o An interest in land that provides security for the repayment of debt Mortgagor o The borrower that grants interest in land Mortgagee o The lender that receives interest in land Nature of Mortgages o Lands titles system Mortgagor charges land as security for loan A charge occurs when the mortgagor agrees that land will be available to the mortgagee if debt is not repaid. Once loan is repaid, mortgagee removes charge o Land registry system Mortgagor conveys title to mortgagee as security for loans Once loan is repaid, mortgagee conveys title back to mortgagor Or pursuant to mortgagor’s equity of redemption Subsequent Mortgages o Lands titles system Mortgagee gets charge on land Mortgagor retains legal title Mortgagor may grant a subsequent mortgage o Land registry system 1st mortgagee gets legal title Mortgagor gets equity of redemption Mortgagor may grant a subsequent mortgage Vulnerability of Mortgagor o Mortgagor may lose land Failure to repay either loan will result in the loss of land Vulnerability of subsequent mortgagees o If 1st mortgagee forecloses or power of sales, any subsequent mortgagee’s rights will be extinguished Subsequent mortgagees could sue mortgagor for the unpaid debt Priority of Mortgages o Registration at the Lands Registry Office is notice to the world of your interest in land Priority is determined by time of registration A subsequent mortgagee can have first priority if they register the mortgage before the 1 st mortgagee Disposition of Interests (sale) o Disposition by mortgagor 8 Mortgagor can sell its interest in land to a 3rd party If mortgagor does not repay mortgage, the 3rd party will take ownership subject to the mortgage Mortgagor may assign its contractual rights to a 3rd part, but not its obligation Mortgagor will continue to be liable on the mortgage o Disposition by mortgagee Mortgagee may sell its mortgage Mortgagee assigns its contractual rights and property rights to 3rd party 3rd party must register its assignment 3rd party must notify mortgagor and direct mortgagor to pay 3 rd party Terms of Mortgage contract o Mortgagor repay loan per agreement Acceleration clause Full amount to be paid immediately if they miss a single payment Prepayment privilege early or additional payments without penalty o Mortgagor pays realty taxes o Mortgagor maintains insurance o Mortgagor must not commit waste Remedies for default o Sue on covenant Sue mortgagor for breach of contract for money owing o Possession of property Mortgagor is entitled to possession until they default Mortgagee usually does not want possession Mortgagee prefer money, not the problems associated with the property Mortgagee becomes responsible for repairs, not committing waste and taking reasonable steps to generate revenue o When mortgagee doe generate income, they are generally required to use that money to reduce mortgagor’s debt Mortgagor may in some cases still be able to redeem through equity of redemption o Foreclosure Mortgagee extinguishes mortgagor’s equity of redemption Mortgagee gets a court Order of Foreclosure Mortgagee applies to court for foreclosure Mortgagor and subsequent interests are notified of foreclosure proceedings If mortgage is not placed into good standing within required time, Final Order of Foreclosure will be issued Mortgagor may apply to court to set aside foreclosure if mortgagee still holds the land Mortgagee becomes owner of land Foreclosure is not common in Ontario Foreclosures are rare since mortgagee does not want to own the land But, mort mortgagee may get windfall if value of land exceed debt o Judicial Sale Mortgaged land is sold under a judge’s order Sale proceeds are paid in priority If deficiency exists, mortgagee may be able to sue mortgagor for shortfall Mortgagee is not allowed to retain sales in excess of debt o Power of Sale Contractual right allowing mortgagee to sell the land to pay off debt, after default Mortgagee must make reasonable efforts to get reasonable price Mortgagee can sue mortgagor for any shortfall Most common in Ontario 9 Chapter 17 – Real Property: Bailments and Insurance Real Property o Immoveable Personal Property o Moveable – 2 types: Tangible Property Intangible Property Acquiring Personal Property Rights By contractual arrangement By gift By possession o i.e. finding a wild animal, or abandoned bike with the intention of controlling it yourself By finding o By intentionally taking control of that thing, you will acquire rights that are effective against everyone except the true owner o Occupier is entitled to things that are found in the private but not public parts of the premises Occupier is person who owns the property of which the personal property was lost. By creation (i.e. author) Losing Personal Property Rights By selling By leasing (temporarily) If destroyed By abandoning it (intentionally giving up control) o If you lose something or got robbed, your rights are not extinguished By affixation to land or other chattels (Fixture) o A chattel that has been sufficiently affixed or attached to land or building o A fixture belongs to the owner of the building or land Factors that determine whether item is a fixture o Degree of attachment The higher the degree of attachment, the more likely it is a fixture o Purpose of attachment Objective intention Would a reasonable person think it was attached to become part of land (to add value) or to better use the item? Become part of land -> fixture To better use item -> Chattel o Tenant’s Fixture Generally, tenant can remove its own fixtures at the end of lease without doing irreparable damage Commercial leases – Tenant has right to remove trade fixtures at end of lease Bailment When 1 person temporarily gives up possession of property with the expectation of getting it back Bailor- delivers property Bailee- receives property Money does not need to be paid 3 essential elements of a bailment o 1 person voluntarily delivers control and possession of property to another o For a particular purpose o With the intention that the property will be returned or disposed of as directed If #1 does not exist, it is a license 10 A license is permission to do something that would otherwise be wrongful Bailment Vs. License o Bailment – 3 essential elements (including delivery of control and possession) o License – no delivery of control and possession of property to another Examples of bailment (page 419) o Consignment Occurs when an owner gives property to another person for purpose of selling it Consignor – owner Consignee – Person selling Liability of bailor o Bailor is liable for failing to use reasonable care in providing appropriate machines Liable if they knew or should have known of a defect that cause the accident o Bailor is liable for failing to pay for service/benefit Bailee has lien (right to hold onto the property until bailor pays) Lien is lost when bailor honestly recovers property Lien gives bailee right of sale Sale proceeds will be used to pay debt o Bailor is entitled to the excess sales proceeds if larger than debt Liability of bailee o Bailee must return the property in good condition to bailor at end of arrangement o Burden of proof is shifted to bailee Only happens when loss occurred during bailment Bailee must prove it took reasonable care of the property in the circumstances otherwise bailee is liable Factors used to assess reasonable care in the circumstance o Contract, custom, and statute o Benefit of the bailment Greater care is required if bailment is entirely for benefit of bailee (i.e. I borrow a truck b-or) o Gratuity or reward Greater care is required if bailee receives property free of charge or gets paid If bailee pays bailor to receive the property, court might be lenient o Value and nature of the property Greater care is required if property is more valuable o Bailee’s expertise Greater care is required if bailee claims to have experience in handling property Bailee can be held liable if they were not careless if they are treated as an insurer o i.e. Common carriers Common carriers o A carrier that offers to deliver any good for any person in exchange for a standard price o Common carriers do not reserve the right to refuse to deliver some goods while taking others i.e. railways in contrast a moving company is a private company Private Carriers o a carrier that reserves the right to refuse to carry some goods Liability Private Carrier Private carrier is liable if it does not exercise the level of care reasonably expected in that line of work Common Carriers Common care is generally liable for any loss or damage, even it was not careless nor personally at fault Owner of the personal property only has to prove 1. Carrier was a common carrier 2. Property was given to carrier in one condition 11 3. Property not delivered or delivered in worse condition Defences for common carriers o War and act of God Natural catastrophe May still be liable if bailee carelessly exposed bailor’s property to danger o Inherent vice and shipper’s fault Defect in goods themselves o Exclusion clause A contractual term that protects one part from liability Sub-bailment o Occurs when property that is already held under a bailment is transferred into a further bailment i.e. repair shops, trucking company, equipment rental o Sub-bailments are only allowed if bailor consents (expressly or implicitly) o Sub-bailments without bailor’s consent makes bailee liable for any loss and liable for conversion Bailee can sue sub-bailee for damages (on behalf of original bailor) or Original bailor can sue sub-bailee if: Original bailor consented to sub-bailment expressly or implicitly Sub bailee knew or ought to have known that it received possession of goods that were already under bailment Personal Property, Risk Management, and Insurance Risk management- personal property may be lost, damaged, destroyed or stolen Options to reduce risk o Proactive i.e. Training, security systems o Property insurance Insurance company, in exchange for a premium, promises to pay money if property is lost, damaged or destroyed. 