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This document was prepared by the staff of the Parliamentary Research Branch to provide Canadian Parliamentarians with plain language background and analysis of proposed government legislation. Legislative summaries are not government documents. They have no official legal status and do not constitute legal advice or opinion. Please note, the Legislative Summary describes the bill as of the date shown at the beginning of the document. For the latest published version of the bill, please consult the parliamentary internet site at www.parl.gc.ca.

LS-310E

TABLE OF CONTENTS

INTRODUCTION

DESCRIPTION AND ANALYSIS

COMMENTARY

BILL S-9: AN ACT RESPECTING DEPOSITORY BILLS AND DEPOSITORY NOTES
AND TO AMEND THE FINANCIAL ADMINISTRATION ACT

INTRODUCTION

Bill S-9, An Act respecting depository bills and depository notes and to amend the Financial Administration Act, received first reading in the Senate on 3 December 1997. A similar bill had been introduced in the House of Commons as Bill C-90 on 13 March 1997, but died on the Order Paper with the dissolution of the Thirty-Fifth Parliament.

The federal Bills of Exchange Act⁽¹⁾ (BEA) governs the form of and dealings with financial instruments such as bills of exchange, cheques and promissory notes. Essentially, a bill of exchange is an unconditional order to pay money. Section 16 of the BEA sets out the following definition of a bill of exchange:

A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person or to bearer.

A promissory note is a credit instrument. It too is defined in the BEA as follows:

A promissory note is an unconditional promise in writing made by one person to another person, signed by the maker, engaging to pay, on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person or to bearer.⁽²⁾

The BEA provides that bills of exchange and promissory notes are incomplete unless delivered. Delivery of an instrument is defined as the transfer of possession, actual or constructive, from one person to another.⁽³⁾ The BEA requires the bearer of a bill or note payable to bearer to have possession of the particular financial instrument.

Bill S-9 would modernize federal legislation with respect to the ownership of certain financial instruments. The BEA is rooted in the notion that the possession of financial instruments must physically change; it does not contemplate the modern practices of holding instruments in a "clearing house" or "depository" and of transferring ownership by means of a book entry in the records of the clearing house. The bill sets out the proposed rights and responsibilities of buyers, sellers, and holders of these instruments in order to accommodate the use of depositories and book-entry transfers.

DESCRIPTION AND ANALYSIS

Bill S-9 would create two new securities that could be used in debt markets ¾ depository bills and depository notes. The most common financial instruments to be covered by the bill would be bankers’ acceptances⁽⁴⁾ and commercial paper.⁽⁵⁾

Like a bill of exchange, a depository bill would be an unconditional order in writing that would require the person to whom it was addressed to pay a particular amount of money at a determinable future time to, or to the order of, a specified person. However, Bill S-9 provides that a depository bill would also have to be:

• accepted unconditionally by the signature of the person to whom it was addressed;

• marked as being a depository bill within the meaning of the Depository Bills and Notes Act;

• not marked with words that would prohibit its negotiation or transfer;

• made payable originally or by endorsement to a clearing house; and

• deposited with the clearing house to which it was made payable (clause 4).

A depository note would have essentially the same characteristics as a promissory note under the BEA but would also be required to be:

• marked as being a depository note subject to the Depository Bills and Notes Act;

• not marked with words that would prohibit its negotiation or transfer;

• made payable originally or by endorsement to a clearing house; and

• deposited with the clearing house to which it was made payable (clause 5).

A depository bill or note would be an instrument that would be held by a clearing house and traded in a book-entry system operated by the clearing house. A transaction related to a depository bill or note held by a clearing house would be effected by making the appropriate entries in the records of the clearing house. This would have the same effect as the delivery of a bill of exchange in bearer form under the BEA. The completion of a transaction would not depend on having physical possession of the instrument. The participant (a person who had entered into a membership contract with a clearing house) in whose favour a transaction was effected would be deemed to be in possession of the bill or note (clause 8). The Bills of Exchange Act would not apply to depository bills and notes (clause 6).

