11
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

CH 11
LEARNING OBJECTIVES
 Outline the many security instruments that are available to creditors to secure the payment of debt
 Understand how security instruments protect creditor investments
 Outline how public notice of a creditor’s claim is established
 Describe creditor rights on default of payment of a debt
 Examine the bankruptcy of a debtor and the distribution of a debtor’s assets
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-1

11.1
The Debtor-Creditor Relationship
Businesses rely on some form of credit
 Credit from bank or financial institution
 Credit card: security of payment to businesses for goods or services provided to the holder of the card
 security interest: creditor interest in a particular asset of the debtor
 Long-term investments by credit instruments are used to raise capital for businesses to acquire assets or expand operations
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-2 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.2
Forms of Security for Debt
To ensure repayment creditors look to land and goods of the debtor
Security is subject to legislation
 Real estate security – mortgages
 Chattel security – chattel mortgage and conditional sale agreement
 Commercial security – assignment of book debts and inventory
 Corporations – pledge of real property and chattel assets by bonds and debentures
 Lien – special forms of security
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-3 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.2
Forms of Security for Debt
Mortgage
 Document that either transfers title of land to the creditor (mortgagee) or creates an interest or charge in land for the creditor, while the debtor
(mortgagor) remains in possession
 Mortgage sets out terms
 Default allows either foreclosure of the interest of the mortgagor or sale of the property to repay the debt
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-4 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.2
Form of Security for Debt
Chattel Mortgage
 Chattels or personal property are security
 Governed by Personal Property Security Acts
 Title is transferred to the creditor and the debtor retains possession
 Mortgage sets out covenants
 May be assigned
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-5 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.2
Forms of Security for Debt
Conditional Sale Agreement
 Seller retains title to goods sold and the buyer has possession
 Buyer receives title upon full payment
 Registration is required (void without registration) for the creditor to secure claims against subsequent creditors or purchasers
 Does not apply to manufacturer / retailer
 Assignment according to ordinary rules
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-6 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.2
Forms of Security for Debt
Assignment of Book Debts
 Accounts receivable are used as security for a working capital loan
 Generally not acted upon until or unless the business defaults
 Registration required for creditor to preserve its claim
 Proper execution and registration will secure the creditor over the trustee in bankruptcy
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-7 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.2
Forms of Security for Debt
Personal Property Security Legislation
 Uniform registration systems to secure creditors’ interests and priorities in chattels
 Registration perfects the security interest
 Information is in a central computer-based system, which can and should be searched
 Default by the debtor permits seizure and resale by the creditor, according to statute requirements
(surplus to the debtor)
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-8 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.2
Forms of Security for Debt
Secured Loans under the Bank Act Section
427
 Special provisions for loans to farmers, fishermen, and forestry products on equipment, goods, crops and products
 Special form signed by borrower and delivered to the bank
 Registration to perfect the security
 Failure to register would render the transaction void against subsequent purchasers and mortgagees for value in good faith
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-9

11.2
Forms of Security for Debt
Bank Credit Cards
 Two separate agreements
 1. Bank and retailer: bank guarantees payment of bank card amounts and retailer pays % charge to the bank
 2. Bank and applicant: cardholder promises to pay bank for card amounts and interest on any unpaid balance; unsecured credit
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-10 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.2
Forms of Security for Debt
Bonds, Debentures, and Floating Charges
 Special security instruments used by corporations to acquire capital using corporate assets as security
 Bonds
 Debt secured by way of a mortgage as a charge on assets of the corporation
 Debenture
 Unsecured debt or with some rights to assets in priority over unsecured creditors
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-11 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.2
Forms of Security for Debt
Bonds, Debentures, and Floating Charges
 May be single instrument or shorter instruments through a trust indenture
 Floating Charge
 Assets are pledged, but not charged until default then security attaches to the particular assets
 Legislation requires filing with the government to perfect security
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-12 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.3
Statutory Protection of Creditor Security
Mechanics’ Lien
 Statutory right by a worker, contractor or material supplier against property to ensure payment for labour or materials applied to land and chattels
 “Owner” is subject to right, and includes anyone with an interest in the property
 Stipulated time frame to register a claim and commence action on the claim
 Hold-back - % of price withheld for payment to any potential claimants
 Chattel lien - allows sale by repair person
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-13