2 types of insurance o Property insurance (1st party coverage) Insurance company’s obligation to pay is triggered by a lose to the insured party itself Does not require 3rd party involvement o Liability Insurance (3rd party coverage) Provides compensation to someone outside insurance contract Insurance company’s obligation is triggered if the insured part is accused of wrongfully inflicting a loss on a 3rd party Essential points that arise in connection with property insurance o Scope of coverage Policy coverage is as set out in insurance contract Policy exclusions o Indemnification Reimbursement for a loss that has occurred Property insurance is never profitable Can’t reimburse money that is worth more than the value of the loss If damage to property, the insurance policy may entitle you to be paid: The value for a new property (uncommon) Depreciated value of property or Depreciated value minus deductible o Insurable Interest You cannot obtain property insurance unless you have an insurable interest Insurable interest exists if a person benefits from the existence of the property and be worse off if it were damaged o Excessive Insurance 12 o o o No incentive to purchase the same coverage from 2 insurers because of doctrine of contribution (DoC DoC states that if 2 parties are equally liable, they share the loss among themselves Insufficient Insurance Avoid insufficient coverage Co-insurance clause states that if an insured party does not maintain a certain level of coverage Insured party may be held partially responsible in the event the actual loss Is less that co-insured amount i.e. EQT Value = 10000, Insurance Coverage = 6000, Co-insurance Clause = 80% of Value Accident occurs damaging EQT If damage is at least 80% of value, you will be entitled to receive 6000 If damage is less than 80% of value, 4000, you will receive 3000. Insurance coverage/(EQT Value*Co-Insurance Clause)*Actual Loss = Insurer’s liability Subrogation Allows insurance company to stand in the insured’s place and acquire any rights that it may have against 3rd party If insured company pays insured, the insurance company through its subrogated rights can legally pursue any 3rd party that caused the insured to suffer a loss Other forms of business insurance (page 432-433 13 Chapter 20 - Agency and Other Methods of Carrying on Business Part 1- Basic Rules of Agency - Agent (A); person who represents someone else for some specific purpose (representor) Principle (P); person whom an agent is representing for a specific purpose (representee) Agency; The legal relationship between agent and principle Third Party (TP) Creation of an agency relationship Agency Relationships can be created through: Express Agreement (with actual authority) – Can be written or oral o Must be in writing if agency is longer than 1 year (statute of frauds) o Must be in writing if (A) is going to have authority to sign cheques on behalf of (P) o Actual Authority exists when the (P) authorizes the agent to act on its behalf Can be granted less formally; oral delegation by (P) to (A) Can be received by: Employment contract, Board of Director’s resolution, or position held Those with actual authority have implied powers to do what is necessary to fulfill their responsibilities Apparent Authority exists when the (P) creates the reasonable impression that the (A) is authorized to act on the (P)’s behalf o Arises without (P) taking any action to appoint (A) and give them specific authority Law o Partnership law – generally each partner is an (A) of the partnership Ratification A contract is ratified when someone accepts a contract that was negotiated on their behalf but without their authority o If person does not ratify, person is not bound to contract o If contract is not ratified, (A) Is not liable on contract, unless that (A) & (TP) intended (A) be personally liable Requirements for ratification: o Ratification must be clear (expressed or implied) o Within a reasonable time o Accept whole contract o (P) was identified by (A) o (P) had legal capacity at time of the contract & at the time of Ratification When is the Principal Liable? (P) does not want to be bound by an (A) who does not have authority (TP) does not want to spend must time & $ determining whether (A) has authority o (TP) wants to rely on common indicators of authority i.e. letter of introduction, certificate copies of BoD’s resolutions, lawyer’s opinion (P) is liable for contract if (A) has: o Actual authority – (P) is bound by any obligation (A) creates within the scope of authority o Apparent Authority o (P) ratified the contract (P) can grant actual authority to (A) by: o Express delegation o Appointing (A) to a position with that authority; or o Implication from circumstances (A) can obtain apparent authority by: o (P)’s statement or conduct o (P) allowing to (A) acting with that authority; or o (P) appointing (A) to a position that usually has that authority (but not actual authority) - Usual authority TEST: Is it reasonable for (TP) to believe (A) had authority? Nature & content of (P) communication to (TP) Circumstances of communication; including type of business Only (P)’s conduct is relevant, not (A)’s 14 - - o When (P) tells (TP) that (A) is authorized to contract, apparent authority is established o Spiro v Lintern [1973] 3 All ER 319 (CA) pg.520 (about apparent authority) o If (A) acted beyond scope of authority, (P) is still bound to any obligation, but can sue (A) for damages (P) is liable if: o Contract is within (A)’s apparent authority; & o (TP) actually relied upon apparent authority (TP) cannot enforce a contract if (TP) knew or ought to have known (A) did not have authority When is the Agent Liable? (A) is normally not personally liable because (A) clearly contracts on behalf of an identified (P) (A) may be personally liable if (A): 1. Expressly or implicitly agreed to be liable to (TP); or 2. Presents themselves as (P) – undisclosed (P) a. This can happen if (A) fails to disclose that (A) was acting on behalf of (P) Undisclosed Principal (UP) o (A) purports to contract on its own behalf i.e. does not disclose (A) is acting on behalf of (P) o if (TP) discovers that that person was only (A) but had authority to act for the (UP), (TP) can hold either (A) or (P) liable, but not both o ∴ (UP) can also enforce contract against (TP) What happens if (A) enters into a contract, on behalf of (P) and does not have actual/apparent authority to do so? o (A) is not personally liable unless (A) & (TP) specifically agreed that (A) would be liable o (A) may be liable for losses suffered by (TP) on the basis of: 1. Fraud or deceit (i.e. (A) knew it did not have authority); or 2. Breach of warranty of authority (i.e. (A) indicated that it had authority to act for (P) but, did not; does not matter that (A) honestly believed (A) had authority) The Agent’s Duties to the Principal (A)’s duties arise from: o Contract o Common Law Fiduciary Duty Duty of Care (A)’s duties cannot be delegated onto someone else, they are personal obligations o EXCEPTION: Express or implied authority to delegate Common law has imposed onerous duties on (A) to reduce (P)’s risk: Fiduciary Duty and Duty of Care Fiduciary Duty (FD) o (A) must act in good faith & in (P)’s best interest o (A) liable for bread of (FD) whether (P) suffered a loss or not This creates a strong disincentive for (A) to ever act contrary to (P)’s interest o Obligations of (FD): Duty not to be in conflict of interest (unless informed consent granted by all (P)s) Duty to disclose to (P) all relevant information to (P)’s interests Duty not to personally profit from unauthorized use of information or opportunity that arose as a result of the agency Duty to not compete with (P) Duty to follow (P)’s lawful instructions Duty of Care o (A) must take reasonable care in performing (A)’s agency responsibilities o (A) liable for any losses due to breach of duty of care o (P)’s knowledge of (A)’s incompetence or lack of qualifications may limit (P)’s claim to damages Fine's Flowers Ltd v General Accident Assurance Co of Canada (1977) 81 DLR (3d) 139 (Ont CA) pg.524 o (A) was appointed to obtain “full coverage” o Heating system failed causing plants to freeze o This risk was not covered by insurance policy 15 o o (P) sued (A) for breach of contract and negligence Court held that (A) was liable since (A) failed to fulfil its duty to obtain adequate insurance and breaching duty of care by not warning (P) about gap in coverage. The Principal’s Duties to the Agent (P)’s duties arise from: o Contract o Common law Pay (A) reasonable remuneration (unless parties agree