Canadian Business Law
BANKING, FINANCING & DEBTOR-CREDITOR LAW
The Importance of Banking, Financing, and Debtor-Creditor Law for Business People
● Knowledge of how financial institutions work can strengthen your position when dealing with
them
● A sound mixture of debt and equity financing may be your business’s recipe for success
● If your business falls on hard times, sensible treatment of your creditors may keep you out of
bankruptcy
● Provincially chartered trust companies and credit unions are regulated by provinces
● Banks use EFTs (Electronic fund transfers), bills of exchange, cheques and promissory notes
when dealing with money
● When borrowing money, the borrower becomes a debtor and lender becomes a creditor to the
business
○ If the debtor has insolvency and unable to pay the creditor, the creditor may petition
for bankruptcy under the Bankruptcy & Insolvency Act
○ Only the payee can cash negotiable instruments
● Negotiable instruments are regulated under the federal Bills of Exchange Act
Cheque - negotiable instrument under which the drawee banking institution pays the payee from the
bank account of the payer
● If there’s insufficient funds in the bank account, then the drawee bank is not liable to
the payee for the cheque amount; payee’s only recourse is against the payer.
● Cheques are only valid to deposit within 6 months
● Certified cheques are secure because the bank certifies them only after withdrawing
the funds from the customer’s account
● Payee can assign or transfer the right of payment to someone else, where the creditor
becomes the holder and can endorse the cheque. This is done in 2 ways:
○ In blank, where the drawee signs the back of the check and passes it to the
creditor to cash
○ By restrictive endorsement, writing “pay to x only” and signs the back of the
cheque
Consumer Bills & Notes
● Issued when purchasing expensive items. Terms and conditions are set out for loan
repayment, with interest after due date
● If a product is bought defective, and the consumer has sold their note to the bank, the holder
can still get their payment, even if the original seller is bankrupt or disappeared
● Bill must be marked with “consumer purchase”
Banking
Negotiable Instrument
● Document that promises to pay the payer a specified amount and that can be transferred to a
third party (cheques, bills of exchange, and promissory notes)
● A promissory note is a document in which the maker promises to pay the promisee the sum
indicated in the note, either on demand or on a later fixed date
● Bill of exchange - document signed by a drawer ordering a drawee to pay a specified sum to a
payee immediately or on a later fixed date
, ● A promissory note is a specific form of a bill of exchange with the essential difference being
that a promissory note is a promise by the maker to pay whereas an 'ordinary' bill of exchange
is an order to someone else to pay.
● Bills of exchange are more often used in international trade, whereas promissory notes are
used most often in domestic trade.
Credit Cards
● Typically used by businesses to buy small items and to cover employees’ business-related
expenses
● Can be constructed as money in ordinary sense, because they don't hold any relation to
currency in the cardholder
Electronic Banking
● The use of computers, public ATMs, and telephones to perform banking transactions
● Financial institutions have separate account agreements for e-banking relating to fraud, which
may be contracted as standard form and non-negotiable
● Some businesses like to only use debit, because there is a small/no fee for transactions
Account Agreements
● When you open your bank account, you sign an account agreement that outlines the risks and
operation. Business must accept the risk and liability that could arise from the bank use
● Since 2001, the FCAC (Financial Consumer Agency of Canada) has been urging businesses
to establish more consumer-friendly codes
○ The agreement covers all services that the bank offers at the time of signing
○ Bank may hold cheques for a specific period of time or until the cheque has been
honoured by the drawer’s bank
○ bank can require 7 days notice of a withdrawal
○ Bank is not responsible for signing verification on cheques, and will cash all cheques
even if fraud. The business has 30 days to report fraud
○ Bank is not liable for damages for any account machinery malfunctions and resulting
losses
■ Business is responsible for reimbursing the bank for any legal costs it incurs
in recovering money owed
○ Bank can close or terminate account agreement without notice
Resolving problems with your business’s bank
● If making a complaint about a bank, you can do so to the provincial body - FCAC
● Banks are more responsive to large business’ needs, as they are less costly than small
businesses
Debt vs Equity Financing
● A business can obtain long-term financing through: arranging loans from financial
institutions, issuing and selling long-term company bonds with fixed interest rates, or selling
shares in the business to investors.
Two main forms of financing a business: equity and debt (or a combination of the two).
