Securing capital is a major milestone for any growing business. Whether you are a startup looking for seed funding or an established corporation seeking a line of credit. However, during due diligence, lenders often request a specific document that leaves many founders scratching their heads: the Borrowing Bylaw.
At CoLex Legal, we often help clients draft these documents to satisfy lender requirements or protect shareholder interests. Here is everything you need to know about borrowing bylaws in Canada.
What is a Borrowing Bylaw?
A borrowing bylaw is a corporate governance document that explicitly outlines how a corporation borrows money. It sets the rules for who can sign loan agreements, who can pledge company assets as security, and the limits on those powers.
Do Corporations Need a Bylaw to Borrow Money?
Technically, no.
Under both the Canada Business Corporations Act (CBCA) and the Ontario Business Corporations Act (OBCA), a corporation has the rights, powers, and privileges of a "natural person." This means that, by default, a corporation automatically has the legal power to borrow money upon incorporation.
However, just because a corporation can borrow money does not mean it should not have rules regarding how it does so.
Why Have a Borrowing Bylaw?
If the power to borrow is automatic, why go through the trouble of passing a bylaw? There are two primary reasons: Lender Confidence and Shareholder Control.
1. Satisfying Lenders (The "Bank Requirement")
This is the most common reason clients contact us. Before a bank or private lender advances funds, they want assurance that:
- The corporation has validly authorized the loan.
- The person signing the documents has the authority to bind the company.
Lenders often refuse to rely solely on a corporation's general "natural person" powers. They prefer to see a specific Borrowing Bylaw (often accompanied by a certified copy of a board resolution) to ensure the transaction is airtight and cannot be challenged later.
2. Protecting Shareholders (Governance)
Without a borrowing bylaw, the Directors generally hold all the power.
Unless the Articles of Incorporation or a Unanimous Shareholder Agreement (USA) say otherwise, directors can borrow money or mortgage company property without asking the shareholders for permission.
Shareholders who want to restrict the board's spending power may enact a borrowing bylaw to:
- Set a maximum debt cap (e.g., directors cannot borrow over $50,000 without shareholder approval).
- Require specific authorization for granting security interests (collateral) over company assets.
What Does the Bylaw Include?
A standard borrowing bylaw typically includes provisions detailing:
- Authorization: Who can authorize borrowing on the corporation’s credit?
- Security: Who can authorize the creation of a security interest (collateral) in the corporation’s property?
- Delegation: How are these powers exercised, and can they be delegated to officers (like a CEO or CFO)?
- Limits: Are there monetary caps on how much can be borrowed?
The Default Rule: What Happens Without a Bylaw?
In the absence of a borrowing bylaw, a Unanimous Shareholder Agreement, or specific restrictions in the Articles:
- Directors have full control. They can borrow money and pledge assets as they see fit.
- Delegation is permitted. Directors can delegate these borrowing powers to a specific director, committee, or officer of the corporation.
While this flexibility is great for small, single-owner corporations, it can pose a risk in multi-shareholder companies where owners want oversight on debt.
Alternatives to a Bylaw
A borrowing bylaw is not the only way to regulate debt. Shareholders can also control borrowing through:
- Articles of Incorporation: Placing restrictions directly in the articles (harder to change than a bylaw).
- Unanimous Shareholder Agreement (USA): A contract among all shareholders that restricts the powers of the directors.
Summary: When to Call a Lawyer
| Scenario | Recommendation |
| Applying for a Business Loan | You will likely need a Borrowing Bylaw to satisfy the bank. |
| Multi-Shareholder Company | You should consider a bylaw or USA to prevent directors from over-leveraging the company without approval. |
| Sole Director/Shareholder | A general borrowing resolution may suffice, but having a standard bylaw is good practice for future growth. |
FAQ: Borrowing ByLaw
Technically, yes. Under the Ontario Business Corporations Act (OBCA) and the Canadian Business Corporation Act (CBCA), a corporation has the "capacity of a natural person," which includes the power to borrow. However, banks and financial institutions rarely rely on this default power. They want a specific bylaw to prove the corporation has formally authorized its directors to incur debt and pledge company assets as collateral.
It is a two-step legal process:
a. The Directors: The board must "enact" the bylaw via a resolution.
b. The Shareholders: The shareholders must "confirm" the bylaw, typically by a majority vote at a meeting or by signing a written resolution.
Absolutely. While many standard bylaws give "full power" to the board, you can customize your Borrowing Bylaw to include a debt cap. For example, you could require that any loan over $100,000 be approved by a specific shareholder vote. This is a common way to protect investors in multi-shareholder companies.
Even if you are the only director and the only shareholder, banks may still insist on seeing a Borrowing Bylaw in your Minute Book. It ensures that the "Corporate Veil" is maintained, showing that the company is acting as a distinct legal entity rather than an extension of your personal finances.
Typically, the President and the Secretary of the corporation sign the bylaws. It is then kept in the corporation's Minute Book, and a certified copy is usually sent to the bank as part of the loan closing package.
How CoLex Legal Can Help
Lenders are notoriously strict about corporate documentation. A missing or poorly drafted Borrowing Bylaw can delay your funding by weeks. CoLex Legal drafts robust borrowing bylaws, reviews lender requirements, and advises founders on proper corporate governance.
Is your corporation planning to apply for a line of credit or a mortgage? Contact CoLex Legal today to ensure your corporate records are in order before you head to the bank.
Contact Us
- Phone: 613-558-5363
- Email: info@colexlegal.ca
Disclaimer: This post provides general information and does not constitute legal advice. For specific legal questions regarding corporate governance or commercial lending, please contact our office.