Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-1 CANADIAN BUSINESS AND THE LAW Second Edition by Dorothy Duplessis Steven Enman Shannon

26-1Copyright © 2004 by Nelson, a division of Thomson Canada Limited.

CANADIAN BUSINESS CANADIAN BUSINESS

AND THE LAWAND THE LAWSecond EditionSecond Edition

byby

Dorothy Duplessis

Steven Enman

Shannon O’Byrne

Sally Gunz

Presentation prepared by Presentation prepared by

Allan Elliott, Southern Alberta Institute of TechnologyAllan Elliott, Southern Alberta Institute of Technology


CHAPTER TWENTY-SIXCHAPTER TWENTY-SIXTHE LEGAL ASPECTS OF CREDITTHE LEGAL ASPECTS OF CREDIT

OBJECTIVES: The legal significance of credit transactions

in business The difference between secured and

unsecured creditors The ways that lenders and borrowers are

protected The implications of guaranteeing a debt


LEGAL ASPECTS OF CREDITLEGAL ASPECTS OF CREDIT

OVERVIEW OF CREDIT collateral – security for a borrower’s

promise to repay a loan default – failure to make required payments

on a loan unsecured credit – debts that are not

backed by specific assets of the debtor


INTERNATIONAL PERSPECTIVEINTERNATIONAL PERSPECTIVE

CREDIT RISK IN INTERNATIONAL

TRADE use of international bankers and letters of

credit letters of credit – a written promise by a

buyer’s bank to a seller’s bank to pay the seller when specified conditions are met


REGULATION OF CREDITREGULATION OF CREDIT

CONSUMER PROTECTION

LEGISLATION applies when borrower is a consumer rather

than a business consumer debt – a loan to an individual for

a noncommercial purpose credit bureau – an agency that compiles

credit information on borrowers



REPORTING credit bureaus compile credit information

for lenders negotiation of terms – lenders are prohibited

from making misleading statements terms of credit – Criminal Code regulates

excessive interest rates provincial legislation prohibits, for example,

where there is no substantial benefit to the consumer



DISCLOSURE OF COST OF THE CREDIT lender must disclose the amount borrowed,

amount of the interest, any other charges, and the total balance payable

REMEDIES consumer may file a complaint or apply to

court to have the terms of the loan adjusted



DEBT COLLECTION collection agencies are subject to licensing cannot harass, threaten, or exert undue

pressure on defaulting borrowers only those with contractual responsibility

for the debt can be subject to any efforts to collect


THE CREDIT AGREEMENTTHE CREDIT AGREEMENT

LETTER OF COMMITMENT a document that is provided by a bank to a

borrower and sets out the terms of a loan, including amount of the loan ▪ interest

repayment terms ▪ renewal security requirements for maintenance of borrower’s

financial position events that constitute default lender’s remedies


SECURITYSECURITY

SECURITY FOR A LOAN CAN BE any interest in property that is of value to

the lender either real property or personal property

GENERAL SECURITY AGREEMENT a loan contract that includes all of the

assets of a business as collateral


ENVIRONMENTAL PERSPECTIVEENVIRONMENTAL PERSPECTIVE

CREDIT AND ENVIRONMENT RISK environmental assurance required as part

of credit documentation review documented contamination, site

visits, inventory of hazardous materials, interviews


PRIORITY AMONG CREDITORSPRIORITY AMONG CREDITORS

COMPREHENSIVE PERSONAL

PROPERTY SECURITY ARRANGEMEMT PROVIDE FOR

registration – the process of recording a security interest in a public registry system

financing statement – the document registered as evidence of security against personal property

after-acquired property – assets purchased after a secured loan is granted


REMEDIESREMEDIES

STATUS OF THE CREDITOR secured creditor – a lender who has the right

to seize and sell specific assets of a borrower to pay off a loan

LENDER’S REMEDIES acceleration clause – a term of a loan that

makes the entire loan due if one payment is missed

deficiency – the shortfall if a secured asset is sold for less than the amount of the outstanding loan


REMEDIESREMEDIES

LIMITS ON LENDER’S REMEDIES receiver – a person appointed by a secured

creditor to retrieve the assets and realize the debt

in some provinces, lender is limited to the proceeds from the seized assets and cannot proceed for any deficiency

there is a requirement to give the debtor reasonable notice before calling a loan


REMEDIESREMEDIES

BORROWER’S REMEDIES negotiate flexible terms when the loan is

given entitled to an accounting of the state of the

loan challenge a sale of assets that is improperly

conducted or that produces unreasonably low proceeds (an improvident sale)


PERSONAL GUARANTEESPERSONAL GUARANTEES

RELATIONSHIPS IN PERSONAL GUARANTEES

BORROWER/PRIMARY DEBTOR

CREDITARRANGEMENT

GUARANTORS

CONTRACTSOF GUARANTEE

BANK

GUARANTOR – A PERSON WHO SIGNS

A GUARANTEE

Figure 26.1


PERSONAL GUARANTEESPERSONAL GUARANTEES

GUARANTEE AGREEMENT must be in written form and signed by the

guarantor in Alberta only the guarantee must be

certified by a notary public to be valid

AVOIDING GUARANTOR OBLIGATIONS guarantor has the right of subrogation

against the debtor subrogation – the right of a guarantor to

recover from the debtor any payments made to the creditor

Documents

Copyright © 2004 by Nelson, a division of Thomson Canada Limited. 26-1 CANADIAN BUSINESS AND THE LAW Second Edition by Dorothy Duplessis Steven Enman Shannon