BUSINESS LAW

BUSAYO LEYE
ADEGUNLOYE

GROUP B

ASSIGNMENT CHAPTER 11
Case 1
Jared's business has been experiencing a huge decline in sales over the past 12 months.
Five months ago, Jared had to suspend payments on the two loans with his bank and a private
investor in order to keep the business going. The business is now $65,000 in debt and he is not
sure what to do. Jared believes that the business will improve in another three months when a
new bus stop in front of his store is added to the transit line. On the other hand, Jared is not sure
he can take another three months of phone calls and letters from his lenders and suppliers
demanding payment.
a. Explain to Jared the differences between insolvency and bankruptcy.
b. Explain to Jared the process of submitting a proposal to creditors under the Bankruptcy
and Insolvency Act.
c. What are the alternatives to Jared submitting a proposal to his creditors?
Answer 1
a. Insolvency is the situation in which a business or individual is unable to pay their debts as
they become due. It's a financial condition that indicates a lack of liquidity. In contrast,
bankruptcy is a legal process designed to provide relief to insolvent individuals or
businesses. Bankruptcy is the declaration of inability to repay debts, which is typically
followed by court proceedings to distribute assets among creditors. The term insolvent
indicates the financial status of an individual while the term bankrupt indicates a person's
legal status.

To explain to Jared the difference between the two will necessitate me to provide
Bankruptcy and Insolvency Act, RSC, 1985, c. B-3 in Section 2:

"Bankrupt means a person who has made an assignment or against whom a bankruptcy
order has been made or the legal status of that person; (failli)"

"Bankruptcy means the state of being bankrupt or the fact of becoming bankrupt; (faille)"
...

"Insolvent person means a person who is not bankrupt and who resides, carries on
business or has property in Canada, whose liabilities to creditors provable as claims under
this Act amount to one thousand dollars, and

a. Who is for any reason unable to meet his obligations as they generally become
due.

b. Who has ceased paying his current obligations in the ordinary course of business
as they generally become due, or
 c. The aggregate of whose property is not, at a fair valuation, sufficient, or, if
disposed of at a fairly conducted sale under legal process, would not be sufficient
to enable payment of all his obligations, due and accruing due.

b. The Bankruptcy and Insolvency Act (BIA) in Canada defines submitting a proposal to
creditors as a formal process in which an insolvent debtor presents a plan to repay
creditors or restructure debts. The proposal includes terms like repayment schedules,
partial repayment amounts, and other arrangements. Creditors vote on the proposal; if
accepted, it binds all parties involved. Under the Bankruptcy and Insolvency Act, a
business is insolvent if it owes its creditors $1,000 or more and is unable to meet its
obligations generally as they come due. The Act allows debtors to make a proposal to
their creditors to restructure their debt and try to reach a compromise. This can be done
informally, through an agreement between the debtor and its creditors. The debtor's notice
of intention to file a proposal creates a 30-day stay period that can be extended up to six
months, against unsecured and most secured creditors. A trustee in bankruptcy is retained
to work with the debtor to prepare the proposal, which is then sent to the official receiver
for approval. If approved, the proposal is sent to the creditors who vote as a group to
accept or reject the proposal. If accepted, the debt restructuring under the proposal is
binding on the debtor and its unsecured creditors. Secured creditors still retain the right to
seize and sell the secured assets. However, the debtor does not go into bankruptcy as long
as it lives by the terms of the proposal.
Note: If the proposal is rejected by the creditors, the debtor is deemed to have made an
assignment into bankruptcy and the legal status of being a bankrupt automatically
attaches to the debtor.
c. Section 57 of the Bankruptcy and Insolvency Act addresses the creditors' rejection of a
debtor's proposal and the steps that follow:

57 - Where the creditors refuse a proposal in respect of an insolvent person, (a) the
insolvent person is deemed to have thereupon made an assignment; (b) the trustee shall,
without delay, file with the official receiver, in the prescribed form, a report of the
deemed assignment;

(b.1) the official receiver shall issue a certificate of assignment, in the prescribed form,
which has the same effect for the purposes of this Act as an assignment filed under
section 49; and

