The 2023 Annotated Bank Act (Thomson Reuters, 2022) is an essential companion for legal professionals which combines case law precedents with commentary. As part of a series highlighting important aspects of the Bank Act, this post will highlight some of the salient features of Part II – “Status and Powers.”
One of the most notable features is s 15(1) – “Corporate Powers,” which states that “bank[s] have the capacity of a natural person and…the rights, powers and privileges of a natural person.” Like Canadian corporations, banks are provided with the capacity of a natural person. Banks are further mandated to carry on business and exercise their powers only in accordance with the Act (s 15(2)).
What happens if a bank exercises their powers in a way which exceeds their authority under the Bank Act?
Importantly, the doctrine of ultra vires does not apply to banks (s 16). This old doctrine provided that actions in excess of a corporate entity’s authority were void for lack of legal capacity. The ultra vires doctrine introduced a lot of uncertainty in business dealings because it was difficult for third parties to know exactly what a corporate entity had the power to do, and not do.
Fortunately, today things are more straightforward. If a bank’s actions are found to be in breach of a restriction under the Bank Act, the bank can be made subject to various sanctions, including fines. Breaches of bank contracts are also subject to civil remedies (s 988 and Part XVII “Sanctions”). The modern approach is aimed at protecting a bank’s creditors, stakeholders, and consumers.
Similarly, shareholders of banks are not held liable for actions or defaults of the bank. Nor are members of federal credit unions liable for any act or default of the federal credit union. This is provided by ss 18(1) and 18(2), respectively. Ss 20(1) and 20(2) further establish the “indoor management rule” for banks, which permits a third party to assume that the internal procedures of the bank have been complied with. Of note, the terms of s 20 are nearly identical to the corresponding provision in the Canada Business Corporations Act.
Another key feature of Part II is s 21(1), which presents a “sunset clause” for the Act – a feature which is more-or-less unique to banking. Section 21(1) requires Parliament to pass new legislation within a given period to ensure the continuity of the Act and the business it permits. If the “sunset date” passes, Canadian banks and authorized foreign bank branches must cease business within Canada. And, like other sunset clauses, this notionally ensures that the Bank Act is reviewed regularly. However, the sunset date can be – and has been – moved by acts of Parliament, such as with Bill C-30, which received Royal Assent in 2021 and pushed back the sunset date for the Bank Act to June 30, 2025.
For further detail and commentary, including case law, regarding Part II of the Bank Act, check out pages 57-64 of The 2023 Annotated Bank Act (Thomson Reuters, 2022).