Uprooted Priorities: What the Financial Protection for Fresh Fruit and Vegetable Farmers Act Means for Lenders

Lenders to food packaging and processing companies may find that amendments (the “Amendments”) to the Bankruptcy and Insolvency Act (the “BIA”) and the Companies’ Creditors Arrangement Act (the “CCAA”), implemented by the Financial Protection for Fresh Fruit and Vegetable Farmers Act (the “Farmers Act”), have spoiled long-held assumptions about priorities and recoveries.[1]

The Farmers Act, which came into force on December 12, 2024, amends the BIA and CCAA to establish, subject to certain conditions, a deemed trust in favour of unpaid suppliers of “perishable fruits or vegetables”[2] (“Suppliers”), where a purchaser of such perishable fruits and vegetables (the “Purchaser”) (i) becomes bankrupt or subject to a receivership proceeding under the BIA,[3] or (ii) applies to a court for the sanction of a compromise or arrangement under the CCAA.[4] This is relevant for secured creditors in an enforcement situation where the Purchaser is bankrupt or subject to receivership under the BIA or has made an application under the CCAA. In such a situation, if the Purchaser has not fully paid its Suppliers, and the perishable produce and its proceeds are subject to the deemed trust, those assets would not be available to secured creditors.

The Amendments provide protection to Suppliers over and above the existing protections under the BIA by prioritizing payment of their claims ahead of the Purchaser’s secured creditors. Until Canadian courts provide guidance on the scope of that priority, however, lenders may struggle to assess their position relative to Suppliers and, in turn, determine whether and how to lend to Purchasers. The key issues, and some suggestions for how lenders can mitigate the resulting uncertainty, are outlined below.

Pre-Existing BIA Priority Regime for Unpaid Suppliers

Prior to the Farmers Act coming into force, Suppliers already had limited priority protections under the BIA.

The BIA provides unpaid suppliers of goods delivered within 30 days of the purchaser becoming bankrupt or subject to receivership with a priority right to repossess such goods.[5] The BIA also gives unpaid farmers, fishermen and aquaculturists a priority security interest on all the inventory of or held by the purchaser for the unpaid amounts owing for their products, provided those products were delivered to the purchaser within 15 days of the purchaser becoming bankrupt or subject to receivership.[6]

Historically, lenders have had confidence in their position vis-à-vis Suppliers protected by these pre-existing BIA provisions. Unlike the priorities established by the Farmers Act, these provisions only apply to goods delivered to a Purchaser within a limited period of time before the Purchaser became bankrupt or subject to receivership. Additionally, Suppliers can face challenges satisfying the conditions required to benefit from these provisions. For example, to benefit from the priority right under Section 81.1 of the BIA, the Supplier must provide a written demand for repossession to the Purchaser, trustee or receiver within 15 days of the day on which the Purchaser became bankrupt or subject to receivership.[7]

Purpose of the Farmers Act

Lawmakers enacted the Farmers Act to advance two main policy objectives. First, they intended the Farmers Act to protect Suppliers, particularly farmers, against non-payment by Purchasers in a sector where the goods being purchased are perishable and, therefore, inherently difficult to recover through repossession and resale.[8] Second, they intended the Farmers Act to align priorities under Canada’s bankruptcy and insolvency regime with the United States of America’s Perishable Agricultural Commodities Act (“PACA”), with the ultimate goal of encouraging the U.S. Department of Agriculture to remove requirements on Canadian companies supplying the U.S. market to post substantial bonds in order to access PACA’s dispute resolution forum.[9] Whether the Farmers Act will achieve those objectives remains to be seen. In the meantime, the Amendments introduce considerable uncertainty for lenders to Canadian purchasers of perishable fruits or vegetables.

Uncertainty and Challenges for Lenders

Until Canadian courts have had an opportunity to interpret the scope and operation of the Amendments, lenders may find themselves grappling with the following areas of ambiguity, among others:

• Scope of “Perishable Fruits or Vegetables”: The Farmers Act defines “perishable fruits or vegetables” to include products that have been “repackaged or transformed” so long as their “nature” remains unchanged. This formulation raises several interpretive questions. For example, what transformation or repackaging would change the nature of a fruit or vegetable such that it falls outside of the scope of the deemed trust? Do common processing techniques that preserve or alter a fruit or vegetable change its nature? What if an alteration renders a fruit or vegetable less perishable, undermining the policy objective of compensating for repossession challenges? It may be difficult for lenders to reserve in their borrowing base for an indeterminate group of assets.

