Priority of Creditors in Canadian Business Law

Chapter 15: Priority of Creditors

Securing Debt by Using Personal Property

  • Secured Creditor: A creditor who holds an interest in a debtor's property.

    • Helps ensure repayment of debt.

Types of Security Agreements

  1. Real Property as Security

    • Mortgage: Legal agreement where property is used as collateral.

  2. Personal Property as Security

    • Pledge: Title retained by debtor; possessions given to lender.

    • Personal Property Security: Right to take possession upon default.

The Traditional Approach To Securing Debt

  1. Conditional Sales Agreement

    • Buyer possesses goods; seller retains title until full payment.

  2. Chattel Mortgage

    • Goods used as collateral while debtor holds possession.

  3. Assignment of Book Accounts

    • Debtor assigns accounts receivable to creditor for security.

  4. Leases

    • Operating Lease: Goods rented for a specific period.

    • Lease to Purchase: Agreement where ownership transfers at lease end.

Personal Property Security Act (PPSA)

  • Unifies approach to using personal property as security across Canada.

  • Eligibility: Most personal property can be used, including licenses, shares, and bonds.

Creating a Secured Relationship

  1. Security Agreement between secured party and debtor.

  2. Attachment of security interest to collateral.

  3. Perfection of security interest via:

    • Registration

    • Possession of collateral by creditor

Priority of Secured Creditors

  • Priority determined by:

    • First to register.

    • Purchase Money Security Interest (PMSI).

  • Buyers in ordinary course of business typically not bound.

Rights and Remedies upon Default

  • Creditor can repossess and sell goods to cover debt.

  • Right to redeem: Debtors may recover goods before sale.

  • Sale must be commercially reasonable; debtors entitled to any surplus.

Securing Debt by Using Guarantees

  • Guarantees are additional security ensuring payment by a more reliable debtor.

  • Guarantees are secondary obligations, activated only upon debtor's default.

  • Requirements for enforceability:

    • Must be in writing and meet contract elements.

    • Given under seal to prevent issues after funds are advanced.

Rights and Obligations

  • Creditor Duties to guarantor:

    • Ensure understanding of guarantee without weakening position.

  • Guarantor's Release Conditions:

    • Contract changes, release of other security, withholding of info.

  • Subrogation Rights for guarantors who pay debts.

Other Forms of Security

  1. Bank Act Security:

    • Includes various assets like crops and inventory.

  2. Floating Charges:

    • Allows corporations to use assets flexibly as collateral without interfering with business operations.

Builders’ Liens

  • Claims by suppliers of goods/services against real property for unpaid amounts.

  • Legal regulations dictate registration process and timing.

  • Holdbacks keep a portion of payment to secure against potential liens (commonly 10%).

Negotiable Instruments and Letters of Credit

  • Negotiable Instruments: Includes cheques, bills of exchange, and promissory notes.

  • Letters of Credit: Bank guarantees payment for client’s obligations, commonly used in international trade.

Bankruptcy Process

  • Bankruptcy and Insolvency Act: Federal law focused on preserving debtor assets for creditor benefit.

  • Insolvency: Condition of being unable to pay debts.

  • Bankruptcy Definition: Transfer of debtor's assets to a trustee for fair distribution among creditors.

Involuntary Bankruptcy Process

  • Initiated by a creditor petitioning court; may involve judicial hearings.

Voluntary Assignment in Bankruptcy

  • Debtor willingly transfers assets under supervision of a trustee.

Priority Among Creditors

  • Trustee handles asset liquidation and equitable distribution among:

    • Super priorities

    • Preferred creditors

    • Unsecured creditors

Bankruptcy Offences and Restrictions

  • Prohibited Settlements: Transfers for no consideration within a year of bankruptcy may be void.

  • Discharge Conditions:

    • Individuals may face conditional or unconditional discharge; certain debts remain post-discharge.

Alternatives to Bankruptcy

  • Negotiation: Discussing alternative agreements for debt repayment with creditors.

  • Other options include:

    • Division proposals for debts over $250,000.

    • Consent for individuals with debts under $1000.

    • Protections for corporations under the Companies’ Creditor Arrangements Act (CCAA).

Discussion Points

  • The fairness of builders’ liens and creditor responsibilities in bankruptcy scenarios.

  • Legislation effectiveness in preventing bankruptcy vs. potential business implications.