11.4
Bankruptcy and Insolvency: Introducction
Bankruptcy legislation
 Procedure to distribute the assets of an insolvent debtor (business and individual) in a fair and orderly way among the creditors – secured and unsecured
 Designed to release honest and unfortunate debtors, with provisions for deliberate misuse
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-14 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.5
Bankruptcy Legislation in Canada
Bankruptcy and Insolvency Act
 Federal legislation
 Purpose
 Release for honest but unfortunate debtors
 Eliminate creditor preference and provide fair distribution of assets by priorities
 Punish debtors who default creditors
 Promote the survival of business
 Enhance the rights of certain unsecured creditors
 Administered by the Superintendent of Bankruptcy
– supervises trustees
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-15 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.5
Bankruptcy Legislation in Canada
Companies’ Creditors Arrangement Act
 Applies to corporations in financial difficulties which have outstanding issues of bonds and debentures
 Court may grant reorganization which must be approved by the creditors
 Rescheduled debt payment arrangements are then binding
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-16 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.5
Bankruptcy Legislation in Canada
Acts of Bankruptcy
 Bankruptcy is the legal condition arising when a person has debts exceeding $1,000 and has committed an act of bankruptcy (10 acts stipulated) within six months prior to the creditor filing for a petition in bankruptcy against the debtor
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-17 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Figure 11-1
Bankruptcy and Insolvency—Initiation of
Bankruptcy Proceedings
Essentials of Canadian Business Law, 1st Canadian Edition Slide 1-18 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.5
Bankruptcy Legislation in Canada
Bankruptcy Proceedings
 1. Proposal to creditors
 Debtor files the proposal and presents it to the creditors for approval. If approved it binds all parties
 2. Voluntary Assignment
 Debtor files an assignment of property and a trustee is selected to proceed with the bankruptcy
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-19 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

Figure 11-2
Bankruptcy and
Insolvency—
Procedure
Essentials of Canadian Business Law, 1st Canadian Edition Slide 1-20 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.5
Bankruptcy Legislation in Canada
Bankruptcy Proceedings
 3. Creditors petition for a receiving order
 Debtor objects then court decides
 Debtor does not object then trustee is appointed
 Meeting of creditors, who examine the debtor and may appoint inspectors
 Provision for unpaid suppliers and other special groups to claim goods or interest
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-21 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.5
Bankruptcy Legislation in Canada
Bankruptcy Proceedings
 Trustee collects all assets and converts them to cash
 Subject to secured creditors who take security assets
 Distributed according to priorities
 Preferred creditors
 Unsecured creditors – pro rata basis
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-22 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.5
Bankruptcy Legislation in Canada
Discharge (not to corporations)
 Release by the court through the trustee
 Limitations on debtor until discharged
 Court may impose conditions
 Releases the bankrupt from all debts and obligations except those arising from wrongdoing and marital obligations
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-23 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.5
Bankruptcy Legislation in Canada
Consumer Bankruptcy Summary
Proceedings
 Consumer-debtor applies to an administrator for a proposal to creditors
 If approved the administrator receives and distributes all moneys
 Upon performance a certificate is issued to the consumer-debtor
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-24 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

11.5
Bankruptcy Legislation in Canada
Bankruptcy Offences
 Superintendent has wide powers to investigate fraud, wrongdoing and improper actions by the bankrupt
 Provision for withholding of discharge, fines and imprisonment
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-25 © 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.

CH 11
SUMMARY
Security instruments by creditors
 Mortgages – land and chattels
 Conditional sale agreement – chattels
 Corporation – bonds, debentures, assignment of book debts
 Bank loans under the Bank Act
 Mechanics’ lien – special security for workers, contractors and suppliers
 Bankruptcy Act – procedure for release of honest debtors with fair distribution of assets by a trustee; penalties for persons guilty of bankruptcy offences
© 2005 McGraw-Hill Ryerson Ltd., All Rights Reserved.
Essentials of Canadian Business Law, 1st Canadian Edition Slide 11-26