This article briefly discusses what a borrowing bylaw is, when it is required, its content and alternatives.

What is a borrowing bylaw?

It is an important document of a corporation, which outlines how the corporation borrows money.

Power to Borrow Money

A corporation has the capacity and powers of a natural person, including entering into a contract to borrow money¹, and does not necessarily have to pass a bylaw to confer these powers on the corporation². The power to borrow money is automatically vested in a corporation once it is incorporated.

Why Does a Corporation Need a Borrowing Bylaw?

A corporation may enact a borrowing bylaw in the following situations:

• To give the shareholders control over the corporation’s borrowing process: Under the Ontario Business Corporations Act³, the Canada Business Corporations Act, and several other provincial business corporations acts, unless the articles, bylaws or a unanimous shareholder agreement of the corporation provides otherwise, the directors do not need the shareholders' authorization to borrow money upon the credit of the corporation. Therefore, to regulate the directors’ powers to borrow money upon the corporation’s credit or create a security in any of the corporation’s assets, the shareholders may enact a borrowing bylaw.
• To satisfy a lender's condition in a corporate finance transaction: To ensure that it is dealing with the right persons, most lenders will ask for a copy of a corporation’s borrowing bylaw before lending money to a corporation.

Provisions of a Borrowing Bylaw

A borrowing bylaw will contain the following provisions:

1. Who can authorize the borrowing of money upon the credit of the corporation
2. Who can authorize the creation of a security interest in any of the corporation’s property
3. How these powers are exercised
4. Authorization limits, when applicable.

Alternatives to a Borrowing Bylaw

Apart from a borrowing bylaw, the shareholders may regulate how a company borrows money using the articles of incorporation or a unanimous shareholder agreement.

How a Corporation Borrows Money in the Absence of a Borrowing Bylaw

In the absence of a borrowing bylaw or borrowing provision in the articles or unanimous shareholder agreement, the directors have the powers to borrow money in the credit of a corporation or create a security interest in any of the corporation’s property are vested in directors have the power to borrow money upon the credit of the corporation. The directors may delegate these powers to a director, a committee or an officer of the corporation.

Cozien Law would be pleased to draft a borrowing bylaw or advise on how to regulate your corporation’s borrowing powers. Reach out to us by calling 819-230-7116 or emailing us at info@cozienlaw.com.

[This post does not constitute legal advice or opinion; please reach out if you have any questions]

1. Section 15, Business Corporations Act, R.S.O. 1990, c. B.16 (OBCA); Section 15(1), Canada Business Corporations Act, R.S.C., 1985, c. C-44 (CBCA) ↩︎
2. Section 17, OBCA; Section 16(1), CBCA ↩︎
3. Section 184(1), OBCA; Section 189(1), CBCA ↩︎