(c) the trustee shall either

(i) forthwith call a meeting of creditors present at that time, which meeting shall be
deemed to be a meeting called under section 102, or
(ii) if no quorum exists for the purpose of subparagraph i), send notice, within five days
after the day the certificate mentioned in paragraph (b.1) is issued, of the meeting of
creditors under section 102,
 and at either meeting the creditors may by ordinary resolution, notwithstanding section
14, affirm the appointment of the trustee or appoint another licensed trustee in lieu of that
trustee.
Case 2
Adelaide had saved a considerable sum of money over the years. She was very proud of her
niece Elandra, who had incorporated and started her own horse racing stable, which had become
quite successful and had quickly grown to four horses. Elandra's horses had done very well at the
racetrack, and she was in the process of planning the next stage in the development of her racing
stable. To make her plans a reality, Elandra required financing of $100,000. She was
experiencing difficulty in finding the money because of the risky nature of horse racing and the
fact she had been in operation for only four years.
Adelaide believes Elandra has what it takes to be a success and wants to help her by investing in
the racing stable.
Adelaide also wants to make sure that the risk to her investment is minimal. Advise her on:
a. The options available for investing in Elandra's business.
b. The process involved with each form of investment.
c. The risks and benefits associated with each form of investment.
d.
Answer 2
a. The Options available for investing in Elandra’s business include;

Debt financing involves borrowing the capital for a period of time and repaying the loan
plus any interest charged, in accordance with the terms of the loan agreement.

Equity financing is the second option available to her which is accomplished through the
sale of shares in your corporation to investors. The investor receives an ownership
interest in the company and its potential growth in exchange for the capital paid to buy
the shares. This alternative debt financing , which involves selling shares to investors
who receive an ownership interest in the corporation. Those investors participate in the
potential growth or failure of the business operation in exchange for the capital paid to
buy the shares. For example, investors might be offered voting common shares in the
corporation or preferred shares that carry a dividend but no right to vote on who will be
directors of the company. The shares that are issued and the degree to which those shares
can participate in making decisions will depend on whether the company is a private
corporation or a public company listed on a stock exchange, the share structure of the
corporation, and the type of financing the company wants to undertake.
An initial public offering or listing a company on a stock exchange to be able to sell to
the public at large is complicated, requiring compliance with a very strict program of
disclosure under provincial and territory securities legislation and regulators. An offering
of this nature should be undertaken with the help of a lawyer. There are also some private
issuer exemptions available, but a strict set of criteria are applied if a closely held
corporation wants to use these exemptions.
 The third option available to her is the crowdfunding option, which is a practice that has
been growing rapidly, particularly as a popular way to fund a project or venture such as a
startup company by raising many small amounts of money from a large number of people
using the internet. Crowdfunding sites such as GoFundMe, Indiegogo, Kickstarter, and
others reflect the growth in popularity of this form of raising funds. According to the
Canada Revenue Agency, depending on the circumstances of the fundraising and the
facts, the money raised could be seen as a loan, a capital contribution in the form of
equity, a gift, business income, or some combination of these elements. In the context of
a business, if the crowdfunding is for a new product, service, or project, it would likely
qualify as income for tax purposes.

In Canada, both private and public companies are able to raise funds by crowdfunding.
Financial statements and other necessary documents are required for this type of
corporate financing, and investors will be subject to limits on the amount of money they
may invest depending on their personal financial conditions and other factors. The
crowdfunding transactions are conducted through an online gatekeeper that is a funding
portal, independent of the issuer raising the funds, registered with the appropriate
government agency. Corporations considering this type of crowdfunding will need to
assess the benefits of being able to access a large pool of investors against the drawbacks
of having a much larger number of shareholders with rights attached to their ownership
interest. Crowdfunding is governed by contract law, and it may be best to speak with a
lawyer if you are thinking of this form of financing.