● With debt financing the business borrows capital, usually from a financial institution
○ A business person who is considering debt financing must also consider whether the
debt is to be secured or unsecured
○ Individual investors can buy a business’ bonds to provide capital in exchange for a
fixed or variable rate of return over x years
BANKING, FINANCING & DEBTOR-CREDITOR LAW
The Importance of Banking, Financing, and Debtor-Creditor Law for Business People
● Knowledge of how financial institutions work can strengthen your position when dealing with
them
● A sound mixture of debt and equity financing may be your business’s recipe for success
● If your business falls on hard times, sensible treatment of your creditors may keep you out of
bankruptcy
● Provincially chartered trust companies and credit unions are regulated by provinces
● Banks use EFTs (Electronic fund transfers), bills of exchange, cheques and promissory notes
when dealing with money
● When borrowing money, the borrower becomes a debtor and lender becomes a creditor to the
business
○ If the debtor has insolvency and unable to pay the creditor, the creditor may petition
for bankruptcy under the Bankruptcy & Insolvency Act
○ Only the payee can cash negotiable instruments
● Negotiable instruments are regulated under the federal Bills of Exchange Act
Cheque - negotiable instrument under which the drawee banking institution pays the payee from the
bank account of the payer
● If there’s insufficient funds in the bank account, then the drawee bank is not liable to
the payee for the cheque amount; payee’s only recourse is against the payer.
● Cheques are only valid to deposit within 6 months
● Certified cheques are secure because the bank certifies them only after withdrawing
the funds from the customer’s account
● Payee can assign or transfer the right of payment to someone else, where the creditor
becomes the holder and can endorse the cheque. This is done in 2 ways:
○ In blank, where the drawee signs the back of the check and passes it to the
creditor to cash
○ By restrictive endorsement, writing “pay to x only” and signs the back of the
cheque
Consumer Bills & Notes
● Issued when purchasing expensive items. Terms and conditions are set out for loan
repayment, with interest after due date
● If a product is bought defective, and the consumer has sold their note to the bank, the holder
can still get their payment, even if the original seller is bankrupt or disappeared
● Bill must be marked with “consumer purchase”
Banking
Negotiable Instrument
● Document that promises to pay the payer a specified amount and that can be transferred to a
third party (cheques, bills of exchange, and promissory notes)
● A promissory note is a document in which the maker promises to pay the promisee the sum
indicated in the note, either on demand or on a later fixed date
● Bill of exchange - document signed by a drawer ordering a drawee to pay a specified sum to a
payee immediately or on a later fixed date
, ● A promissory note is a specific form of a bill of exchange with the essential difference being
that a promissory note is a promise by the maker to pay whereas an 'ordinary' bill of exchange
is an order to someone else to pay.
● Bills of exchange are more often used in international trade, whereas promissory notes are
used most often in domestic trade.
Credit Cards
● Typically used by businesses to buy small items and to cover employees’ business-related
expenses
● Can be constructed as money in ordinary sense, because they don't hold any relation to
currency in the cardholder
Electronic Banking
● The use of computers, public ATMs, and telephones to perform banking transactions
● Financial institutions have separate account agreements for e-banking relating to fraud, which
may be contracted as standard form and non-negotiable
● Some businesses like to only use debit, because there is a small/no fee for transactions
Account Agreements
● When you open your bank account, you sign an account agreement that outlines the risks and
operation. Business must accept the risk and liability that could arise from the bank use
● Since 2001, the FCAC (Financial Consumer Agency of Canada) has been urging businesses
to establish more consumer-friendly codes
○ The agreement covers all services that the bank offers at the time of signing
○ Bank may hold cheques for a specific period of time or until the cheque has been
honoured by the drawer’s bank
○ bank can require 7 days notice of a withdrawal
○ Bank is not responsible for signing verification on cheques, and will cash all cheques
even if fraud. The business has 30 days to report fraud
○ Bank is not liable for damages for any account machinery malfunctions and resulting
losses
■ Business is responsible for reimbursing the bank for any legal costs it incurs
in recovering money owed
○ Bank can close or terminate account agreement without notice
Resolving problems with your business’s bank
● If making a complaint about a bank, you can do so to the provincial body - FCAC
● Banks are more responsive to large business’ needs, as they are less costly than small
businesses
Debt vs Equity Financing
● A business can obtain long-term financing through: arranging loans from financial
institutions, issuing and selling long-term company bonds with fixed interest rates, or selling
shares in the business to investors.
Two main forms of financing a business: equity and debt (or a combination of the two).
● With debt financing the business borrows capital, usually from a financial institution
○ A business person who is considering debt financing must also consider whether the
debt is to be secured or unsecured
○ Individual investors can buy a business’ bonds to provide capital in exchange for a
fixed or variable rate of return over x years
