BLAW CH 9 questions

52. List the conditions usually required for a lender to provide unsecured credit.

A lender rarely provides unsecured credit unless there is • an ongoing relationship between the parties, • a high degree of trust, • a small loan, • a short repayment period, and • a high expectation that the loan will be repaid.

56. What is a floating charge?

Because loans may be advanced in the future and may be in amounts not yet known, the general security agreement requires that a business — and possibly its officers and directors — pledge a pool of assets sufficiently large to cover its future debt. This pool of assets will vary from time to time. This pledge is called a floating charge. It is created because this business needs to be free to use its assets to earn income.

58. In what ways can common shares produce a return on investment for shareholders?

Common shares are the most widely traded shares. They can produce a return on investment for shareholders in two ways: • through dividends — that is, a company's distribution of its profits to its shareholders; and • through resale by shareholders to new investors at a higher price than originally paid.

45. What is electronic banking?

Electronic banking is a term that describes the use of computers, public automated teller machines (ATMs or bank machines), and telephones by bank customers to perform many of their banking transactions, instead of having to complete paper documents and attend bank branches in person.

57. Briefly explain equity financing in the context of businesses in the private and public sectors.

Equity financing involves the contribution of funds by the shareholders. In the case of a privately held corporation, this may involve a contribution by the founders or it may involve an "angel investor" who invests in the business but does not get involved otherwise. In the case of public companies, equity financing involves issuing and selling shares to institutional investors and the public.

48. Explain equity financing.

Equity financing is arranged through the sale of shares in a business corporation. The shares give investors an interest in the business in exchange for providing capital. The value of a company's shares generally depends on how successful the business becomes. Shareholders must accept the risk that their shares may turn out to be valueless if the business fails. They cannot sue a company for the return of their capital in the same way that a lender can sue for repayment of a loan.

12. A late-coming secured creditor often recovers little or nothing from a bankrupt because the unsecured creditors with priority get in ahead and take the bankrupt's most valuable assets.

False

13. A company cheque is more secure than a bank cheque because it cannot be issued unless sufficient funds are available to the payer.

False

16. With a secured loan, the borrower promises the lender that he will repay the loan and may provide the lender with rights in collateral, although this is not required.

False

2. The rules that govern negotiable instruments in Canada are very different from those in the United States and the United Kingdom.

False

20. The payer of a cheque is always a financial institution.

False

23. Businesses use credit cards for large purchases that they would otherwise have to pay for in instalments.

False

5. Where a creditor has an interest in collateral owned by the debtor, the creditor is known as an unsecured creditor.

False

9. The unsecured creditor with the earliest registered interest in a particular item of collateral takes priority over secured creditors with interests in the same collateral.

False

49. Explain the concept of collateral in the context of a secured debt.

If the debt is secured, the debtor — in addition to promising to repay the debt — backs up the promise by giving the lender a security interest in something of value owned by the debtor. The right or thing given as security is called collateral, and if the debtor fails to repay the debt, the lender has the right to seize and sell the collateral and use the sale proceeds to pay down the loan. Examples of collateral include land, machinery, the right to collect on account receivables, royalties, and inventory.

60. What are the conditions under which you can sue a debtor in Small Claims Court in BC? What is a significant advantage of doing so?

In BC, if you are a creditor and the amount of the debt is under $25,000, you can sue the debtor in Small Claims Court. There are a number of advantages: the court fees are much lower; the process is simpler and faster; and the evidence rules are relaxed, which makes it easier to prove a case. In Small Claims Court, you can either represent yourself or hire an agent — rather than a lawyer — to represent you.

55. What is a general security agreement?

In a general security agreement, a borrower pledges all or most of its assets as collateral or security for a loan. Financial institutions may also require that the officers and directors of small businesses pledge their personal assets — their homes, for example — as security for the business's loan.

51. What are the differences between a secured loan and an unsecured loan?

In an unsecured loan, a lender advances funds to a borrower in exchange for a simple promise to repay the loan. If the borrower does not repay the loan, the lender's only legal recourse is to sue the borrower on his promise to repay. With a secured loan, the borrower promises the lender that he will repay the loan and provides the lender with rights in collateral. If the borrower does not repay the loan, the lender can still sue the borrower, but the lender may also seize the collateral and sell it, using the money from the sale to pay down the loan.

59. What are the pros and cons of equity versus debt financing? How do most companies deal with this dilemma? A company's "capital structure" refers to its mix of debt and equity financing. Achieving an appropriate capital structure usually requires consideration of a number of factors.