A financial institution, a finance company, or an individual creditor may be willing to

lend money to a business on an unsecured basis, if it considers the loan to be a low risk.
In this arrangement, the debtor promises to repay the loan in accordance with the terms of
the lending agreement. If the debtor defaults on the repayment, the creditor will sue for
breach of the lending agreement and enforce its judgment against the debtor.

b. Debt Financing
Debt Financing entails Adelaide providing financing to Elandra's racing stable in
the form of a loan. Adelaide acts as a lender, lending money to the company in exchange
for interest payments. The process begins with negotiating the loan terms, which include
the principal amount, interest rate, repayment schedule, and any collateral required. Once
the terms have been agreed upon, a formal loan agreement is drafted outlining the loan's
terms and conditions. Adelaide then transfers the funds to Elandra's business, which is
responsible for repaying the loan in accordance with the agreed-upon terms. Adelaide
receives regular interest payments from the loan, which provides a consistent income
stream. However, there is still a risk of default if the racing stable fails to repay the loan,
although Adelaide's risk as a lender is lower compared to an equity investor, as she has
priority in repayment.
Equity Financing
 Here, the investor receives an ownership interest in the company and its potential
growth in exchange for the capital paid to buy the shares. Those investors participate in
the potential growth or failure of the business operation in exchange for the capital paid
to buy the shares. For example, investors might be offered voting common shares in the
corporation or preferred shares that carry a dividend but no right to vote on who will be
directors of the company. The shares that are issued and the degree to which those shares
can participate in making decisions will depend on whether the company is a private
corporation or a public company listed on a stock exchange, the share structure of the
corporation, and the type of financing the company wants to undertake.
An initial public offering or listing a company on a stock exchange to be able to sell to
the public at large is complicated, requiring compliance with a very strict program of
disclosure under provincial and territory securities legislation and regulators. An offering
of this nature should be undertaken with the help of a lawyer. There are also some private
issuer exemptions available, but a strict set of criteria are applied if a closely held
corporation wants to use these exemptions. In relation to the case above, if Adelaide
makes an equity investment by purchasing ownership shares in Elandra's horse racing
stable. This means Adelaide becomes a part-owner of the company, sharing in its profits
and losses. The process begins with Adelaide and Elandra negotiating the percentage of
ownership Adelaide will receive in exchange for her investment. Once the terms are
agreed upon, legal documentation, such as a shareholders' agreement, is usually drafted to
formalize the arrangement. Adelaide's investment is then transferred to the business, and
she is entitled to a share of the profits and any capital appreciation. As a shareholder,
Adelaide may be able to participate in decision-making processes and receive dividends
if the company is profitable. However, Adelaide's investment is at risk if the racing stable
does not perform, she may lose some or all of her investment if the business fails.
Crowdfunding
Crowdfunding is a practice that has been growing rapidly, particularly as a
popular way to fund a project or venture such as a startup company by raising many small
amounts of money from a large number of people using the internet. Crowdfunding sites
such as GoFundMe, Indiegogo, Kickstarter, and others reflect the growth in popularity of
this form of raising funds. According to the Canada Revenue Agency, depending on the
circumstances of the fundraising and the facts, the money raised could be seen as a loan,
a capital contribution in the form of equity, a gift, business income, or some combination
of these elements. In the context of a business, if the crowdfunding is for a new product,
service, or project, it would likely qualify as income for tax purposes.
In Canada, both private and public companies are able to raise funds by crowdfunding.
Financial statements and other necessary documents are required for this type of
corporate financing, and investors will be subject to limits on the amount of money they
may invest depending on their personal financial conditions and other factors. The
crowdfunding transactions are conducted through an online gatekeeper that is a funding
portal, independent of the issuer raising the funds, registered with the appropriate
government agency. Corporations considering this type of crowdfunding will need to
assess the benefits of being able to access a large pool of investors against the drawbacks
 of having a much larger number of shareholders with rights attached to their ownership
interest. Crowdfunding is governed by contract law, and it may be best to speak with a
lawyer if you are thinking of this form of financing.

