Canada: Is The Death Of Ontario's Bulk Sales Act Upon Us? It Looks Like It May Be

On June 8, 2016 Bill 218 (the Burden Reduction Act, 2016) passed first reading. The Bill is part of a provincial government initiative to, in part, reduce the regulatory burden on Ontario businesses. Schedule 3 of the Bill repeals Ontario's Bulk Sales Act (BSA). The BSA was enacted in 1917, and is intended to protect unpaid trade creditors (i.e. the people a seller is indebted to for goods, money or services furnished for the purpose of enabling the seller to carry on his or her business) from "bulk sales" by a seller of all or substantially all of its assets over a short period of time.

The consequences of not complying with the BSA can be significant, and can include a non-compliant transaction being set aside by a court upon the application of a trade creditor of the seller. As such, the BSA is an important consideration for both the buyer and the seller in an Ontario M&A transaction that is structured as an asset deal.

Typically, the parties to an asset purchase transaction will deal with the BSA in one of three ways:

#1 – Follow the procedure for compliance with the BSA.

Prior to closing the transaction, the seller must disclose to the buyer the names and amounts owing to all the seller's trade creditors, and the buyer must confirm (in accordance with the BSA) that such trade creditors have been paid. A few days after the transaction closes, the seller must file with the court, an affidavit confirming the particulars of the sale and that trade creditors have been paid.

Depending on the number of trade creditors involved, and the timing constraints surrounding getting the deal done, this route is not always practicable.

#2 – Get a court order.

The BSA includes a provision allowing for a seller to apply to the court for an order exempting the transaction from the BSA.

The trouble here is that such an order is only available where the seller can prove that the sale is advantageous to the seller and that it will not impair the seller's ability to pay creditors in full. Furthermore, like option #1, timing constraints surrounding getting the deal done may prohibit the parties from going down this route.

#3 – Waive compliance with the BSA.

Often the buyer and the seller will agree to waive compliance with the BSA in exchange for the seller agreeing to indemnify the buyer in full for any consequences of non-compliance with the BSA. The indemnity here is critical as the mere fact that the buyer and the seller agree to waive compliance with the BSA does not absolve the parties of their obligations under the BSA. The BSA exists to protect trade creditors, who may still challenge a transaction regardless of whether a buyer and a seller have waived its application. Typically this waiver / indemnity is dealt with in the purchase agreement governing the transaction.

Although this option is often determined to be the most practical, it leaves the seller with the risk of having to indemnify the buyer. Furthermore, if the seller is likely to have little or no assets following completion of the sale, the indemnity may be of little value to the buyer.

Ontario is the only remaining Canadian jurisdiction with bulk sales legislation. All other Canadian jurisdictions have repealed similar legislation on the basis that other rights and remedies have been developed for trade creditors and compliance with bulk sale legislation increases transactional costs for both sellers and buyers.

Although repeal of the BSA (if and when finalized – Bill 218 is still subject to further legislative approvals, including the receipt of Royal Assent, before it becomes law) will mean that buyers and sellers no longer have to deal with the challenges presented by the BSA as part of Ontario M&A transactions that are structured as asset deals, such repeal will place more emphasis on the need for general creditors to protect themselves against the risks the BSA is intended to address. For example, despite there being general protections under the Bankruptcy and Insolvency Act and assignment and preference legislation, general creditors who supply goods should be mindful of taking the appropriate measures such as properly perfecting a purchase-money security interest under the Personal Property Security Act (PPSA) in order to benefit from the statutory priority rules. In addition, as part of the due diligence process, buyers in M&A transactions will almost always conduct a PPSA search against the seller of assets, so a PPSA registration will serve as notice to the searching public of the general creditor's interest in the seller's assets.

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