It might appear that a business can minimize its risk by preferring equity financing over debt financing. However, a company may need to sell a lot of shares — thereby greatly expanding its ownership base — in order to raise the funding that it needs. If key shareholders control the management of a company, they will not be willing to share control with a group of dissatisfied shareholders, nor do they wish to set the scene for a successful takeover of the company. For these reasons, most companies opt for a mix of both debt and equity financing.

44. Explain the advantages negotiable instruments have over money.

Negotiable instruments have certain advantages over money. They are more portable than large sums of cash, and they reduce the risk of theft because only the named payee can cash them. They can create credit by deferring the payment of funds from the date the instrument is created to another date specified in the instrument (consider a post-dated cheque, for example). They can also be transferred to third parties.

41. What are the three types of negotiable instruments currently in use in a business context?

There are three types of negotiable instruments currently in use in a business context: cheques, bills of exchange, and promissory notes.

43. What are the most common financial institutions a small business is likely to form a relationship with in Canada?

To accomplish any of these goals, your business — or the business that you work for — needs an ongoing relationship with a financial institution. In Canada, that institution is likely to be a federally chartered bank, a federally or provincially chartered trust company, or a provincially chartered credit union.

1. In Canada, negotiable instruments are regulated under the federal Bills of Exchange Act.

True

10. In British Columbia, if you are a creditor and the amount of the debt is under $25,000, you can sue the debtor in Small Claims Court.

True

11. An act of bankruptcy includes either being unable to pay debts as they come due (and not having assets that can be sold to pay them) or committing fraudulent or evasive acts to avoid creditors.

True

14. If there are insufficient funds in the account, the drawee bank may refuse to honour the cheque by returning it to the payee. The drawee bank is not liable to the payee for the amount of the cheque; the payee's only recourse is against the payer.

True

15. Shareholders must accept the risk that their shares may turn out to be valueless if the business fails.

True

17. Under section 427 of the Bank Act, if the business gives the bank a collateral interest in an asset to secure continued financing, the bank acquires an ownership interest in the asset.

True

18. If the defendant in a Superior Court debt case fails to file a statement of defence, after a brief period the plaintiff may ask the court for a default judgment.

True

19. An act of insolvency is being unable to pay debts as they come due (and not having assets that can be sold to pay them).

True

21. The payer of a cheque is always an account holder at that institution.

True

22. Credit cards are not negotiable instruments.

True

3. Like other bills of exchange, promissory notes often provide for the payment of interest after their due date.

True

4. Credit cards are not negotiable instruments.

True

6. Borrowing money from a lender is called debt financing, a concept that includes both short-term and long-term borrowing.

True

7. Once a bond has been issued, its resale value will be governed by its rating and also by the economy generally.

True

8. Unsecured creditors are those who extend credit in exchange for a simple promise by the debtor to repay the debt.

True

50. What is a secured creditor? What does this status entitle a creditor to?

Where a creditor has an interest in collateral owned by the debtor, the creditor is known as a secured creditor. A secured creditor can often register his interest in a public registry system. Registration gives notice to the world that the secured creditor has an interest in property owned by the debtor. This means that others who have no collateral interest in the debtor's property — or who have an interest but who registered or acquired it after the secured creditor acquired and registered his — cannot interfere with the secured creditor's right to seize and sell the collateral to pay down the debt. The secured creditor in this example is said to have priority over secured creditors who acquired or registered interests at a later date, or who had no security interest at all. In situations where there are multiple creditors and few valuable assets, a creditor's place in the priority sequence can make the difference between collecting on the debt and being out of luck.

47. What is debt financing? Give two ways that it may be accomplished.

With debt financing, the business borrows capital, usually from a financial institution. The business's obligation is to repay the loan, including interest, in accordance with the terms of the loan agreement. Debt financing may also be accomplished through the sale of bonds. Individual investors buy a business's bonds, thereby providing the business with capital in exchange for a fixed or variable rate of return over a number of years.

