Legal Updates

Perry _work (1)

Update

Monday, July 11, 2016

Could this finally be farewell to the last remaining bulk sales legislation in Canada? On June 8, 2016, Bill 218 entitled the Burden Reduction Act, 2016 passed its first reading in the Ontario Legislature. If passed into law, the bill will repeal the 99-year-old Bulk Sales Act, R.S.O. 1990, c.B.14(the “BSA”).

Historical Background

Bulk sales legislation was first enacted in the 1890’s in the United States. Wholesalers who sold goods on credit to retail merchants complained of a fraudulent practice that was apparently becoming more and more prevalent: merchants selling their entire stock of goods to third parties for cash and disappearing soon thereafter, leaving creditors unpaid, with little to no recourse after the dust had settled. As a result, creditors were searching for a way to challenge such "bulk sales" that did not require proof of a buyer’s actual knowledge of the intention to defraud a seller’s creditors. The solution? Impose a positive obligation on the buyer in a transaction in respect of the seller’s creditors. Legislation to accomplish this result was passed by state legislatures at the turn of the century. Canadian creditors sought similar protection and bulk sales legislation in Canada followed shortly after its adoption in the United States.

The current version of the BSA was adopted in 1959. Over the years, bulk sales legislation in the various jurisdictions across North America, including in Ontario, has typically shared two key characteristics. First, it made it more difficult for business owners to sell tangible business assets and suddenly abscond with the proceeds without first paying their creditors. Second, it invalidated the title of the bulk sale purchaser as against the seller’s creditors unless certain steps were taken prior to the sale taking place. However, Canadian bulk sales legislation in particular, including the BSA, often placed an additional burden on buyers in Canada, which was that buyers would also be required to either satisfy themselves that sellers’ debts had all been paid, or take steps to ensure that the proceeds from a sale were distributed among sellers’ creditors, rather than pocketed by the sellers themselves.  

Section 1 of the BSA sets out that every sale of stock in bulk that is “out of the usual course of business or trade of the seller” is subject to the provisions of the BSA, which broad definition has had many buyers (and their respective legal counsel) over the years scratching their heads to determine if a transaction triggers the requirement to comply with the provisions of the BSA, or, failing which, what the consequences of non-compliance would be.

Today, Ontario remains the only Canadian jurisdiction that has retained its bulk sales legislation. All other Canadian provinces and territories have repealed similar legislation, whereas south of the border, 44 out of 50 U.S. states have repealed theirs. The primary reason cited for such widespread repeal is that bulk sales legislation achieves its goals “only at the costs of significant commercial inconvenience, disruption, and expense” (National Trust Co. v H&R Block Canada Inc., [2003] 3 SCR 160).

The Repeal

Compliance with the BSA can add significant costs and delays to M&A asset purchase and sale transactions: a concept which the drafters of Bill 218 seemed to be keenly aware of. The burdens associated with the BSA are heightened due to the fact that it undermines transaction finality, contributes to an inefficient use of scarce judicial resources, and is inconsistent with the commercial practices observed elsewhere.

Those in favour of repealing the BSA often point to the fact that the purpose of the BSA can generally be achieved through the operation of other, more modern statutes. Even after Bill 218 becomes law, such existing legislation will remain in place and will serve as protection to creditors going forward. Creditors in Ontario will still have a variety of protections available to them at both the provincial and the federal levels, including the following:

At the provincial level:

  • The Personal Property Security Act, R.S.O. 1990, c. P.10 (the “PPSA”) enables a supplier of goods to obtain security in the goods provided to both commercial customers and consumers. In contrast, the BSA only applies to the disposition of the tangible property of a business. Under the PPSA, a supplier can take and perfect a super-priority purchase-money security interest (PMSI) in the goods (equipment, vehicles and inventory) it supplies.
  • The Fraudulent Conveyances Act, R.S.O. 1990, c. F.29 assists a creditor to recover real or personal property that the debtor has conveyed or transferred to others with the intent to defeat, delay or defraud the rights of creditors or others.
  • The Assignment and Preferences Act, R.S.O. 1990, c. A.33 gives one group of creditors the right to recover property that a debtor transfers to one or more of its other creditors in preference to the complainant creditors.
  • The Absconding Debtors Act, R.S.O. 1990, c. A.2 provides a mechanism for seizing real or personal property in Ontario if a resident of Ontario leaves the province with the intent to defraud his/her creditors.
  • A Mareva court injunction/orderis generally sought by a plaintiff prior to trial with the goal of preventing a defendant from dissipating assets in response to the threat of litigation and effectively precludes the defendant from transferring or liquidating any assets other than in the ordinary course of business.
  • Under the Business Corporations Act, R.S.O. 1990, c. B.16 (the “OBCA”), suppliers have been able to obtain remedies under section 248 (oppression remedy) and section 246 (derivative action) if the corporate debtor is incorporated or continued under the OBCA.

At the federal level:

  • Under section 96(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”), in the case of a transfer at undervalue, a court can either void a transfer at undervalue, or order a party to the transfer and/or any other person who is privy to the transfer, to pay to the trustee in bankruptcy the difference between the fair market value of the property or services sold or disposed of by the debtor and the actual consideration given or received by the debtor.
  • Under section 81.1(1) of the BIA, a supplier or distributor of goods may, in certain circumstances, repossess goods that it has delivered to a customer who later becomes bankrupt or placed into receivership.
  • Under the Canada Business Corporations Act, R.S.C. 1985, c. C-44 (the “CBCA”), suppliers have obtained remedies under section 241 (oppression remedy) and section 239 (derivative action) if the corporate debtor is incorporated or continued under the CBCA.

Moving Forward

Bill 218 has passed its first reading and will be referred to a committee of the legislature for further review prior to being voted on and passed into law at a later point in the current legislative session. The future of bulk sales legislation in Ontario (and in Canada for that matter) appears to be a bleak one; however, its demise may not be met with much sorrow.

This update is intended as a summary only and should not be regarded or relied upon as advice to any specific client or regarding any specific situation.

If you would like further information regarding the issues discussed in this update or if you wish to discuss any aspect of this commentary, please feel free to contact us.