Week 12 Flashcards
Do principals of contract law apply for credit?
Yes, credit is a contractual relationship.
Debt and credit intro
A lender agrees to lend money in exchange for a promise by the borrower to repay the loan.
Repayment usually includes interest and a time frame.
Additional regulations apply for credit: debtor and creditor law.
Secured credit
a debt where the creditor has an interest in the debtor’s property to secure payment (collateral)
- the creditor can seize the property and sell it to pay down the unpaid debt.
- strongest position
Unsecured credit
The creditor has no security interest in the debtors property
- the creditor only had a contractual right to payment but no right to particular property to satisfy the debt.
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
When credit is limited, the terms will be more stringent for the borrower
After-acquired property
collateral that includes personal property acquired by the debtor during the term of the loan
Personal property security act
Allows lenders to grant credit, knowing where they will stand with respect to collateral in the event of default.
Basic concepts of the PPSA
Attachment
Perfection
Registration
Priorities
Remedies
Attachment 3 conditions
- The debtor has rights in the collateral (owns)
- The secured party has provided value (granted a loan, extended credit)
- The debtor has signed a written security agreement
Once attachment has occurred
Security interest is enforceable against the debtor
Perfection and registration
Combination of attachment and registration
Registration
The registration of financing statement to record a security interest
Financing statement
The document registered as evidence of a security interest
Once the security interest is perfected
The secured party has priority over secured interest that have not been perfected
Priorities
The PPSA resolved conflicts over who has priority among competing interest in the same collateral. (A security interest made public should have priority over subsequent interest)
Purchase Money Security Interest (PMSI)
A security interest that enables the debtor to acquire assets and gives the secured party priority over existing perfected security interest. A “super priority”
Remedies
Remedies are mostly determined by whether the creditor is secured or unsecured
Unsecured creditors
Unsecured creditors can sue a debtor for unpaid debt.
Secured creditors
Secured creditors can sue a debtor, and seize collateral and sell it to pay down the debt owed
If a debtor is bankrupt, secured creditors will still have assets
Guarantees
Personal guarantees reduce bank risk by allowing personal assets to be available to the bank if a debtor defaults.
guarantee
A contract between a creditor and a guarantor.
A conditional promise to a creditor to pay a debt if the debtor defaults.
Guarantor
a person who agrees to pay a debt if the primary debtor does not
trustee in bankruptcy
The person who has legal responsibility under the BIA for administering bankruptcies and proposals
- licensed by the office of the superintendent of bankruptcy
- will assess the estate and prepare a statement of assets, liabilities
estate
The assets of the insolvent or bankrupt
Insolvent
Unable to meet financial obligations as they become due or having insufficient assets, if liquidated, to meet financial obligations.
Insolvent avoid bankruptcy
An insolvent debtor may be able to avoid bankruptcy with a proposal or arrangement with creditors
- assume the business is worth more as a going concern than it is liquidated
- the BIA and CCAA govern situations where debtors become insolvent
- legislation ensures all stakeholders are treated fairly, including debtors, creditors, employees, government, and the broader community.
Proposal
A contractual agreement governed by the BIA that allows a debtor to restructure its debt in order to avoid bankruptcy
- reduce the amount to be paid to creditors while the debtor retains assets ti carry on business
Extend the time for the payment claims
Arrange for a trustee to control assets for the benefit of the creditors for the period of the proposal.
Proposals under the BIA
A proposal is a procedure governed by the BIA that allows the debtor to restructure its debt and avoid bankruptcy
- the debtor offers creditors a percentage of what is owed to them, it and extension of the deadlines for payment of debts.
- creditors usually prefer this over bankruptcy
Division 1 proposals
Division 1 proposals are available to individuals and corporations with no limit on the total amount of debt that is owed
Division 2 Proposals
(Consumer proposals)
Are available to individuals with total debts less than $250,000 (not including a mortgage in a principal residence).
Arrangements under the CCAA
An arrangement governed by the CCAA allows an insolvent business to avoid bankruptcy when the debt exceeds $5 million.
Companies’ Creditors Arrangement Act (CCAA)
- this is another option for an insolvent business to avoid bankruptcy
- it is used for corporations that have extensive debts and the affairs of which tend to have considerable impact on the community
- they just have a total debt exceeding $5 million.
Bankruptcy
The legal process of transferring assets of the bankrupt to a trustee in bankruptcy for liquidation and distribution to creditors.
- it is governed by the BIS
- it preserves assets for creditors
- it ensures fair equitable distribution of assets
- for personal bankruptcy, it allows a fresh start to the debtor
Bankrupt
The legal status of a debtor who has made an assignment or against whom a bankruptcy order has been issued (also used to describe a debtor who is bankrupt)
Protection of assets.
The trustee typically will:
- secure the business
- conduct a detailed examination of assets
- prepare appropriate statements
- ensure assets are adequately protected, including insurance coverage
- establish appropriate books and accounts
- sell any perishable goods immediately
in exceptional circumstances, the trustee may continue running the business for a period of time in order to perform the duties above
Transfers at undervalue
If the parties to the transaction are at arms length, then a transaction is a transfer at undervalue if:
- it took place within one year prior ti bankruptcy
- the debtor is insolvent (or was rendered insolvent by the transaction)
- the debtor intended to defraud, defeat, or delay the interests of a creditor
creditors are at arms length when they are independent and not related (there are extensive rules in the BIA to determine when parties are related).
Preferences
A preference is a payment that benefits one creditor over another.
When a company is insolvent, the preference may result in the other creditor not being paid at all.
Ordinary unsecured creditors should be treated equally.
Fraudulent Conveyance
In addition to the BIS provisions dealing with preferences and transfers at undervalue, there are provincial laws dealing with similar situations where creditors are unfairly prejudiced.
