Question

George Smith was the sole director and only shareholder of Chameleon Construction Ltd. When the construction industry was strong he borrowed $250,000 from the bank. The security agreement gave the bank a fixed charge against the following assets:

1. Crane truck which was purchased for $35,000;

2. Framing machine which was purchased for $125,000;

3. Cutting machine which was purchased for $50,000.

 

The bank registered the security agreement on March 1. However, the serial number of the Crane truck was improperly transcribed. The bank then advanced all the funds. In October the bank manager became concerned about the money lent. The construction industry was in a recession because of high interest rates and the new G.S.T. The bank manager received a directive form the bank's head office telling all bank managers that outstanding loans to construction companies must be reduced by 30%. The bank manager then gave George an unlimited guarantee for all of the loans of the company and required he, his wife and his father to sign it. George took it home where he, his wife and his father signed it after George said to them that it was a temporary loan to the company. The guarantee was returned to the bank manager. The company continued to make all payments as they became due to the bank. However, the rent on the premises which held the framing and cutting machine fell into arrears in the sum of $20,000.

 

Two weeks later the bank manager, following the directive, demanded that George repay $75,000 of the outstanding loan. The company did not have the money at the time but George endorsed a cheque in the sum of $25,000, which he received from the owner for job site 1, but told the bank that they were not to cash it because the cheque was conditional on completing that job. The company then assigned all of the proceeds for job site 2 ($50,000) to the bank. George told the bank manger that that job would not be completed and the moneys would not be due and owing until December 27.

 

Sensing pending difficulties George went to Lender 2 and borrowed $40,000 and gave it to his wife. Lender 2 knew of the previous security agreement with the bank but when it did a computer search, he discovered the error in the serial number. This security agreement took as collateral the crane truck and all accounts receivable. It was properly registered. The next day the bank called the loan and immediately appointed a receiver. The landlord seized the cutting machine and refused to let the bank sell it. The bank sold the framing machine to another customer of the bank for $30,000.

 

Discuss all of the claims, counter claims, defence and remedies which can be raised by various parties.

Answer 1

1. Bank

A Corporation is a legal body that operates solely in the light of statute and, in the case of its actual absence, it cannot handle its activities on its own under which it appoints the Board of Directors that performs its activities on behalf of the Business. The corporation and officers have a partnership as principal and employee who operate toward the organization's successful activity in comply with laws and regulations. The Corporate Legislation includes a structure under which a business will act and include the policy to be implemented as well as the firm's legal duty and the members' obligations to the stakeholder and the client. This gives the directors some authority to work on behalf of the organization and authorizes them to work within the assigned powers and to perform their obligations. These powers shall involve investing or leasing money or other properties for the project and shall enter into negotiation with the outside parties. As long as directors perform their duties within limits, they cannot be held liable for any act against them. For situations where a corporation has refused to perform any obligations and has been compliant with the fees negotiated by any deal with an third entity, it shall be responsible to compensate any penalty to the group caused by any other non payment. A director should give the client a guarantee with consideration or without consideration, if it sees appropriate, the manager is directly responsible for every other assurance that he gives. Collateral is an collateral where a creditor has promised to a lender before a loan is repaid.... Borrower and lender must be very explicit about what they mean by the promised asset: contract law usually offers guidelines in this respect, at least in the formal financial industry. The lander shall assume over the properties of any borrower backed by collateral protection in the case of non-payment of the borrower or interest thereof.

 

It is under director's authority to borrow money as defined for the business under the cap. So Mr. George Smith is allowed to borrow $2,50,000 from the company's fund. The company has been paying all the instalments as and when due from the start of the loan arrangement. Yet later on, the bank manager issued the memorandum in the month of October recommending reducing unpaid sums lent to the lenders in the building sector owing to a slowdown in the business. Yet at the point George could not manage the sum requested by the client in one go alone. Therefore, the bank manager took 3 assurances from him, his wife and his father in favor of the advanced loan upon common agreement. This helps the director to be kept directly accountable for the company's allegations. That he'd written a informal pledge. And the bank is demanding the company's unpaid number. The bank eventually sold the framing system for $30,000 to another Bank client.

 

Defense: -

Nevertheless, if the earlier payments were collected on schedule by default, the corporation as the claimant will seek an extension of the period for restitution. Request for a stay on the selling of the framing system and Receiver appointment fee. As the organization is yet to be found insolvent.

 

2. The Landlord

The landlord of the premises that held the framing and cutting machine can claim $20,000 in rent arrears. For which he seized the cutting machine (which the company bought for $50,000) and refused to let it sell to the bank. The behaviour of the lender is wrong as the value of the loan cannot be secured against any properties that are not protected properties in a bank arrangement. The landlord cannot seize any assets that are already under bank loan collateral, the bank may sue the landlord for any such seizure. The owner will blame the corporation for his tenants being irrecoverable.

 

Defense:

Here anyway, the client will apply to free the framing unit because the owner wrongly confiscated it. If such clause was mentioned in their agreement, the landlord can ask for some additional security.

 

3. The Lender 2

The Lender 2 advanced the $40,000, and took the crane truck (which was purchased for $35,000) and all receivable accounts as collateral. He signed up for the loan arrangement. Yet he wrongly took the same crane truck which was initially held to the bank as security owing to the flaw of matching the vehicle's serial number. The bank's protection was misunderstood because a common commodity should not be leverage to two separate loans. The consequence would be ownership disputes in the event of non-payment of the loans. And the above mentioned properties are already pledged under the first lander's cover, such that the latter may be sued by the first lender bank on the basis of an arrangement between the parties.

 

Defense:

Here, the company should have explained the presence of the single crane truck to the applicant. Also, as lender was already informed of the reality of the protection arrangement with the bank, he should have asked more regarding the amount of crane trucks under George 's control.

a. Bank

A Corporation is a legal body that operates solely in the light of statute and, in the case of its actual absence.