Law 603

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Chapter 15- Real Property: Interests and Leases
Interests in land
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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
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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
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Lease
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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
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o
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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
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 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
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Chapter 16 – Real Property: Sales and Mortgages
Registration systems
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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
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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
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 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
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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
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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
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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
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Chapter 17 – Real Property: Bailments and Insurance
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Real Property
o Immoveable
Personal Property
o Moveable – 2 types:
 Tangible Property
 Intangible Property
Acquiring Personal Property Rights
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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
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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
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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
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 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
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3.
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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
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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
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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
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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
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Chapter 20 - Agency and Other Methods of Carrying on Business
Part 1- Basic Rules of Agency
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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
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-
-
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
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-
(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
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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.
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Chapter 21 – Basic Forms of Business Organizations
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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
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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
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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
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
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
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-
(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)
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-
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
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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
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-
-
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]
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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
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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
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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
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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”
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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:
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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
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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
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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
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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])
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Assignment into Bankruptcy by the Debtor
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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
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[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
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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
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Void transfer at undervalue
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o
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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
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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
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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
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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
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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
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