• Supply Chain Reach: The Farmers Act’s protections extend beyond Canadian farmers to many others within the food processing and packaging supply chain. Under the BIA and CCAA more generally, “supplier” refers to a person who has sold to another person (i.e. the Purchaser).[10] Within the context of the Farmers Act, many creditors could qualify as “Suppliers”—for example, wholesalers, intermediaries, and foreign suppliers selling perishable fruits and vegetables into Canada.

• Extension to Proceeds: The deemed trust for Suppliers extends to the proceeds of sale of the perishable fruits and vegetables. While the produce is only in play for as long as it does not spoil, the proceeds of its sale and the Supplier’s priority in such proceeds, in any shape or form, potentially survive indefinitely while the Supplier remains unpaid. Proceeds of sale of any perishable fruits and vegetables may be intermingled with other funds in the debtor’s accounts and traced into other property.

While these ambiguities remain, lenders may adjust their underwriting practices to accommodate these risks and may ultimately be less willing to lend to Purchasers.

Mitigation Strategies for Lenders

Future judicial guidance will be critical in clarifying the consequences of the Amendments. In the interim, lenders to Purchasers may look to safeguarding strategies developed under the U.S. PACA regime, including: [11]

• Excluding, or heavily discounting, perishable fruits and vegetables and proceeds of their sale, when determining what will form part of the collateral of a Purchaser, and interpreting those terms conservatively;
• Taking a borrowing base reserve in an amount equal to payables owing to Suppliers;
• Giving credit only for inventory supplied (in whole or in part, looking up the supply chain) by Suppliers which have not met the requirements for priority protections under the Farmers Act;[12]
• Requiring the Purchaser to provide the lender with an accounts payable aging report and notify the lender when there is an unexpected increase in its accounts payable; or
• Requiring representations, warranties and covenants from the Purchaser protecting against debt outstanding to Suppliers beyond the agreed payment date with such Suppliers.

Looking Ahead

For lenders to Purchasers, the Farmers Act represents a significant shift in the Canadian insolvency and secured lending landscape. Until Canadian courts provide guidance on the scope and operation of the Amendments, we recommend that lenders assess their exposure to Purchasers, adjust their underwriting practices where appropriate and mitigate uncertainty through targeted diligence and transaction documentation on deals in the food packaging and processing industries. Taking these steps may help lenders manage priority risk while pursuing viable origination opportunities that would have otherwise been missed.

If you have any questions with respect to the matters discussed above, please contact Rachel Manno ([email protected]) and James Oliver ([email protected]), or any other member of our Banking & Financial Services practice group.

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.

[1] Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA]; Companies’ Creditors Arrangement Act, RSC 1985, c C-36 [CCAA]; Financial Protection for Fresh Fruit and Vegetable Farmers Act, SC 2024, C 31 [Farmers Act].

[2] BIA, supra note 1, s. 81.7 (7); CCAA, supra note 1, s. 8.1(4).

[3] BIA, supra note 1, s. 81.7 (1).

[4] CCAA, supra note 1, s. 8.1 (1).

[5] BIA, supra note 1, s. 81.1 (1).

[6] Ibid, s. 81.2 (1).

[7] Ibid, s. 81.1 (5).

[8] See Canada, House of Commons Debates, 44-1, No 180 (19 April 2023) at pp. 1829 – 1839 (Scot Davidson), where Scot Davidson, Member of Parliament, discusses the policy objectives underlying the amendments to the BIA and CCAA enacted by the Farmers Act.

[9] Ibid.

[10] BIA, supra note 1, s. 81.7 (1); CCAA supra note 1, s. 8.1(1).

[11] Anthony Cianciotti and Mark Duedall, “The Perishable Agricultural Commodities Act: Suggestions for a Grade A Loan” (27 June 2024), online: ABF Journal <https://www.abfjournal.com/the-perishable-agricultural-commodities-act-suggestions-for-a-grade-a-loan/>.; Sara McNamara and Robert J Heinrich, “PACA’s Priority: A Potential Problem for Secured Lenders” (4 May 2023), online: Reinhart Boerner Van Deuren s.c. <https://www.reinhartlaw.com/news-insights/pacas-priority-a-potential-problem-for-secured-lenders>.

[12] Farmers Act, supra note 1, ss. 2-3, in order to benefit from the Farmers Act’s protections, (1) Suppliers must state in their invoice that they intend to benefit from their rights as beneficial owners of the perishable fruits and vegetables and the proceeds of sale if the Purchaser becomes bankrupt or subject to receivership (or otherwise notify the Purchaser within 30 days of the Purchaser’s receipt of the perishable fruits and vegetables of such intention), and (2) the Suppliers’ invoices must be payable within thirty (30) days or less.