Week 12

Question 1

Do principals of contract law apply for credit?

Answer 1

Yes, credit is a contractual relationship.

Question 2

Debt and credit intro

Answer 2

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.

Question 3

Secured credit

Answer 3

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

Question 4

Unsecured credit

Answer 4

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.

Question 5

Security for a loan can be:

Answer 5

Any interest in property that is of value to the lender
Either real property or personal property

Question 6

General Security Agreement

Answer 6

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

Question 7

After-acquired property

Answer 7

collateral that includes personal property acquired by the debtor during the term of the loan

Question 8

Personal property security act

Answer 8

Allows lenders to grant credit, knowing where they will stand with respect to collateral in the event of default.

Question 9

Basic concepts of the PPSA

Answer 9

Attachment
Perfection
Registration
Priorities
Remedies

Question 10

Attachment 3 conditions

Answer 10

1. The debtor has rights in the collateral (owns)
2. The secured party has provided value (granted a loan, extended credit)
3. The debtor has signed a written security agreement

Question 11

Once attachment has occurred

Answer 11

Security interest is enforceable against the debtor

Question 12

Perfection and registration

Answer 12

Combination of attachment and registration

Question 13

Registration

Answer 13

The registration of financing statement to record a security interest

Question 14

Financing statement

Answer 14

The document registered as evidence of a security interest

Question 15

Once the security interest is perfected

Answer 15

The secured party has priority over secured interest that have not been perfected

Question 16

Priorities

Answer 16

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)

Question 17

Purchase Money Security Interest (PMSI)

Answer 17

A security interest that enables the debtor to acquire assets and gives the secured party priority over existing perfected security interest. A “super priority”

Question 18

Remedies

Answer 18

Remedies are mostly determined by whether the creditor is secured or unsecured

Question 19

Unsecured creditors

Answer 19

Unsecured creditors can sue a debtor for unpaid debt.

Question 20

Secured creditors

Answer 20

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

Question 21

Guarantees

Answer 21

Personal guarantees reduce bank risk by allowing personal assets to be available to the bank if a debtor defaults.

Question 22

guarantee

Answer 22

A contract between a creditor and a guarantor.
A conditional promise to a creditor to pay a debt if the debtor defaults.

Question 23

Guarantor

Answer 23

a person who agrees to pay a debt if the primary debtor does not

Question 24

trustee in bankruptcy

Answer 24

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

Question 25

estate

Answer 25

The assets of the insolvent or bankrupt

Question 26

Insolvent

Answer 26

Unable to meet financial obligations as they become due or having insufficient assets, if liquidated, to meet financial obligations.

Question 27

Insolvent avoid bankruptcy

Answer 27

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.

Question 28

Proposal

Answer 28

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.

Question 29

Proposals under the BIA

Answer 29

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

Question 30

Division 1 proposals

Answer 30

Division 1 proposals are available to individuals and corporations with no limit on the total amount of debt that is owed

Question 31

Division 2 Proposals

Answer 31

(Consumer proposals)
Are available to individuals with total debts less than $250,000 (not including a mortgage in a principal residence).

Question 32

Arrangements under the CCAA

Answer 32

An arrangement governed by the CCAA allows an insolvent business to avoid bankruptcy when the debt exceeds $5 million.

Question 33

Companies’ Creditors Arrangement Act (CCAA)

Answer 33

• 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.

Question 34

Bankruptcy

Answer 34

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

Question 35

Bankrupt

Answer 35

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)

Question 36

Protection of assets.
The trustee typically will:

Answer 36

• 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

Question 37

Transfers at undervalue

Answer 37

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).

Question 38

Preferences

Answer 38

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.

Question 39

Fraudulent Conveyance

Answer 39

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.