Bill S-9 also deals with situations where there might be many depository notes or bills that were equivalent. Transactions related to like depository bills or notes or related interests in such instruments could be recorded by a clearing house as part of a "fungible bulk" and entries could refer to a quantity of such instruments. Entries could also be made on a net basis where there was more than one transaction. The bill defines "fungible bulk" as a bulk of depository bills or notes of which any unit is, by usage of trade, the equivalent of any other unit (clause 9).

The proposed liabilities and enforcement obligations relating to depository bills and notes are set out in clauses 11 to 18 of the bill.

An acceptor (the person to whom a bill was addressed and who signed it) of a depository bill would be liable to provide the clearing house to which the bill was payable with funds to pay the participants who had an interest in the bill (clause 11). If the acceptor dishonoured a bill, the drawer (the person who addressed the bill) of the bill would be liable to pay the required amount to the clearing house (clause 12). Furthermore, if the bill were dishonoured by both the acceptor and the drawer, every endorser (a person who signed a depository bill otherwise than as an acceptor or drawer) would be jointly and severally liable to pay the amount of the bill to the clearing house (clause 13).

Similarly, the maker of a depository note would be liable to provide the clearing house with the funds necessary to pay the note and any interest thereon on the note’s due date (clause 14). Endorsers of the note would be jointly and severally liable to pay if the maker dishonoured it (clause 15).  A party who was liable and made final and irrevocable payment of amounts owing to a clearing house on the due date of a depository bill or note would be discharged of that liability to pay (clause 17).

Subject to certain exceptions set out in the bill, a clearing house would be required to enforce payment of a depository bill or note for the benefit of each participant who had an interest in it. If the clearing house did not fulfil this requirement within a reasonable time, any participant who had an interest in the bill or note in question could bring an action in the name of the clearing house (clause 18).

The fact that a depository bill or note was payable to a clearing house would not give the clearing house a beneficial interest in the bill or note (clause 19). Subject to two exceptions, any defence that affected a bill or note or the liability of any party to pay it would not apply to a clearing house. Excepted would be the defences that the signature of the party liable to pay had been forged or unauthorized or that the bill or note was counterfeit or had been materially altered without consent of the party liable to pay it (clause 20(1)).

Clause 21 would amend section 70 of the Financial Administration Act⁽⁶⁾ (FAA) to provide that Part VII of the FAA, which deals with the assignment of Crown debts, would not apply to securities issued under Part IV of that Act. Section 70 of the FAA now states that Part VII does not apply to negotiable instruments or Crown debts incurred by corporations set out in Schedule III of the Act. Among other things, Part IV of the FAA deals with the authority of the federal government to raise money through the issuance and sale of securities and treasury bills or notes. The amendment would ensure that securities could be assigned and would not be subject to the limitations pertaining to the assignment of Crown debts contained in Part VII.

COMMENTARY

Bill S-9 would create a regime outside the Bills of Exchange Act for instruments to be known as depository bills and depository notes. These instruments would be held by a clearing house and traded in a book-entry system. Only instruments that fell within the definitions contained in the bill would be subject to the regime. The bill would enable financial instruments such as bankers’ acceptances and commercial paper to be traded in the Canadian Depository for Securities.

The bill seeks to update federal legislation dealing with the transfer of ownership of certain financial instruments so as to reflect the practice of holding instruments in a depository and transferring ownership through book entries rather than by physical possession.

The bill is likely to be well received by the business and financial community as increasing numbers of financial transactions become subject to book-entry record systems.

(1) R.S.C. 1985, Chap. B-4.

(2) Ibid., s. 176(1).

(3) Ibid., s. 2.

(4) A banker’s acceptance is a time draft drawn on a bank ordering the bank to pay a specified amount to the holder of the draft at the time of its maturity. When a bank accepts the borrower’s draft, the borrower usually arranges its sale to a money market dealer, who may hold it or resell it. H.H. Binhammer, Money, Banking and the Canadian Financial System, Fifth Edition, Nelson Canada, 1988, p. 81.

(5) Ibid. In certain situations where non-financial corporations borrow funds for short periods, they issue notes, referred to as commercial paper, through investment dealers, who may act as agents or as principals purchasing it for subsequent resale.

(6) R.S.C. 1985, Chap. F-11, as amended.