otherwise) Implied obligation to indemnify (A) for liability & expenses Must reimburse (A) for any expenses they incurred Termination Several ways to terminate an agency relationship: - Either party gives other notice of termination (subject to contract; subject to employment law) An event occurs that results in termination under the terms of the agency contract Performance of the agency becomes impossible Ends per contract Specific project completed or specific period expires (P) or (A) loses capacity to contract (death, insanity or bankruptcy) o If (P) loses capacity, and (A) does not know: o (P) is not liable for obligations that arise after (P)’s incapacity o (TP) may try to hold (A) personally liable on ground of breach of warranty of authority Part 2- Risk Management Issues - (P) is exposed to liability by (A) in contract & tort Contracts (P) is liable for contracts created on behalf by (A) with actual or apparent authority Actual authority o (P) can limit risk by clearly setting out (A)’s authority in contract Apparent Authority o (P) can limit risk by: Being careful how (P) communicates to (TP)s, directly or indirectly Notify (TP)s when (A)’s authority is terminated Apparent authority may exist after agency relationship has ended Torts - - (P) is vicariously liable for (A)’s tort if: o (A) was an employee & tort committed within course of employment or closely connected thereto; or o (A) was not an employee & tort committed by (A)’s fraud or negligent misrepresentation (P) must carefully select, train, supervise and monitor (A) Part 3- Business Relationships in which Agency Issues Arise - - Business Relationships in which agency issues arises: o Joint venture and strategic alliances o Distributorships o Franchises o (A)’s Governed by Special Statutes Parties are not automatically (A) for each other Parties can become (A) for each other by: o Actual authority; or o Apparent authority 16 Joint Ventures and Strategic Alliance Joint Venture (JV); legal arrangement in which 2 or more parties combine their resources for a limited purpose, a limited time or both Strategic Alliance (SA); any arrangement where 2 or more parties agree to co-operate for some purpose o Conduct research together, share information, jointly market products If (SA) or (JV) is purely contractual, then participants are not automatically (A)s to each other If no actual authority is given, 1 person in (JV)’s actions may provide the (JV)er with apparent authority o (TP) may be entitled to rely on actions of 1 (JV)er to have authority to contract on behalf of other (JV)ers Distributorships Distributorships; when 1 business enters into a contract to sell another’s product Suppliers must worry about avoiding the creation of apparent authority o If distributor is made to look like an (A) of supplier, (TP) may acquire rights against supplier, regardless of what distribution agreement says. Franchises Franchise; contractual relationship where franchisor (Fr-or) gives franchisee (Fr-ee) the right to operate its ‘business system’ in return for a set of fees Franchise agreements invariably provide that (Fr-ee) is not (A) of (Fr-or) o This is done to minimize risk to the (Fr-or) of liability arising out of (Fr-ee) Agents Governed by Special Statutes Special rules are in place for (A) to protect the public o i.e. lawyers, real estate agents, insurance agents, stockbrokers, travel agents etc. 17 Chapter 21 – Basic Forms of Business Organizations - Basic Forms of Business Organizations: o Sole proprietorships (SP) o General Partnerships (GP) o Limited Partnerships (LP) o Corporations (C) Part 1 - Sole Proprietorships - Definition: a person carries on business on their own, without adopting any other form of business organization (SP) is created automatically Individuals and the business are 1 and the same (SP) can hire employee but cannot hire themselves (SP) gets: o All benefits; & o All risks (i.e. torts, contracts, debts) Advantage of (SP) - Simple Easy to set up Easy to dissolve Disadvantage of (SP) - Unlimited personal liability; (TP)s may take all (SP)or’s personal assets to satisfy business obligations o Try to limit liability through insurance & contracts Limited Financing options o (SP) must borrow $ personally Legal Requirements for Sole Proprietorships Must register business name if different than individual’s name Business license Part 2 - General Partnerships - Definition: When 2 or more persons carry on business together with a view to a profit (GP) is created automatically (facts and substance fall within definition of (GP)) Legal Requirements - Register (GP)’s name Business license Characteristics of General Partnerships (GP) is not legally separate from partners (P) o A partner cannot be an employee of (GP) o EXCEPTION: (GP) can hold title to land & sue in name of (GP) All benefits flow through to (P) Each (P) is fully & personally liable for every obligation of (GP) All (GP)’s assets & each (P)’s personal assets are exposed Share of income/loss is allocated to each (P) Income tax is calculated at (P)’s level (GP)’s Property - All property acquired on behalf of the (GP) or for the business of the (GP) o Must be used exclusively for the (GP) o Cannot convert to a (P)’s personal use without consent to all (P)s 18 Partnership Legislation and Partnership Agreements Partnership Act (Ontario) – default rules for (GP) Partnership Agreements – you can change the default rules Creating a Partnership (GP) is created when: o 2 or more persons o Carry on business together o With a view to a profit If it is unclear whether (GP) is created, the court will look at FACTORS: 1. Carrying on business together (suggests enduring relationship – repaying loan out of profits is not a business; an employee profit sharing is not a business; paying a purchase price out of earnings is not a business) 2. Sharing of profits (very important factor) (but you may share profits without being in business together; an employee on a profit sharing plan) 3. Sharing responsibility for losses including guaranteeing partners (very important factor) 4. Jointly owning property (but passive investors may not be in (GP) unless investors are actively managing and sharing profits) 5. Participating in management (i.e. decision making, signing authority and access to information) 6. Holding oneself out as a (P), or allowing others to do so 7. Your name is in the (GP)’s name 8. A contract states an intention to form a (GP) 9. Filing government documents (i.e. business name regulation) 10. Using (GP) name in advertising 11. Separate address for (GP) 12. Contribution of capital ($, property, or services) by a number of parties Risk and Liability in General Partnership How (GP) liabilities arise? - Partnership Act (Ontario) governs Each (P) has unlimited personal liability for all (GP)’s debt, torts and contracts Each (P) is an agent of the (GP) when acting in the usual course of the (GP)’s business & therefore binds the (GP) o EXCEPTION: if (P) does not have authority (per partnership agreement) & (TP) knew of lack of authority, then (GP) will not be liable Managing the risk that a business relationship will be found to be a partnership - - You may take the risk of (GP) for tax deduction and/or potential profits You may wish to avoid (GP) by: o Contract stating that this relationship is not a (GP) o Use a corporation o If it is a (GP), try to get sufficient compensation to reflect any residual risk Do not enter a business relationship without seeking advice from a lawyer Managing Liability Risk if you are a Partner - Fiduciary Duty (FD); each (P) must act honestly & in good faith with a view to the best interest of (GP) o No conflict of interest Cannot put personal interests ahead of (GP) Cannot use (GP)’s name, property, or reputation for personal benefit Cannot compete with (GP) o Remedy for Breach of (FD) Must pay any resulting profits to (GP) Case Brief 21.1 Rochwerg v. Truster (2002) p.542 Case Study #1 – Oren & Jenna – p.554 o Partnership Agreement – limit authority of (P)’s to sign documents or obligations 19 o o If (P) breaches authority, the other (P)s are still liable to (TP), but they have right to indemnification from the breaching (P) Breaching (P) must compensate other (P)s for any amount that was paid to (TP) Monitoring Limited Liability Partnerships Individuals (P) is not liable for negligence for negligence of another (P); but all (P)s are still liable for all other obligations Most law and accounting firms are limited liability partnerships Managing Risk when you are NOT a partner - - (P) is not liable for liabilities that arose: o Before the person joined the (GP) o After the person left the (GP) If you are not actually a (P), you may be liable if: o You actually hold yourself as a (P); or o You allow or know someone else is doing so Minimizing Risk for liabilities after (P) leaves (GP) - - When a (P) leaves a (GP) you wish to avoid liability for debts that arise after you leave: o Clients you dealt with prior to leaving – notify them of your departure You may be liable to the client until you notify them o New clients of (GP) (after your departure) – you are not liable unless you were held out to be a (P) Give notice of departure to clients, banks, suppliers, employees, etc. that knew you were a (P) Delete your name for (GP)’s name, letterhead, and government