Textbook Notes (368,460)
Canada (161,892)
BUS 393 (52)
Chapter 11

Chapter 11 – Priority of Creditors

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Business Administration
BUS 393
Richard Yates

Chapter 11 – Priority of Creditors Methods of Securing Debt • Secured creditor – successful in ensuring priority over other creditors Personal Property • Real property – land, buildings, fixtures (items attached to the land) • Personal property – chattels (tangible, movable things) and choses in action (intangible rights that are legally enforceable claims, eg. cheques and promissory notes) • Pledge – when creditor has right to sell item if borrower does not repay the loan (pawn shop) • When personal property used as security, creditor has right to take possession upon default  The Traditional Approach • Conditional sale – possession of good is given to buyer, but seller (creditor) retains ownership; after final payment, title is conveyed to the buyer (SOGA applies) • Chattel mortgage – creditor is not the seller of goods. Typically, debtor borrows money from bank, and bank requires security => title of some good transferred to creditor as “collateral security”, while debtor has possession of goods; after final payment, title of goods is returned to debtor (Sale of Goods Act does not apply) • Assignment of accounts receivables – in case of default, creditor has right to intercept payment of A/R • Leases – possession of goods goes to lessee while title remains with lessor o Operating lease – goods are rented to lessee to use during lease period o Lease to purchase – credit purchase where title is transferred to lessee and end of lease period  Personal Property Security Act • Used all across Canada, creating unified approach towards personal property as security • Allows both tangible and intangible forms of personal property to be used as security • Creating a Secured Relationship – 3 stages: 1) enter into contractual agreement 2) secured interest must attach to the collateral 3) secured interest must be perfected o Attachment – when debtor receives value under the contract, which gives the creditor a claim against the security in the event of default o Perfection – either through registration of the obligation with appropriate government agency, or creditor obtaining physical possession of collateral • Priority of Secured Creditors – generally determined by date of registration o Exception: purchase money security interest o Exception: sales made in normal course of business • Rights and Remedies upon Default o Creditor can take possession of goods and sell – must usually hire a bailiff to seize goods o Before creditor can sell goods, must notify debtor and give them the right to redeem by paying any money owing – after notification period expires, creditor can sell and charge debtor for any shortfall and additional expenses o In BC, creditor loses right to sue for deficiency if he takes possession of goods, fails to properly look after them, or fails to get a fair price b/c of careless sale o If there is a surplus from the sale, debtor is entitled to surplus o Creditor may choose to take goods and keep them – no deficiency/surplus • Summary: If a person borrows money from a bank using a car as security, attachment is when the money is advanced and perfection is when the bank files registration. A buyer of the car would search the registry and be forewarned to avoid buying it. In the rdse of default, the bank can recover the vehicle, even from an innocent 3 party. Guarantees • Guarantors must pay when a debtor defaults – creates a secondary or conditional obligation that arises only in the event of default • Indemnity is when a person agrees to be directly responsible for the debt, sharing the responsibility – creates a primary obligation • Guarantee must include all elements of a contract, unless under seal (no consideration needed) o Consideration: advancement of funds, or refraining from suing the debtor  Rights and Obligations of the Parties • Creditor should ensure guarantor understands the guarantee • Creditor must not subsequently weaken the position of the guarantor (eg. substantial change of terms without consent) • Creditor must not withhold information from guarantor • Continuing Guarantee – allows creditor to continue advancing funds up to a limit without affecting guarantor’s obligation to pay in event of default • Creditor can collect from guarantor without first suing the debtor • Guarantor has subrogation rights to demand payment from debtor – assumes rights of the creditor upon payment • Defences available to the debtor are also available to guarantor Other Forms of Security  The Bank Act • Allows flexibility in items taken for security (eg. growing crops, inventories, goods in process of manufacture)  Floating Charges • Floating charge – a security not fixed on any particular assets until default or other specified event, allows business to continue without interference, while giving creditor priority in case of default (eg. inventory, goods in process of manufacturing)  Builders’ Liens • Gives suppliers of materials/work a claim for payment against owners of land/buildings enhanced by their work, instead of just the contractor • Owner of property must retain percentage of what must be paid to general contractor (holdback, usually 10%)  Negotiable Instruments • Must be honoured in the hands of holder in due course • Certified cheque – secure because bank has made a commitment to honour it • Bills of exchange – can be made payable at some future date, and payment is guaranteed when it is accepted • Many credit transactions will require promissory notes signed by debtors, allows merchants to assign debt to a finance company • In consumer transactions, third party rights as a holder in due course do not apply  Letters of Credit • Often used in
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