42. Give three reasons why business people should familiarize themselves with banking, financing, and debtor-creditor law.

a. Knowledge of how financial institutions work can strengthen your position when dealing with them. Understanding that there is room for negotiation with banks and other financial institutions when, for example, signing account and loan agreements may assist you in obtaining the services of these institutions on the terms most favourable to your business. b. A sound mixture of debt and equity financing may be your business's recipe for success. At some point your business will very likely need to acquire funds for operations or expansions. Should you borrow? Should you seek investors? There are advantages and disadvantages to both approaches. Knowledge of your options will help you obtain the financial balance that you need, both in the short and in the long term. c. If your business falls on hard times, sensible treatment of your creditors may keep you out of bankruptcy. Bankruptcy is not the only option if times get tough for your business. The law provides you with various opportunities, such as the relatively inexpensive procedure of making a proposal to your creditors in order to restructure your debt. You may have much more leverage than you think because banks like to avoid suing their customers, running the risk of recovering less than they are owed, and spending money on enforcing their rights, if possible.

30. In ___________, a borrower pledges all or most of its assets as collateral or security for a loan. a. a general security agreement b. a proposal to creditors c. a floating charge d. equity financing

a. a general security agreement

26. The debtor on a promissory note is called the a. maker. b. holder. c. payer. d. drawer.

a. maker.

36. A secured creditor who wants to recover a debt a. may seize and sell property as soon as the debtor defaults. b. must wait until a writ of seizure and sale is obtained from the court. c. must obtain a court order to decide that a default has occurred. d. must sue the debtor for what is owed.

a. may seize and sell property as soon as the debtor defaults.

40. Using the ____________, a business is able to make a proposal to its creditors to restructure its debt while under the court's protection. a. Bankruptcy and Insolvency Act b. Companies' Creditors Arrangement Act c. Assignments and Preferences Act d. Bankruptcy Protection Act

b. Companies' Creditors Arrangement Act

24. Tim wrote a cheque that was named to Sally. Sally's bank has just returned the cheque to Tim's bank marked NSF. a. Tim is the payee. b. Tim's bank is the drawee. c. Sally is the drawee. d. Sally's bank is the drawer.

b. Tim's bank is the drawee.

31. If a business defaults on its loan, the floating charge over all the pledged assets a. is extinguished. b. crystallizes. c. is discharged. d. executes.

b. crystallizes.

27. Borrowing money from a lender is called a. equity financing. b. debt financing. c. secure financing. d. collateral financing.

b. debt financing.

34. If more than one unsecured creditor has obtained a judgment against a debtor the creditors will be paid as follows: a. in the order of when each creditor filed their writ. b. on a pro rata basis. c. by dividing the assets equally among them. d. in the order of the earliest registered interest.

b. on a pro rata basis.

28. Where a creditor has an interest in collateral owned by the debtor, the creditor is known as a. an interested creditor. b. a registered creditor. c. a secured creditor. d. an execution creditor.

c. a secured creditor.

37. Generix Company finds itself unable to pay its debts as they become due but it wants to avoid bankruptcy and continue to carry on business. Generix should consider a. voluntarily assigning its assets to a trustee in bankruptcy. b. petitioning for a receiving order. c. making a proposal to its creditors. d. avoiding creditors until it returns to financial health.

c. making a proposal to its creditors.

39. Generix Company owes Big Fish Inc. $15,000 and the account has been past due for three months. Despite this, Generix remains optimistic about its financial future and isn't considering declaring bankruptcy. Big Fish a. must wait until Generix voluntarily declares bankruptcy before it can take action. b. must file a writ of seizure and sale. c. may file a petition for a receiving order. d. must wait for Generix to make a proposal.

c. may file a petition for a receiving order.

32. Potential lenders inquiring into the credit history of a business may consider a. how the business's corporate bonds have been rated. b. the business's credit transaction history. c. existing security holders and details of their security interests. d. all of the above

d. all of the above

33. When a debtor defaults, which creditor has the right to be paid first is determined by a. whether the security interest was registered. b. when the security interest was registered. c. which creditor's debt was secured. d. all of the above

d. all of the above

35. Before an unsecured creditor takes legal action to collect a debt, it may consider a _________ that states that the debtor has defaulted and that he must pay the full amount owing, including interest, by a given date, or face legal action. a. garnishment b. proposal c. notice d. demand letter

d. demand letter

25. The payee of a cheque may assign or transfer the right of payment to somebody else. In order to do so, the payee must _________ the cheque. a. deposit b. hold c. secure d. endorse

d. endorse

29. A lender may consider providing unsecured credit if a. the relationship between the parties is new. b. the loan is significantly large. c. the loan is expected to be repaid over an extended period. d. none of the above

d. none of the above

38. If a judge grants an absolute discharge from bankruptcy, obligations to pay ________ are relieved. a. any outstanding child support b. any orders for payment of restitution by the court c. any debts arising from a fraudulent act d. none of the above

d. none of the above