registrations Place notice in newspaper Get indemnity(insurance) from (GP) – especially if your name remains in (GP)’s name Internal Organization of the Partnership Partnership Act (Ontario) – Default rules for (GP) unless (P)s agree otherwise Statutory Default rules – Each (P): o Shares equally in capital, profits and losses o Gets no interest on capital contributed o Entitled to be indemnified for payments they make o Has right to participate in management o Not entitled to interest on capital that they contribute o Has access to books Ordinary matters – majority of (P)s decide Admission of a (P), expulsion of (P) or any change in nature of (GP) (Extraordinary matters) – Unanimous (P)s Dissolution of Partnership DEFINITION: Termination of (GP) Can be dissolved easily. Unless (P)s agree otherwise, dissolution happens when: o (P) gives notice of termination to other (P)s; or o (P) dies or becomes insolvent(bankrupt); or o (GP) was for a specific purpose (& it was achieved) or for a specific time (& it expired) Upon dissolution of (GP), claims are paid in the following order: 1. Debts & Liabilities to (TP) - not (P)s 2. Debts to (P) (other than capital) 3. Capital invested by each (P)s is returned; and then 4. The remaining balance is paid out to (P)s equally (unless (P)s agreed otherwise) Key issues to address in a (GP) agreement Issues Content 20 Name Membership of partnership Capitalization Profits Management Dissolution What is the name of (GP)? Who will be entitled to use it if (GP) breaks up? What criteria will be used to admit and expel of (P)? What process will be required to admit and expel (P)? What will be the financial contribution of (P)s now and in the future? How will the profits be shares between (P)s? On what basis will they be paid to (P)s How will (GP) make decisions? What monitoring and control procedures will be set to guard against unauthorized liability and negligence by (P) How will disputes be resolved? What limits will be placed on the right of dissolution? Will death, insolvency, or resignation of a partner terminate (GP) for all (P)s? Part 3 - Limited Partnerships - - - Limited Partnerships (LP) Act (Ontario) Definition: a partnership in which the person liability of at least 1 (P) is limited to that (P)’s investment in the business o Allow people to become (P)s but avoid unlimited person liability so long as they restrict their involvement in the partnership business 3 distinctions between (LP) and (GP): o (GP) has unlimited liability – your assets can be used to satisfy debt (LP) has limited liability – your debt is limited to the amount of your investment o (GP) comes into existence automatically when (P)s start carrying on business together with a view of profit (LP) comes into existence when a declaration is filed with the government o (P)s can be employees of (LP), (P)s of (GP) cannot b employees (P)s will lose limited liability if they participate in controlling the business or allow names to be used in (LP)’s name (P)s will not lose limited liability by merely giving management advice Very difficult to distinguish between control and advice Advantage of (LP) o (P) of (LP) can deduct any losses while maintaining limited liability Part 4 - Corporations Incorporation Process Corporations [C] is created when the following are filed with the government: o Articles of incorporation o A name search report on the proposed name of [C] o The Fee (OBCA, $360, CBCA $250) Articles of incorporation o Name of [C] o Class and number of shares to be issued o # of directors o Restrictions of business Directors’ regulations Shareholder regulations General by-laws o Sets out arrangements for carrying on legal business of [C] o By-law takes effect when passed by directors But, only continues if it is passed by shareholders (S) at next meeting Shareholders agreement (CH.22) o Contract between (S)s that customizes their relationship Minute book (MB) o Contain corporate records o Kept at registered office 21 o (S)s and creditors have access to (MB) Characteristics of Corporations 3 characteristics of [C] o Separate legal existence o Separation of ownership and management o Corporate finance Separate legal existence - - - [C] is a separate legal person 3 implications: o (S) can be employee or creditor (because (S) is distinct from [C], they can contract with each other) o [C] is unaffected by (S)’s death or withdrawal o [C] is taxed separately ((S) taxed only upon dividends and other benefits received from [C]) (S)s have limited liability – risk only to their investment Creditors may ask (S)s to personally guarantee [C]’s debts o This may be done for creditors to lend [C]s with few assets o If [C] defaults, and (S) guarantees, (S) will be liable for [C]’s debts Courts sometimes disregards separate corporate entity and imposes personal liability on (S)s o Pierce the corporate veil This is done when there has been serious wrongdoing or unfairness Separation of Ownership and Management - Shareholder (S); owners of [C] o Majority of (S)s elect the (B of D) Board of Directors (B of D); managers o (B of D) delegate to (O) Officers (O); people whom (B of D) delegates management to (O) Corporate Finance - - - [C] are financed in 2 basic ways: o Equity; (S)’s investment in return for shares in [C] o Debt; loans to [C] from lenders or (S)s Shares; claim on residual assets of [C] after all creditors’ claims paid o May have different classes of shares o Must have shares that provide at least 3 basic rights Vote for directors Receive dividends Receive residual assets after dissolution and all prior claims paid Common shares (CS) Preferred Shares (PS) o Fixed dividends on regular basis o On dissolution, investment in (PS) returned before (CS) o Usually no voting rights and no claim to residual value 22 Chapter 22 – Legal Rules for Corporate Governance Management and Control of Corporation - Power and responsibility are allocated among: o Shareholders [S]; entitled to residual claim on assets, elect directors, do not manage [C] o Directors [D]; Manage business o Officers [O]; the ones appointed by [D] to manage How Shareholders Exercise Power - - - At [S]s’ meetings [S] questions [D]s management [S]s vote on proposals made to them They have annual general meetings [AGM] o Elect [D]s o Appoint auditor o Review prior years’ financial statements Can participate in meetings through Proxy Holder – person designated by [S] to vote at [S]’s meetings o Management proxy circular – a document sent to [S]s that contains managements proposals and information regarding the proxy, the business dealt at the meeting and other information Dissident [S]s – those who disagree with management’s proposals and seek to defeat management o Dissidents’ circular – a document to all [S] by [S]s who seek the votes of other [S]s against management Shareholders’ access to information [S] and [CR] have access to: o Articles o By-laws o Minutes of [S]s’ meetings o Share register (owners of shares) o Annual financial statement (audited unless [S]s waive audit requirement) They cannot see minutes of [D]s’ meetings Shareholders’ Agreement [S]s can: o Change [S]s’ voting rights o Change [S] approval requirement o Create rules for share transfers Voting and Management - Uniform shareholder agreement [USA] o All [S]s agree to transfer some or all of the powers of the [D]s to the [S]s o In [USA] the [S]s have all the rights and power of [D]s and the duties and liabilities – effectively the [S]s manage the business Share Transfer - Shareholders’ agreement often will prohibit share sales except in accordance with certain procedures: o Right of 1st Refusal; right for [S]s to be offered shares that a [S] wants to sell before they are offered to non-[S]s This is to discourage [S]s from, setting an unreasonably high price for their shares in the 1 st place o Shotgun Buy-Sell; forces 1 [S] to buy out the other [S] This is used to break a deadlock between shareholders Shareholder Remedies Derivative Action [D]s are responsible for making [C] pursue claims for injuries or losses to it If [D]s do not (i.e. [D]s were involved in the wrongdoing), [S]s can do it by derivative action Derivative Action – An action by [S] on behalf of [C] If derivative action succeeds, the remedy goes to the [C] 23 Relief from Oppression Oppression remedy [OR] allow [S]s to claim relief from an act or omission by [C] or its [D]s that oppresses or prejudices the interests of the [S]s [OR] is available when the reasonable expectations of [S]s regarding management behaviour have not been met o [S] must commence [OR] o Court has broad discretion with remedies (i.e. share buybacks, $) Examples of oppressive behaviour of management: o Benefits of a transaction favour the majority [S]s to the exclusion or detriment of minority [S]s o Lack of adequate/appropriate disclosure to minority [S]s o Planning to eliminate minority [S]s o Approval of a transaction lacking a valid corporate purpose that is prejudicial to a particular [S] Other Shareholder Remedies Liquidation and Dissolution (winding up); [S] seeks court order to sell [C] assets, pay off [CR]s and distribute balance to [S]s because it is (just and equitable) o i.e. 2 equal [S]s cannot agree how to run business Dissent and Appraisal Right; if 2/3 of [S]s approve a fundamental change (i.e. major change to Articles, amalgamation, sale