Case 3
Kintook's 10-year-old IT security company, Security Focus First (SFF), has achieved great
success. It began as a sole proprietorship that later became a corporation which moved
progressively forward by obtaining financing from selling shares in the company to friends and
family. Now Kintook has been told by other successful CEOs that the time is ripe for SFF to
obtain more financing by "going public."
How should Kintook take his company public? What is involved? What advice would you give
to Kintook?
Answer 3
Kintook first needs to make his company listable company on a stock exchange to be able
to sell to the public at large. Here, the investor receives an ownership interest in the
company and its potential growth in exchange for the capital paid to buy the shares.
Those investors participate in the potential growth or failure of the business operation in
exchange for the capital paid to buy the shares. For example, investors might be offered
voting common shares in the corporation or preferred shares that carry a dividend but no
right to vote on who will be directors of the company. The shares that are issued and the
degree to which those shares can participate in making decisions will depend on whether
the company is a private corporation or a public company listed on a stock exchange, the
share structure of the corporation, and the type of financing the company wants to
undertake.
An initial public offering or listing a company on a stock exchange to be able to sell to
the public at large is complicated, requiring compliance with a very strict program of
disclosure under provincial and territory securities legislation and regulators. An offering
of this nature should be undertaken with the help of a lawyer. There are also some private
issuer exemptions available, but a strict set of criteria are applied if a closely held
corporation wants to use these exemptions. Selecting underwriters and investment banks
to manage the IPO process is vital for structuring the offering, setting the IPO price, and
allocating shares to investors. Throughout this process, it's important to consider the
impact on existing creditors and ensure their rights are protected. Choosing a stock
exchange for listing SFF's shares and complying with listing requirements is another
crucial step, involving the development of corporate governance policies and procedures
to meet ongoing reporting obligations and protect creditors' rights.
I would advice Kintook to maintain open communication and transparency with existing
creditors throughout the IPO process to building trust and addressing any concerns or
questions they may have. Post-IPO governance and risk management are also important
considerations, requiring the establishment of robust corporate governance practices to
protect creditors' rights and mitigate financial risks.
 Ultimately, Kintook should prioritize compliance with securities laws, protect creditors'
rights, maintain strong relationships with existing creditors, and plan for the future
implications of going public on SFF's financial position and operations. By carefully
navigating these steps and considerations, Kintook can successfully take SFF public in
Canada while safeguarding creditors' rights and ensuring compliance with regulatory
requirements.

Case 4
Aiping fulfilled her ambition to create artisanal breads and pastries by opening a bakery a year
ago. Although sales have been on the rise (excuse the pun) she is just meeting her operating
expenses, which for a business of this type in its first year is considered a success.
Aiping wants to purchase a second commercial baking oven that will cost $45,000 and has
arranged to meet with her banker to discuss a loan. First, Aiping approached Sigurd, a long-time
friend, and asked him to help her with the loan from the bank. "Need some dough, eh? Let me
think about it!" Sigurd replied.
a. Explain to Aiping the different ways in which Sigurd might help with the bank loan.
b. Identify and explain the issues Sigurd should be aware of before helping Aiping with the
bank loan.
c. Identify the concerns the bank might have with providing a loan to Aiping and make a
recommendation to the bank as to the best method to address these concerns.
Answer 4
a. Secured Credit (collateral requirement)
More commonly, the financial institution will want to have its loan secured against
some valuable property or asset of the borrower, as well as have the debtor's promise
to repay. The borrower's ability to repay is the primary interest of the lender; financial
institutions are in the business of lending money, not the business of taking property
and selling it to get the capital and interest owed. However, the reassurance provided
by the debtor giving the creditor the security of being able to claim and sell some
valuable asset of the debtor will sometimes make the difference as to whether a loan
will be made or not. The security is referred to as collateral and the creditor has the
right to take and sell the collateral and use the money to pay down or eliminate the
loan. A security interest in the collateral is created through an agreement between the
lender and the borrower, referred to as a security agreement, setting out the rights,
duties, and remedies available to both parties. It will usually take the form of a
general security agreement in which the borrower offers all or specific assets as
collateral for the repayment of the debt. If the collateral consists of a pool of assets
that may change from time to time (for example, the inventory of the business), it is
referred to as a floating charge. This type of arrangement allows the business to
continue to sell the secured assets in the normal course of business. When the loan is
repaid, the interest in the secured property reverts to the borrower. In the event of a
default under the loan the lender can sell the secured assets. If the sale proceeds are
not enough to eliminate the debt, the creditor can start a legal action for the balance
 owing based on breach of the lending agreement. The creditor must make a
reasonable effort to obtain a fair price for the asset being sold, which may be done at
public auction or possibly privately provided proper commercial procedures are
followed. If the sale results in funds that exceed the debt, the excess amount is paid to
the debtor. In the event, Sigurd could offer to provide collateral to secure the loan.
This could involve using personal assets, such as property or investments, as security
for the loan. By offering collateral, Sigurd would reduce the risk for the bank and
increase the likelihood of loan approval.

