The Province of Ontario has been first for a number of things. It was one of Canada's first provinces. It was the first province to pass a law which required drivers and passengers to wear seat belts. It was the first province to pass human rights legislation. Yet Ontario is the last province to repeal bulk sales legislation. Ontario's Bulk Sales Act (the Act) continues to be in effect and continues to surprise purchasers.
The Act is intended to protect creditors from a vendor selling its assets without first paying the debts owed to creditors. The Act protects creditors by imposing certain duties on the purchaser of the assets. If the purchaser fails to comply with the Act, the sale to the purchaser is voidable. The vendor's creditors (or its trustee in bankruptcy) may apply to set aside the transaction. Where this has occurred and the purchaser has taken possession of the assets, the purchaser is personally liable to the creditors for all money or other property realized from the sale or other disposition of the assets.
The Act applies to every "sale in bulk", which includes a sale of stock in bulk made outside the vendor's usual course of business. The definition is broad enough to catch real estate. With such a broad definition, the simple sale of a business may inadvertently trigger the compliance requirements with the Act.
Compliance with the Act may occur in one of three ways: (1) the vendor may apply to a judge for an order exempting the sale from the application of the Act, (2) the purchaser may require the vendor to provide a statement giving the particulars of all amounts owed by the vendor to its secured and unsecured trade creditors, or (3) the purchaser may pay the proceeds of the sale to a trustee appointed in accordance with the provisions of the Act. Each of the above can add unexpected delays and cost to a transaction.
As matter of practice, if a transaction posses little risk of the vendor not satisfying its debts, the parties to the transaction may waive compliance with the provisions of the Act. In such instances, the purchaser usually obtains an indemnity from the vendor for any potential loss or damage that it may suffer as a result of non-compliance with the Act.
I recently had to explain Ontario's Bulk Sales Act to a client. They were mystified about the application of the Act and how it places an onus on a purchaser to ensure that a vendor has paid its creditors. Since creditors are generally protected under bankruptcy, insolvency or assignment and preference legislation, it is a common view that the Act has outlived its use. I can make carbonated drinks at home with a SodaStream machine or surf the internet on my mobile phone because we now live in an age of convenience. Buyers and sellers expect this convenience to continue from their everyday lives to the transactions they participate in. What they do not expect is the possible cost and inconvenience of legislation whose intended goal is dealt with by other legislation.
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