or lease of all or substantially all [C]’s asset), [S]s that did not approve are entitled to have their shares bought by [C] at fair value o [C] can drop/cancel shares if it is too expensive to buy shares back How Directors and Officers Exercise Power Directors Under Canada Business Corporation Act (CBCA), the 1st [D]s are named in Articles of Incorporation o Hold office until 1st meeting with [S]s – must be done within 18 months of incorporation Majority of [S] elect [D]s Canadian Residency requirements for some proportion of [D]s – 25% under CBCA [D]s exercise their power collectively o At meetings – each [D] gets 1 vote o Written resolution – all [D]s sign it Officers - Nothing in Canadian corporate legislation addresses what [O]s a [C] should have or what [O] are to do. By-laws are passed by [D]s & approved by [S]s, which will be designated to [O]s [D]s appoints [O] [D]s can delegate powers to [O] and others (i.e. management company] o EXCEPT for certain key functions relating to internal management in [C]: Issuing shares Declaring dividends Repurchase shares Management’s Duties to the Corporation Fiduciary Duty [FD] Duty of [D] and [O] is to act honestly & in good faith with a view to the best interest of the [C] [FD] is owed to [C] not to [S] or anyone else [C]’s interests are defined by the interests of [S]s o Maximize share value Evolution of [FD] Concept - - Recently, the Supreme Court of Canada rejected this view: o [C]’s interest should consider the interest of [s], employees, creditors, suppliers, consumers government and environment o [D] must treat all stakeholders fairly and to act in best interest of [C] [FD]’s main purpose is to prohibit [D] and [O] from benefitting themselves when their personal interests and their duty to [C] conflict 24 Transacting with [C] - Conflict of interest arises if [D]/[O] transacts with [C] Transaction between [D]/[O] and [C] is permitted if procedural safeguards are in place (s.120 CBCA) o Give adequate notice of [D]/[O]’s interest o [D]/[O] may not vote at [B of D] o Contract must be fair and reasonable to [C] Taking Corporate Opportunities - [FD] prohibits a fiduciary ([D],[O],senior employee) from taking an opportunity belonging to [C] o Taking advantage in which [C] has an interest in Any personal gain must be paid to [C] Factors indicating that an opportunity belongs to [C]: o Specific nature of opportunity – actively being pursued o Maturity of opportunity – extensive work had been done o Significance of opportunity – major component o Private Opportunity – (not publicly advertised, only a fiduciary would have access to this information) o No rejection – (opportunity had not been rejected before fiduciary acquired it) Competition by [D] and [O] with [C] - NOT a breach of [FD] if [D]/[O] resigns and go into competition with [C] (unless you agreed not to compete after) o Otherwise there is an unreasonable restraint on them making a living It IS a breach of [FD] when you resigned from [C]: o You took the opportunity that you developed while working for previous [C] o Using [C]’s confidential information for personal gain Duty of Care DEFINITION; Every [D] and [O] must exercise the care, diligence, and skill that a reasonably sensible person would exercise in comparable circumstances What does this mean? o Basic understanding of business [D] who does not have this understanding should resign o [D]s must monitor business – stay informed about business and policies o You are not relieved of duty if removed from some aspect of business The more knowledgeable or experienced you are, the higher the standard The more important the position, the higher the standard (i.e. audit committee) Breach of Duty of Care - Courts are reluctant to find a breach of duty of care o Court does not want to 2nd-guess business decisions Business Judgement Rule o Presumption: not a breach of [D of C] if decision is within range of reasonable alternatives available in the circumstances. Reasonable process (i.e. decisions based upon adequate information and advice) No breach of [D of C] if you rely on financial statements or professional advice Protection for Creditors [CR] [D] & [O] have no duty to [CR] o BUT; corporate assets must not be paid to [S],[D],[O] or employees if [CR]s would not be paid [D] cannot authorize dividend or share repurchase if there is reasonable grounds that: o [C] could not pay its liabilities as they become due o Realizable value of remaining assets (after payment) would be less than the total amount owed to [CR]s + total of all [S]’s investment – A < D+E [D]s are personally liable to [C] if they authorize the above payments 25 Other Sources of Personal Liability for Directors and Officers - [D] and [O] can be fined &/or jailed for: o Unpaid taxes & statutory remittances o Environmental breaches o Tort of inducing breach of contract Managing Liability Risk for Directors and Officers - - [D]/[O] are not liable for breach of [D of C] under statute if they reasonably rely on financial statements or reports from professionals [C] may reimburse(indemnify) [D] & [O] for any expenses that they reasonably incur in defending an action [D]/[O] will be indemnified by [C] if [D]/[O]: o Was not at fault o Complied with their [FD]; & o Had reasonable grounds for believing their conduct was lawful Indemnification commitments are only as good as the ability of the indemnifier to pay o If there is a risk: [D]/[O] may seek a guarantee from a shareholder to provide great security Ask [C[ to pay for insurance to compenetrate them if they are held liable Liabilities for Contracts [C] is liable for contracts created by Agents [A] o i.e. ([D],[O],Purchasing Manager) [A] can bind [C] if [A] has: o Actual Authority o Apparent Authority (Obstensible) [C] represents to [TP] that [A] has authority; & [TP] is induced to enter into contract Knowing whether an [A] has actual authority is difficult. o Most corporate statutes prevent [C] from avoiding liability by relying on their internal restrictions The risk of unauthorized conduct falls upon [C] Indoor Management Rule [IMR] o A [C] cannot rely on any provisions in its articles or laws or any [USA], that creates a defect in [A]’s authority to defeat a contractual claim o A [C] will be liable for contracts entered into by its [A] despite [A]’s lack of authority due to: Restrictions on authority in the articles, by-laws, or [USA}; or [A] is not properly appointed or does not have authority usually given to that position o NOTE: [TP] cannot rely on [IMR] if they knew or ought to have known of defect in authority Liabilities for Crimes [C] can be liable for crimes o BUT; [C] cannot be imprisoned, but they can be fined 3 types of offenses: o Absolute Liability o Strict Liability o Mens Rea Absolute Liability Offence [ALO] o [C] is liable when [A], on behalf of [C], commits a prohibited act o No intent is required o No defence of due diligence o i.e. Regulatory Laws – Health, Safety, Environment Strict Liability Offence [SLO] o [A], on behalf of [C], commits prohibited act o No intent is required o Defence of due diligence is available if [C]’s directing mind acted reasonable in the circumstances to prevent offence 26 - Directing mind – a person who has responsibility to establish policy in the relevant area o i.e. Regulatory Laws – Health, Safety, Environment Mens Rea Offence [MRO] o The accused committed: Prohibited act; & With knowledge or intention o Whose ‘mens rea’ is relevant? The person who has the directing mind However, Criminal Code has expanded definition to include the senior officer Senior officer: any person who either plays an important role in setting [C]’s policies or responsible for managing an important aspect of [C]’s activities 1. [A] commits prohibited act 2. Senior officer had required intention/knowledge, or knew [A] would commit offence and failed to take steps to prevent Liability in Tort [C] is liable for torts committed by o A directing mind of [C]; or o Employees in the course of employment Vicarious liability basis 27 Chapter 14 – Special Contracts: Negotiable Instruments Introduction - You can pay by: o Cash o Credit Card o Debit Card; or o Negotiable Instrument [NI] A contract containing an obligation to pay money i.e. cheque 3 differences with respect to [NI] as contracts: - - - Consideration o Normally, a party cannot promise an obligation that is already owed as consideration o Under [NI], consideration under a contract can also be consideration for [NI] Privity o Normally, a contract can only be enforced by someone with privity o Under [NI], anyone that holds [NI] can sue You do not need privity to sue. All you need is the cheque Assignment o Normally, a contract can be assigned to a [TP], but subject to equities o Under [NI], a [NI] can improve as it is passed on to another person Types of Negotiable Instruments 5 mandatory requirements for all [NI] 3 types of [NI] Cheques Created when a person orders a bank to pay a specific amount of money to someone 1. 2. 3. Drawer; someone who creates a cheque Drawee; the bank that is ordered to pay the money Payee; the person that is entitled to receive the money from the bank The relationships that exist between the parties - - Drawer & Payee have 2 contracts o The sales contract and the cheque Drawer & Drawee have 1 contract o The chequing account agreement o If bank improperly refused to pay payee, then it can be liable to drawer for breach of contract Drawee & Payee have no contract o Pa05-yee cannot sue the drawee for not giving the money. o Payee can only sue the drawer 5 possible complications with cheques 1. 