Get (More) Security – Repeal of Bulk Sales Act (?)

The joy of Summer reading is that you don’t do everything in a rush and look at things more leisurely.  That was the case with recent legislation that is proposed by the Ontario government.  Bill 218 is an omnibus piece of legislation that seeks to do all sorts of things – clean up existing legislation, repeal old legislation, replace other legislation.  The Bill can be found here.

Now, this is not law yet and will not be for at least another couple of months until the Legislative Assembly comes back from its Summer break and looks at the legislation more closely, etc.  But what is interesting is the proposed repeal of the Bulk Sales Act in Ontario – which would be effected through Schedule 3 of Bill 218.  The Bulk Sales Act is very old legislation that is a holdover from a time long gone by that, for whatever reason, remained in Ontario while being jettisoned in all other Canadian provinces and Territories.

OK, a little background.  If I am the owner of a business (and it is a company) and I want to sell my business, I have two options: (a) sell my shares in the company; or (b) sell the assets of the business.  If I am a sole proprietor, then all that I can sell are the assets of the business.  Now, if I sell my shares (assuming that it is a company), any creditors of the business have no complaints.  Why?  Because the company has incurred the debt and the creditor has the right to sue the company if there is non-payment and ultimately look to seize and sell the company’s assets if judgment is obtained and there is still no payment on the debt.  The sale of shares merely changes who are the owners of the company but the company’s assets are still there to satisfy any judgment.  But what if it is an asset sale?  Let’s suppose that A sells the assets of her business to B for $100,000.  There is no requirement for A to make a public announcement of the sale.  As such, if C is a creditor of A’s business, in most instances C will not know about the asset sale until after A has already sold the assets to B.  And therein lies the problem.  C cannot say to B “Hey, you took those assets subject to my claims against the business, so I get to sue you.” because, in most instances, B will have no knowledge that C even exists – let alone that C is owed money by A.  In such a case, C will likely be found to be a “bona fide purchaser for value without notice” and any claims of C would likely fail.  So who can C sue?  Well, A, of course.  The practical problem, though, is that by the time that C has learned of the sale, A has already received the money and either spent it or gone off to somewhere else to retire and A couldn’t give a plug nickel (speaking very politely) about C or any amounts owed to C.

To address this problem where C could end up being stuck with a bad debt, the Bulk Sales Acts were enacted.  What the law provides is that if a business is selling its assets, then the vendor has to provide a list of all creditors to whom the vendor owes money.  This list, which is attached to an affidavit, is not only given to the purchaser, but is also filed in the Superior Court of Justice.  The law goes on to say that arrangements must be made to pay off the creditors on the list at or before the closing of the sale of the assets and that if these arrangements are not made, then the unpaid creditors may be able to go after the purchaser (B in my example above).  There have been criticisms of the legislation and one which springs to mind is that this legislation can create a false sense of security.  For example, suppose that Vendor A gives the list to Purchaser B, but Vendor A conceals the fact that creditors X, Y and Z are owed a lot of money.  X, Y and Z might think that they are protected by the Bulk Sales Act because they should be listed as creditors – and thus payment arrangements would be made.  But, unless B has some reason to suspect that A is lying (or failing to be complete) on the list, then X, Y and Z have no claims against B who accepted the list from A in good faith and filed the affidavit in the court.

At this point, then, it would appear that creditors in Ontario should start to take pages from their colleagues in other provinces.  How do you deal with a debtor who owes a lot of money and you are concerned might sell the business?  Take security and register it under the applicable personal property security regime in the province.  That way, if A tries to sell to B, then B will either do a search under the PPSA and require A to pay you out on your debt or, if not, then you will have rights to say that B took the assets subject to the security granted to you and you have a right to seize and sell those assets covered by the security if B does not pay you the debt.

When I was in law school in the early 1990s, I remember my professor saying that the Bulk Sales Act‘s days in Ontario and the Maritimes were numbered.  The Maritime provinces repealed their legislation in the late 1990′s and early 2000′s.  Ontario waited.  It looks like Ontario’s time has come.  Instead of waiting for this legislation to be repealed through Bill 218 either later this year or sometime next year, it is probably best to take a proactive approach.  If you have a sales contract that will be large, or you have an ongoing supply agreement where the debts could be substantial, you may want to think now about asking your customers for security agreements and registering those agreements, since the Bulk Sales Act is not likely to be around much longer to give any protection to unpaid creditors.

Something to think about.

CALC

 

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