B. Permitted Business

AuthorM.H. Ogilvie
ProfessionLSM, B.A., LL.B., M.A., D.Phil., D.D., F.R.S.C. Of the Bars of Ontario and Nova Scotia Chancellor's Professor and Professor of Law, Carleton University
Pages150-159

Page 150

1) Operating Branches

Although no longer expressly empowered to operate from branches, there can be no doubt that banks are permitted to do so, since the Act contains a definition of a branch and also makes frequent reference to branches. "Branch" is defined as an agency, a head office, or any other

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office of a bank.7

There are approximately 12,000 branches in Canada, as well as 16,160 automated banking machines.8

A branch has no legal identity separate from the bank; it is simply a part of the body corporate of the bank.9

This means that customer accounts kept at separate branches may be consolidated to determine the net balance between bank and customer, subject to any contractual agreement to the contrary.10

Secondly, a bank may be deemed to be resident for legal purposes in every jurisdiction where it has a branch regardless of the jurisdiction of the head office.11

Thirdly, a bank may pay out funds from an account at one branch at another branch of the bank, although the situs of the indebtedness to the customer is at the branch of the account.12

On the other hand, branches have been treated as separate entities by the courts for certain practical purposes. First, each endorsing branch of a bank is entitled to separate notice of dishonour of a cheque so that it may reverse its accounts.13

Secondly, a bank is entitled to pay out funds from an account only at the branch of that account and not at any other branch.14

Thirdly, a customer is required to place a stop-payment order on a cheque only at the branch of the account and not at any other branch.15

Fourthly, branches are deemed to be separate for the purposes of a writ or process originating a legal proceeding or in pursuance of a legal proceeding; an order or injunction; an instrument purporting to assign, perfect, or otherwise dispose of an interest in any property or deposit account; or an enforcement notice for a support or-

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der.16

Fifthly, branches are deemed to be separate for the purpose of determining the situs, or the locality, of the indebtedness represented by a deposit in a deposit account.17

Sixthly, branches are treated as separate entities for the purpose of knowledge of customer business carried on at a particular branch, so that another branch is not deemed to have constructive notice of that business.18

In none of these cases have the courts doubted the principle that a branch is a part of the whole bank; rather, branches have been treated as if they were separate entities for specific, purely commonsense reasons.

2) Borrowing and Dealing in Money

Previous Bank Acts expressly listed borrowing money and dealing in bills, notes, coins, bullion, and securities as parts of the business of banking, but since 1991, this is no longer the case. It is self-evident that banks engage in, and have long engaged in, these activities, since they are at the heart of banking. Deposit taking is the most obvious example of borrowing money, and the economic value in which banks deal may come in the form of bills, coins, bullion, or securities. Borrowing need not be secured, but both the Bank Act and the Office of the Superintendent of Financial Institutions (OSFI) place numerous restrictions on bank borrowing in its many manifestations.19

3) Lending

As with borrowing money, lending money has long been a core part of banking business at common law before the Bank Acts and since the beginning of banking in the West. Loans may be unsecured or secured and, generally speaking, may be on such terms as the bank negotiates with the borrower. The Bank Act places certain restrictions on the lending powers of banks in relation to certain categories of loans, for example, in relation to self-dealing by related parties20or property-value ceilings in residential mortgage lending21or cost-of-borrowing disclosure requirements.22

Otherwise, the core terms of any loan, such as the

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amount, the nature of the security taken, and the repayment terms, are subject to negotiation. A lending bank’s duties to the borrower are restricted to providing loans within the parameters of sound banking practice, complying with the lending agreement, and enforcing that agreement in accordance with its terms.23

In addition to enforcing a lending agreement according to its terms, the common law also requires lenders, including banks, to give a borrower notice of any contractual requirement to repay and a reasonable time within which to repay, prior to taking legal steps to enforce repayment including the seizure of any property for which the contract provides.24

Reasonable notice must be given even where the loan is payable on demand.25

What is reasonable notice depends on the circumstances of the case and may vary from a few hours to several weeks.26

The goal is to permit the borrower sufficient time to repay or to persuade the bank that the borrower has access to other funds with which to repay shortly. An exception to the reasonable notice requirement is the loan represented by a line of credit extended to a customer for which a bank need not give notice of an intention to terminate in the absence of a contractual term to the contrary because a line of credit is typically extended "at the pleasure" of a bank.27

The Bank Act contains specific provisions relating to securing loans on both personal and real property. Earlier Bank Acts had placed restrictions on bank lending secured by interests in real property, but since 1980, have provided broad powers to take security on real property. A bank is permitted to hold, manage, and otherwise deal in real

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property,28but in respect to residential mortgages, the Act continues to place some restrictions on banks’ lending powers. The Act prohibits a bank from making a loan on the security of residential property if the amount of the loan, together with the amount of an outstanding mortgage of equal or prior claim against the property, exceeds 80 percent of the value of the property at the time of the loan.29

There are four statutory exceptions to this maximum value requirement: (i) loans guaranteed under any federal legislation, which provide for a different limit on the value of the property; (ii) loans for which repayment of an amount in excess of 75 percent is guaranteed or insured by a government agency or an OSFI-approved private insurer; (iii) loans for which the bank acquires from an entity other securities against any residential property; and (iv) loans secured by a mortgage taken back by the bank on a property disposed of by the bank when the mortgage secures the payment of an amount payable to the bank for the property.30

This fourth exception permits banks to take any interest in property in order to secure a previous loan for which it may subsequently require additional security.

The Bank Act also places a limitation on the total value of a bank’s interests in real property that have an indirect effect on the legal power of a bank to make secured loans on real property on an individual basis. Thus, a bank and its subsidiaries are prohibited from acquiring interests in real property if the aggregate value of all those real property interests exceeds a percentage of the regulatory capital as prescribed by OSFI.31

When a bank exceeds the statutory ceilings in relation to loans secured on real property, the mortgage is valid as between bank and mortgagee,32but the bank would be subject to the provisions in the Bank Act sanctioning breaches of the Act.33

The Act also makes provision for banks to secure loans on personal property by stating that the rights, powers, and privileges that a bank

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has pursuant to the Act in respect of real property on which it has taken security are also enjoyed in respect of any personal property on which it has taken security.34

Clearly, the restrictions relating to residential mortgages do not apply, so banks are essentially empowered to take any type of security known to the law on personal property to secure a loan.

Whether a bank secures a loan on real property or on personal property, it would normally comply with local lending practices and register that security in local personal and real property security registries as provided in provincial legislation.

4) Providing Guarantees

Another aspect of banking business probably covered by the rubric in section 409(2)(a) "providing any financial service" is that of providing guarantees. Banks have long done so, but express permission to do so was not incorporated into the Act until 1980. The power to provide guarantees is subject to three restrictions: (i) the sum of money guaranteed must be a fixed sum with or without interest; (ii) the person guaranteed must have an unqualified obligation to reimburse the bank for the full amount; and (iii) where the person guaranteed is a subsidiary of the bank, the sum need not be fixed.35

There are no further requirements36for guarantees in relation to such issues as the repayment obligations, taking security, or ceilings on the sum guaranteed.

5) Acting as a Financial Agent

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