2. 3. Postdated; cheque dated in the future a. Payee cannot receive payment from drawee until the date that was stated in the future Staledated; when the payee does not seek payment within reasonable time a. Payee did not cash in the cheque b. Reasonable time is 6 months c. Payee is forced to sue drawer for the cash on either sales contract or cheque Overdrawn; not enough $ in account (nonsufficient funds) a. Drawee can treat this cheque as a loan, and seek repayment from Drawer b. If Drawer knew that his account had insufficient funds, he is charged with the crime of false pretences 28 4. 5. Countermanded; when a customer orders a bank to refuse payment on a cheque (stop payment) a. Automatic countermand occurs if the drawee is notified that the drawer died before payee is paid b. Limited by 2 factors: i. Banks will only countermand IF; the drawer gives the order in person and the cheque is described fully (date, payee, amount) ii. Banks can sue the payee if they want to recover a payment that was made by mistake Certification; drawee promises to honour cheque a. Either drawer or payee can certify b. Drawer cannot countermand after certification c. Bank can be sued by payee if the cheque is certified Bills of Exchange [BoX] Drawer orders a drawee to pay $ to payee - The drawee can be a bank or a non-bank Example: using a line of credit to pay a supplier [BoX] may be made payable on a future date - Payee can deliver [BoX] to drawee before payment date to request assurance that it will be honoured/paid Drawee has 2 options: 1. Dishonour [BoX] a. Payee would be entitled to sue drawer for immediate payment 2. Honour [BoX] a. This is done by writing “accepted”, the date of acceptance and signing [BoX] and returning it to payee b. Acceptance of [BoX] is very similar to certification of a cheque i. Drawee can now be sued by payee for non-payment ii. Drawer can not cancel [BoX] 4 points about [BoX] 1. 2. 3. 4. [BoX] is a contract a. Contract is not enforceable unless it is supported by consideration [BoX] may be: a. Demand draft; drawer must order drawee to make payment as soon as payee presents the [BoX] b. Sight draft; Payee is not entitled to receive any money until 3 days after [BoX] has been presented to drawee c. Time draft; [BoX] is payable on a future date [BoX] is usually used for 2 purposes: a. Can be used like a cheque b. Can be used to extend credit [BoX] is not common today Promissory Notes [PN] Created when 1 person gives another person a written promise to pay a specific amount of money [PN] has 2 parties: - Maker; person who created the [PN] Payee; person receiving the money What is on a [PN] - Place of payment o The place of payment is the maker’s office unless it is stated otherwise in [PN] Credit Instrument Lump Sum or Instalments When a payment is made, details of any payments should be on [PN] 29 - o [PN] can be transferred to [TP] & [TP] can rely on face value of [PN] if there are no indications of payments Acceleration clause o if a single instalment is not paid, the entire amount becomes due immediately Negotiation; The process of transferring [NI] from 1 person to another (selling) Methods of Negotiation This process depends on whether [NI] is payable to bearer or to order - Bearer form; Any person who holds [NI] is entitled to payment To order form; only the named party is entitled to payment A bearer form can arise out of several ways: - Drawer/maker could make the note payable “to payee or bearer” or “to bearer” Payee is left blank on the [NI] Made note payable to a fictitious person Made note payable to a non-person (to cash) A “to order” note that is endorsed by payee’s signature & delivered to someone else o This becomes a bearer note A bearer form may be negotiated by simple delivery or physical transfer of the document - An endorsement is not necessary A [NI] is payable to order if - The party entitled to receive payment (payee) is specifically named To negotiate a [NI] that is to order the [NI] must be endorsed by payee & delivered to another party Liability The primary liability under [PN] falls on the maker Endorser may also be liable – endorser promises to subsequent acquirers of [PN] that the [PN] will be paid o Endorsers cannot sue subsequent acquires, but can sue the person that endorsed [PN] before Limits to Endorser’s Liability - - Generally, endorser is not liable unless he/she receives notice of dishonour [NoD] [NoD] is a statement that the person who was primarily liable failed to pay o Must be given with 1 business day o Must clearly identify the instrument in question Does not have to be in writing o Must be given by a holder to all prior endorsers o 1 endorser must give [NoD] to prior endorsers o If [NoD] is not properly given, the endorser is discharged and cannot be held liable [NoD] is not required if: o The endorser cannot be reached through reasonable effort; or o Th endorser waved [NoD] by writing “[NoD] unnecessary beside the signature” Forms of Endorsement 1. Special Endorsement o Payee signs name on back of cheque & and adds “pay to [TP]” o That other person is now the only payee 2. Identifying Endorsement o [TP] givers buyer of cheque assurance that payee was indeed the payee o [TP] signs back of cheque & adds “Name of Payee hereby identified” o [TP] is not liable as normal endorser o [TP] is only liable if person claiming to be payee is not 3. Qualified Endorsement o Endorser signs the back of [NI] & adds “without recourse” 30 4. 5. 6. 7. o Endorser is not liable if cheque is not honoured Conditional Endorsement o A cheque must not be conditional o But, an endorsement can be conditional o Endorser signs & adds “pay to payee if he completes condition” o Endorser is liable on endorsement, but she can sue payee if he does not complete their condition Accommodation Endorsement a. [TP] helps an endorser to negotiate the cheque to payee b. [TP] signs back of [NI] & adds “Guarantor for Endorser” c. [TP] is liable as endorser General Endorsement a. Payee signs on back b. Cheque is now in bearer form Restrictive Endorsement a. Payee signs on back and adds “For Deposit Only” b. Cannot be negotiated further c. Good protection against theft Defences Contractual rights can be assigned from one party (assignor) to another (assignee) - Assignee steps into shoes of assignor Assignee takes “subject to the equities” o If assignee is sued, debtor can rely on any defence that could have been used against assignor Rights in a {NI] can be improved as it is negotiated - Defences available against payee may not be available to a party that received [NI] by negotiation 3 Types of Parties 1. Immediate Parties [IP] a. Parties that dealt directly with each other 2. Holder [H] a. Party that possesses [NI] 3. Holder in Due Course [HIDC] a. Party who acquired [NI] under special conditions b. This special condition is related to honesty: i. Supported by value ii. Complete & regular on its face iii. Without [NoD] iv. Good faith & without notice of defect v. Before overdue c. Every person who acquires [NI] after a [HIDC] is also a [HIDC] as long as they are not involved in illegal activities 3 Types of Defences Type of defence available depends on type of party 1. 2. Personal Defences [PD] a. Only apply to [IP] b. Affects the parties themselves, not the instrument c. 2 common examples of [PD] i. Set off ii. Failure of consideration (defective product) Defect in Title Defences [DITD] a. This applies against [IP] and [H] b. Occurs when instrument is obtained improperly c. 6 Defects in Title: 31 3. i. Fraud or Duress ii. Illegal Consideration iii. Drunkenness or Insanity iv. Absence of Delivery v. No Authority vi. Discharge or Renunciation Real Defences [RD] a. Applies against [IP], [H], and [HIDC] b. Occurs when an instrument is fundamentally flawed c. Defences: i. Fraud or Duress ii. Drunkenness or Insanity iii. Absence of Delivery iv. Discharge or Renunciation v. Minority; under legal age. Endorsers who are adults are liable to holder. vi. Material Alteration; 1. when alteration is not apparent to the naked eye, the holder can sue the maker for the original amount, and also sue the wrongdoer and the endorser for the forged amount. 2. When alteration is apparent, maker is not liable, but wrongdoer and endorser are liable for forged amount. vii. Forgery You must notify the bank of the drawee’s forged signature in reasonable time You must notify bank of an endorser’s forged signature within 1 year A person who signed the cheque before forgery is not liable A person whose signature is forged is not liable A person who signed an instrument after a forgery can be held liable Consumer Bills and Notes Consumer Instrument [CI] – a [BoX], cheque or [PN] that is used by a consumer to buy goods or services on credit - Amendment to Bills of Exchange Act applies only to [CI] [CI] must be: 1. 2. 3. 