Guarantor or Co-Signer
Another form of security for a loan involves a third party acting as a guarantor or co-
signer for the debt.
Sigurd acting as a guarantor, agrees to pay the debt if the borrower defaults in
making the payment. The guarantee must be in writing, and until default occurs there
is no liability on the guarantor. In the event the debtor and creditor agree to change
the terms of the original loan without the written permission of the guarantor, the
guarantor is released from their obligation under the loan. If the borrower defaults and
the guarantor is called on by the creditor to pay the debt, the guarantor assumes the
rights of the original creditor to receive payment of the debt, or, if secured, to sell the
assets and apply the money against the debt.
If you have been asked to co-sign for a loan, it is because the person who is applying
for the loan does not have sufficient income or a reliable credit history to be able to
get the loan on their own. You are agreeing to pay off the debt if the primary borrower
is unable to do so and the lender does not need to demand payment from the primary
borrower first. A co-signer should actively ask questions and stay informed on the
status of the loan as long as it is outstanding.
As a co-signer, Sigurd is making himself responsible for the loan made to the
primary borrower as though the loan was made to you.

b. Before assisting Aiping with the bank loan, Sigurd should carefully consider several
important factors. First and foremost, Sigurd must understand the significant
financial risk associated with providing assistance. If Aiping defaults on the loan,
Sigurd may be held liable for repayment, potentially causing financial hardship or
even personal ruin. Sigurd should also be aware of the legal ramifications of co-
signing or providing collateral, as these actions legally bind him to the terms of the
loan agreement.

Sigurd should also assess the stability and viability of Aiping's business. While sales
are increasing, the fact that Aiping is only barely meeting operating expenses
indicates a level of financial fragility that may jeopardize her ability to repay the loan.
Sigurd must also consider the potential consequences for his relationship with Aiping.
Mixing financial matters and personal relationships can sometimes cause tension or
conflict, especially if there are difficulties repaying the loan or disagreements about
financial matters.
 Furthermore, Sigurd should assess his own financial situation and ability to bear the
potential risks. Providing assistance with a bank loan may have an impact on Sigurd's
creditworthiness and financial stability, especially if he needs to access credit or
secure loans for himself in the future. Sigurd should also seek professional advice,
such as speaking with a financial advisor or an attorney, to fully understand the
implications and risks of providing assistance.

c. The bank may have reservations about lending to Aiping for her bakery business,
especially given the fact that it has only been in operation for a short time and is
barely covering its operating expenses. For starters, the bank may question Aiping's
ability to generate enough revenue to repay the loan, particularly given the volatile
nature of the food industry and the competitive market for artisanal breads and
pastries. Furthermore, Aiping's limited business experience may raise concerns about
her company's stability and long-term viability, affecting her ability to repay the loan.

The bank may suggest alternative methods for mitigating the perceived risks. One
option is to require Aiping to provide a guarantor or co-signer with a stronger
financial position, who would be responsible for repaying the loan if Aiping
defaulted. This would provide the bank with additional security and increase the
chances of loan approval. Alternatively, the bank may offer Aiping a smaller loan
amount or a shorter repayment period to reduce the risk exposure.

The bank may request additional documentation from Aiping, such as cash flow
projections, business plans, and financial statements, to assess her company's
financial health and ability to repay the loan. This would give the bank more insight
into Aiping's business operations, easing concerns about her ability to meet her
financial obligations.
References
a. Nancy, M.B., Shane, A. E., & Craig, S. (2022). Canadian Business Law Today. McGraw
Hill.
b. OpenAI.(2024). https://chat.openai.com/c/7a681736-df38-4735-89e9-fc41fe46b0ca