Borrowing powers of directors (CBCA section 189)

To check whether a federal corporation can borrow and grant security, read section 189 and then the corporation’s own documents. The section sets a default, and the corporation can change it.

What section 189 says

Unless the articles, by-laws or a unanimous shareholder agreement relating to the corporation otherwise provide, the directors may, without authorization of the shareholders, borrow money on the credit of the corporation; issue, reissue, sell, pledge or hypothecate its debt obligations; give a guarantee on behalf of the corporation to secure performance of an obligation of any person; and mortgage, hypothecate, pledge or otherwise create a security interest in all or any property of the corporation, owned or subsequently acquired, to secure any obligation of the corporation. Under subsection 189(2), on the same conditions, the directors may by resolution delegate those powers to a director, a committee of directors or an officer.

What to check or ask

• Whether the articles, by-laws or a unanimous shareholder agreement limit the power. Corporations Canada says such a provision is sometimes used to limit directors’ authority or to satisfy lending institutions.
• Which resolution approved this loan and the security, and who signed it.
• Whether the deal involves a sale, lease or exchange of all or substantially all the property outside the ordinary course. Subsection 189(3) requires shareholder approval for that, in accordance with subsections 189(4) to (8), which is a separate rule.

For what a lender may take as security, see what security a lender can take over the business. Board oversight of the numbers is covered in audit committee. This entry covers the Canada Business Corporations Act only; check which statute governs the company.