4. Used for credit purposes (post dated for at least 31 days) Used to purchase goods/services from a business person Given by a consumer (i.e. purchase is for personal purposes) Front of [CI] is marked “consumer purchase” [CP] a. Anyone that acquires a [CI] marked [CP] takes “subject to equities”; consumer can use any defence that could have been used against original seller If [CI] is not marked [CP] - [HIDC] does not take [CI] subject to equities o [HIDC] can only be defeated by a real defence [CI] is void against [IP] or [H] The following parties will be fined or jailed if they do not properly mark a [CI] o Seller o Person who transfers unmarked [CI] BUT knows it was for consumer purposes 32 Chapter 23 – Secured Transactions Introduction - Debtor [D]; owes money Creditor [C]; entitled to money at a future date Risk Management Strategies for Creditors - 2 ways to reduce risk: o Security interests [SI] Allows [C] to seize [D]’s personal property if debt is not paid Without [SI[, [C] could only sue for money Property that is subject to a [SI] is called collateral o Guarantees A contractual promise by a [TP] to satisfy [D]’s obligation if the [D] fails to do so [TP] is a guarantor that contractually promises to pay [D]’s debt if not paid by [D] Guarantor may have a defense to paying o If the [C] and [D] act in ways that unfairly hurts the interests of the Guarantor, the law may release guarantor from liability How Security Interests are Created Granting a Security Interest in a Specific Asset [SI] is an interest in [PP] that secures payment or performance from [D] [SI] can be created using - Condition sales contract Consignment Lease Loans & General Security Agreement If [SI] is created, you must register [SI] to protect yourself+ [D] agrees to lend ownership or [SI] to [C] - Secured loan; [SI] granted in specific personal property [PP] Chattel mortgage; [D] gives ownership of specific [PP] to a [C] to secure the performance of obligation to [C] o Ownership of chattel is given to [C] Ways that [SI] is created without transferring title to [C]: Conditional Sales [CS] Created when the seller retains ownership of [PP] to secure payment by buyer Buyer is given possession of [PP] but not ownership If Buyer defaults, Seller takes back [PP] Buyer is responsible for any damages to [PP] Buyer may be required to obtain insurance o Seller is to be named the beneficiary under insurance law Consignment Owner (Consignor) of [PP] transfers possession, but not ownership, to someone else [Consignee] [Consignee] is not bound to pay until it buys [PP] or sells [PP] to a [TP] Consignor retains ownership until paid o This is a form of [SI] Lease - Lessor retains ownership of [PP], but gives possession of [PP] to tenant for a time period in return for rent o Lessor retains ownership until all rent paid & Tenant exercises option to purchase o This is a form of [SI] 33 Bank Financing Borrower gets ownership of [PP] Bank takes [SI] in [PP] as collateral Assignment of Accounts Receivable Accounts Receivable; money owed by customers to a business Assignment of Accounts receivable o Allows a [C] to collect money owing to the [D] If the [D] defaults to [C] o Usually [D] is allowed to collect accounts receivable until [D] defaults Granting a Security Interest in All at the Debtor’s Assets General Security Agreement [GSA] [C] gets a [SI] in all of [D]’s [PP] o [SI] covers assets that were held during the time of [GSA] and acquired after that time [SI] attaches as soon as [D] acquires the [PP] [SI] stays with [PP] even after it is sold (unless exempted) Usually [D] is entitled to carry on business, including selling inventory and replacing equipment until default Special Security Interests of Banks Section 427 of Bank Act allows Banks to take [SI] in assets other [C]s cannot take. o Applies to goods of retailers, wholesalers, manufacturers, and mining & forestry products. Banks may take S.427 interests in addition to the [SI] taken from before. S.427 cannot be used in consumer’s assets or the assets of most businesses providing services To be effective; bank must get [D] to file a notice of intention to give security to the bank at a branch of Bank of Canada Advantages: o 1 registration applies to all of [D]’s assets o S.427 prevails over most other [Si] Provincial Rules for Secured (PPS) Transactions - [SI] gives [C] interest in [PP] to secure [D]’s performance Facilitating Risk Management for Creditors Personal Property Security Act (PPSA) creates simple & inexpensive system for o Recording [SI] o Searching for [SI] o Determining priority among [SI] Scope of Application Provincial [PPS] applies to all [SI] in [PP] created by agreement between [D] and [C] Leases When does a lease create a [SI]? o All leases greater than 1 year are deemed to be created to grant a [SI]. If a lease is a [SI], Lessor must register under [PPSA] in order to protect its [SI] If a lease is NOT a [SI], Lessor’s ownership would defeat all other claims o Including claims that have registered under legislation Exception [PPSA] does NOT apply to rights created by other statutes, such as; o Landlord’s Right of Distress/Distraint Allows landlord to seize property, sell it and use the sale proceeds to pay outstanding rent Can’t be used against non-commercial tenants o Deemed Trusts Some assets of a business are held for the benefit of the government and cannot be used for business 34 - Example: tax deductions from employee wages by employers are deemed to be held in trust for government o Liens for Repair or Storage Services Allows a person who has not been paid to retain possession of goods that were repaired or stored until payment is made NOTE: These rights do not have to register under [PPSA]. They usually have priority Protecting Security Interests under PPS Legislation [PPSA] states that a perfected [SI] may be effective against [TP] o Perfected [SI] – usually when: [SI] has attachment; & [SI] has registered financing statement under [PPSA] or takes possession of [PP] [SI] are enforceable against people who acquire collateral from [D] Attachment Attachment occurs when: o [D] signs written security agreement containing description of collateral, or secured party [SP] gets possession of collateral o [SP] gives some value such as a loan; & o [D] has some rights in collateral Registration of Financing Statement [FS] Priority [SI] is to be determined o Registrar notes the time and date of the registration o Fee is $8 per year o Nature of [SI] This gives a notice to world of [SI] [FS] does not require agreement to be disclosed [FS] can be registered before a Security Agreement is signed [SI] perfected by registration has priority over all subsequently registered [SI]s in same collateral o But NOT previously registered [SI]s Priorities under PPS Legislation Basic rule; 1st to register has best priority Registration date is critical – attachment may come later o [PPSA] only considers the date of registration for priority Unperfected [SI] is subordinate to: - Any perfected interest Other unperfected [SI] that attached earlier Any lien created by law Any [C] who has both successfully obtained a judgement against [D] & taken steps to enforce it by seizing [D]’s property Unperfected [SI] are ineffective against a trustee-in-bankruptcy [TIB] - [TIB]; Anyone who represents the [D]’s [C]s and has control of [D]’s assets Perfected [SI] are effective against [TIB] Purchase Money Security Interests [PMSI] [SI] in [PP] that were acquired after creates problems for a [D] that wishes to buy other [PP] on credit o A special priority rule for [PMSI] [PMSI] gives priority over all other [SI] in the same collateral o It does not matter if the subsequent [SP] knew about another [SP]’s interests that was registered before [PMSI]; [SI] in [PP] given by a [D] to a [SP] that either: o Sells that [PP] to the [D]; or o Finances the purchase of the [PP] 35 - - [PMSI] may be claimed by a lender if: o They lend money to [D] to acquire [PP] o [D] actually uses the money to buy that [PP]; & o [D] uses that [PP] as collateral for loan [PMSI] can be in: o Inventory; or o Collateral [PMSI] in inventory Inventory; goods held for sale or lease [SP] must: o Register [FS] before [D] gets possession; & o Give notice to any [SP] who previously filed a [FS] indicating an interest in inventory [PMSI] in Collateral (anything other than inventory) [SP] can get [PMSI] if [SP] must register [FS] within 15 days of [D] getting possession of [PP] Security Interest when Collateral is Transferred [SI] continues in [PP] after it is sold to a Buyer [B] with or without knowledge of [SI] o [B] must search for [SI] before buying unless the exceptions applies Exception: [B] gets [PP] free of any [SI]s if: o [SP] permits [D] to sell or otherwise deal with the [PP]; or o [D] sells that [PP] in the ordinary course of [D]’s business [B] does not get [PP] free of any [SI]s if: o Sale was in breach of Security Agreement; and o [B] knew it A [B] does not have to worry about unperfected [SI]s o [PPSA] states that unperfected [SI]s are not effective against a payer who had no knowledge of [SI]s Enforcement of Security Interests Default by [D] After default, [SP] can take possession of property Default occurs when: o [D] fails to pay or to perform under security agreement; or o An event occurs that is defined as a default under the security agreement Failure to maintain collateral in good working order Failure to insure collateral o A security agreement may give [D] a curing period, such as 30 days, to remedy the default Taking Possession Can’t use force to take possession o if [D] resists, get a court order [SP] must take reasonable care of [PP] once it has possession [SP] must give reasonable notice before taking possession (unless collateral is at risk) Disposition (Sale) of Collateral [SP] must be commercially reasonable o obtain fair value o have professional appraisal o ensure competitive bidding process [SP] must give [D] & others who have [SI] in collateral at least 15 days notice of sale o May also decide to lease collateral to someone or do something else [SP] cannot keep proceeds that are in excess of what they are owed (debts) and expenses incurred as a result from enforcing their rights o Excess money is paid to subsequent interest holders, & then finally [D] [D] is still liable for any unpaid debt 36 When [SP] can keep collateral If [SP] keep collateral, it gives up any claim for debt [SP] must give notice to [D] & other interest holders before electing to keep collateral If anyone objects, the collateral must be sold When [D] can keep collateral [D] can recover back collateral seized by a [SP] only if: o [D] fulfilled all secured obligations (debts); & o [D] pays all [SP]s’ reasonable expenses NOTE; In Ontario, [D] does not have the right to pay only the missed payments to redeem the collateral o [D] must redeem the collateral before [D] can get it back Special Rules for Consumers - Consumers are protected under [PPSA] and consumer protection legislation [C] are required to provide consumers with a disclosure statement before they enter into a credit agreement o If disclosure is not made, agreement is not enforceable Guarantees - DEFINITION; Contractual promise by a [TP] (guarantor) to satisfy [D]’s obligations if [D] fails to do so If [D] does not pay, [C] can pursue guarantor rather than [D] Guarantor may be relieved of liability if guarantor’s risk is increased without guarantor’s consent 4 Possible DEFENCES for guarantor 1. Contract is modified without guarantor’s consent such that guarantor’s risk increased (increased loans/rates) 2. [C] breaches contract such that guarantor’s risk increases ([C] enforces remedies opposing to contract) 3. [C] causes value of collateral to decrease (allowing goods to perish) 4. [C] breaches contract, such as failing to notify guarantor of [D]’s default Guarantor can al use any defence available to principal [D] (e.g. defective goods) Guarantee Document NOTE: A well drafted guarantee document will attempt to get the guarantor to waive all the foregoing defences Guarantee must be in WRITING 37 Chapter 24 - Bankruptcy & Insolvency - Insolvency; when debts exceed assets, or cannot meet liabilities when come due Upon bankruptcy; all legal proceedings against [D] are subject to stay o Stay; legal proceedings are suspended and superseded by the bankruptcy proceeding Assets are then liquidated Once money is distributed to [C]s, law prohibits new claims from being made against the bankrupt for any pre-existing debts Authority to Regulate Bankruptcy and Insolvency - - Regulation of Bankruptcy is Federal Jurisdiction The Bankruptcy & Insolvency Act [BIA] provides a framework for bankruptcy process. Purpose of [BIA]: o Fair distribution of bankrupt assets o Not forgive certain debts (student loans, family support payments) o Punish – fraudulent transfers & preferences o Rehabilitation of [D] o Certainty & confidence is system [BIA] does not apply to: o Banks, insurance companies, trust companies & railways o Farmers & fishermen Bankruptcy and Insolvency Laws 1. 2. 3. - [BIA] Companies Creditors Arrangement Act [CCAA] a. [D] can seek a stay or bar of all claims pending the acceptance of a reorganization plan Winding-Up and Restructuring Act a. Applies to Federally incorporated companies, banks, insurance companies b. Liquidation of these companies [BIA] prevails over provincial laws in the event of conflict o E.g. Employment Standards Act purports to give priority to unpaid wages over all claims, but [BIA] governs therefore secured creditors [SC] have priority Bankruptcy and Insolvency under the Bankruptcy and Insolvency Act - - Insolvency defined under [BIA] o [D] is unable to meet liabilities when they become due o [D] has ceased paying their current obligations in the ordinary course of business when they come due o The value of [D]’s property is not, at a fair valuation, sufficient to enable payment of all obligations due Bankruptcy o Legal status of a person who has made an assignment in bankruptcy; or o Had a bankruptcy order made against them because they committed an act of bankruptcy (insolvency) Corporate & Consumer Bankruptcy - - Corporate Bankruptcy o Proposal – need majority in each class of [C]s and those [C]s represent at least 2/3 of value of liabilities in each class o Discharge from bankruptcy – rare unless it pays all debts Personal Bankruptcy o Proposal – need approval of majority of [C]s o Discharge from bankruptcy – usually within 9 months if this is your 1st bankruptcy The Process of Bankruptcy - Bankruptcy can be triggered in 2 ways o Voluntarily (by assignment) o Involuntarily (by petition, or application of [C]s for a bankruptcy order against [D]) 38 Assignment into Bankruptcy by the Debtor - D] voluntarily requests court to place it into bankruptcy [D] has minimum of $1000 debts & committed act of bankruptcy Application by Creditors for a Bankruptcy Order - [C] requests court to place [D] into bankruptcy [D] has minimum of $1000 debts & committed act of bankruptcy within past 6 months If court does, receiving order directs [D] to give assets to [TIB] Distribution of Assets - When TIB takes possession of bankrupt’s assets, [TIB] must liquidate assets and distribute proceeds to [C]s Exempt property List of Individual consumers are allowed to keep: THIS HAS BEEN UPDATED Bankrupts are entitled to keep wages earned during bankruptcy up to a max set by Official receiver Corporate bankrupts are not entitled to exempt property [C]s’ Entitlements upon Bankruptcy Categories of [C]s o Secured [C]s - [SC]s Has collateral [BIA] stay does not apply to [SC] [SC]s can seize asset & sell it If there is an outstanding balance, the [SC] can make a claim as a [UC] in bankruptcy If there is a surplus, it must be paid to [TIB] o Unsecured [C]s [UC] Preferred Unsecured [C]s [C]s who are owed Unpaid wages (max 6 months to $3908), taxes, rent, support payment [C]s who bears the administrative costs incurred in carrying out bankruptcy; ie. [TIB] General Unsecured [C]s The residual class of [C]s [C]s are paid out the remaining amount [C] equality o Stay All [UC]s are subject to a stay All court actions stop & no new actions can start [SC]s are not subject to a stay o Pro Rata Sharing All [C]s in same class recover on pro rata basis Corporation assigns itself into bankruptcy; Total assets = 5000 Bank Loan: 2500 (2500/(2500+5000+500))*5000 Sharon Loan: 5000 (5000/ (2500+5000+500))*5000 Uncle Loan: 500 (500/(2500+5000+500))*5000 Undischarged Debt o These debts are not discharged on bankruptcy: Fines Spousal & Child Support Judgements for assault & misrepresentations Student loans Proof of [C]’s claims o Each [C]s must complete & submit proof of claim before deadline o Proof of claim must be approved as valid Prohibited Pre-Bankruptcy Transactions - Void transfer at undervalue 39 o - Transfer of [D]’s property at undervalue made within 1 year before bankruptcy when [D] is insolvent & intended to defraud [C]s Transfer may be declared VOID o NOTE: 1 year is extended to 5 years if the parties are non-arms lengths Void preference o A [C] is preferred if [C] gets more than [C] would have under [BIA] o Transfer to a [C] done within 3 months before bankruptcy is VOID (if the aims was to prefer that [C]) o NOTE: 3 months is extended to 1 year if non-arms length parties Liability of Directors of Bankrupt Corporations - Generally, Directors are not liable to [C]s Directors have no fiduciary duty to [C]s Director are liable for personal guarantees Directors are liable under Canada Business Corporations Act [CBCA] for 6 months wages for employees Proposals - A proposal is an offer by [D] to [C]s to restructure claims against [D] o Once a notice of intention is filed with the Official Receiver, all actions of [C]s are stayed Types of Proposals: o Composition [C]s agree to accept less than the amount owing to them o Extension of Time Prolongs time to for repayment to [C]s o Scheme of Arrangement [C]’s assets are controlled by trustee during proposal o Liquidation Proposal [D] agrees to sell assets and distribute proceeds themselves Under bankruptcy, a trustee is handling this o Share Exchange [D] offers to exchange shares for outstanding debt Form and Approval Requirements - - Proposal must be verified by o [TIB]; & o [C]s [C]s are categorized into classes o No definition for classes of [PC]s & [UC]s [SC] are not required to be part of proposal If [SC]s are included in proposal, they must be placed in the same class if they are secured against same assets If approved, all [C]s in proposal are bound If not approved, [D] is deemed bankrupt Other Statutes Dealing with Financial Distress & Failure - Companies Creditors Arrangement Act [CCAA] o Corporation o Issued debentures in series Dentures – promissory note or bond back by general credit of corporation o Can be used by insolvent corporations with outstanding debts greater than $5000,000 o Stay of all [C]s