Chapter 16 - Business Law 2275

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Western University
Management and Organizational Studies
Management and Organizational Studies 2275A/B
Cristin Keller

Chapter 16Priority of CreditorsMethods of Securing DebtWhen the creditor is successful in ensuring their priority over other creditors they are said to be a secured creditorPersonal PropertyBoth real property and personal property have been used as securityMortgages are the most common method of using real property as securityPersonal property can be divided into chattels which are tangible movable things and choses in action which are intangible rights that are legally enforceable claims Ex cheques and promissory notes are examples of choses in action can be legally enforcedPersonal property security involves right to take possession upon defaultPledgethe debtor leaves an item with the creditor but the debtor still owns the item and the creditor only gains the right to sell the item if the borrower does not repay the loanIn most situations the debtor needs the use of the goods used as securityUnder modern legislation the creditor usually does not actually assume ownership of the goods but the creditor has first claim in the event of a default by the debtorDefault may be a debtor missing a payment or failing to meet any obligation that increases the creditors risk or that threatens the value of the assets used as securityThe Traditional Approach o Conditional salepossession of the goods is given to the buyer and the seller creditor retains the title as security and after the final payment is made title to the goods is conveyed to the buyer o Chattel mortgagecreditor is not the seller of the goods Ex the bank would be the creditor and the bank would require the transferring of title of some good as collateral security while the debtor has possession of the goods when the last payment is made the title of the goods is returned to the debtor o The assignment of book accountschose in action as security rather than goodsDebtor can assign their accounts receivables and if they default the creditor has the right to intercept the payment of the accounts receivable o LeasesOperating leasegoods are simply rented to the lessee to use during the lease period after which the goods are returned to the lessorLease to purchaseTitle to the goods will be transferred to the lessee at the end of the lease period with the lease simply providing securityIn leases possession of the goods goes to the lessee while the title to the goods remains with the lessor providing the lessor with security for the transactionLessee can make claims against the manufacturer or the suppler for the quality and fitness of the goods suppliedPersonal property security acts now in placeThe Personal Property Security Act o Now used in all jurisdictions in Canada o Creates common process for using personal property as security o Allows licenses shares and even intellectual property to be used as security o Provides rules to determine the ranking of various claims when several secured creditors have claims against those assets o The right to take possession of the goods used as security even when they get into the hands of an innocent purchaser is the essential nature of a secured transaction o Registration protects secured creditors and others o Purpose is to give effect to the contractual obligations entered into by the parties o Creating a Secured RelationshipThree stages
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