THE RIGHTS OF UNPAID SUPPLIERS
October 19, 2011
Presented by:
Timothy R. Dunn
Partner
Minden Gross LLP
Ryan Gelbart
Associate
Minden Gross LLP
Christine Lafleur
Counsel Corporate/Commercial
Law Group Ontario Power
Authority
Jonathan Lau
Legal Services and Business Affairs
TVO
Presentation
Agenda
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Introduction
Overview of Bankruptcy and Insolvency Act (Canada)
CCAA Plans of Arrangement and BIA Proposals
Rights of Unpaid Suppliers to Repossess Goods
Purchase Money Security Interests
Bankruptcy Application
Consignment Arrangements
Statutes of Interest
Overview of Bankruptcy and
Insolvency Act (Canada)
(“BIA”)
Overview of Bankruptcy
and Insolvency Act
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Federal Legislation
Effective Canada-wide
Deals with personal and corporate Bankruptcies
BIA is now subject to review every 5 years
Overview of Bankruptcy
and Insolvency Act
Ways in which an individual or corporation can become
Bankrupt
1.
2.
3.
Filing assignment in Bankruptcy
An application by a creditor
An unsuccessful proposal to creditors = deemed bankruptcy
Overview of Bankruptcy
and Insolvency Act
• Upon bankruptcy a debtors property automatically vests in trustee
• Secured creditors realize their security outside the bankruptcy process
• The crown and various liens take priority over both secured and
unsecured creditors
Overview of Bankruptcy
and Insolvency Act
Reviewable Transactions
– Arms length creditors – can challenge payments made within 3
months of bankruptcy as fraudulent preference if insolvent at time
of payment.
– Can also review certain transfers of property and other
transactions which occur within one year prior to bankruptcy
depending on circumstances.
• If trustee cannot or does not want to investigate/ challenge, any
creditor can apply for assignment of the cause of action. All creditors
must be invited to join action, and all who do will bear pro-rata costs
and benefits.
Commercial Plans of
Arrangement and Proposals
Commercial Plans of
Arrangement and Proposals
Two Restructuring Options
1.
2.
Company Creditors Arrangement Act (“CCAA”)
Bankruptcy and Insolvency Act (“BIA”)
CCAA Plans of
Arrangement
• Very flexible
• The only requirements
– Debtor must be insolvent
– Aggregate debt in excess of $5,000,000
• The process
– Ex Parte application for initial order
CCAA Plans of
Arrangement
The Initial Order
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Initial 30 day stay of proceedings against debtor and its property;
Order restraining the enforcement or exercise of any rights against
the debtor and its property or against third parties as a result of the
debtors default and/or insolvency;
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Appointment of a monitor
CCAA Plans of
Arrangement
The Initial Order
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Order restraining any person from interfering with or suspending
any rights of the debtor;
Order for the continued provision of essential services to the
debtor;
Power to borrow and/or grant security during restructuring;
Creates professional fees charge against assets of debtor.
CCAA Plans of
Arrangement
Question:
What is the benefit of having both the BIA and CCAA?
Answer:
• CCAA is more flexible
• Better suited for complex restructurings
• BIA = strict time periods and formal requirements
CCAA Plans of
Arrangement
Rights of creditors cannot be compromised unless:
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Creditors have been given a right to vote in the appropriate class
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Creditors’ vote is in accordance with a value ascribed to the claims
by a court approved procedure
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The class has voted by a majority in number and two-thirds in value
in favor of the plan
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The court has sanctioned the plan on the basis that it is fair and
reasonable, with considerable deference being given by the court to
the degree of support of the creditors.
BIA PROPOSALS
Who can make a proposal?
• s. 50(1)A proposal may be made by a business that is:
– Insolvent
– Bankrupt
– The receiver of an insolvent person
– A liquidator of an insolvent person
– The trustee of the estate of a bankrupt
BIA PROPOSALS
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To whom may a proposal be made?
How is a proposal filed?
Notice of intention
Cash flow statement
Monitoring and reporting by the trustee
Post-filing procedures
BIA PROPOSALS
The Statutory Stay of proceedings
• The Automatic stay
• Exceptions to the stay
– Fresh advances
– Hardship
– Other exceptions
• Extending the stay
BIA PROPOSALS
• The Creditors Response
• Mandatory provisions of proposals
• Consideration of proposals
– Classification of creditors
– Proving claims under a proposal
– Meetings of creditors
– Approval of proposals
– Refusal of proposal
– Annulment of proposal
• Certificate of assignment
Rights of Unpaid Suppliers To
Repossess Goods
BIA Section 81.1
Rights of Unpaid Suppliers
Remedy may be available where:
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Suppliers are unsecured creditors
Goods are identifiable
Goods were supplied to the bankrupt
Full payment was not made
Rights of Unpaid Suppliers
Time Constraints on Unpaid Suppliers:
• Must present written demand for repossession in prescribed form
within 15 days of bankruptcy.
• If not paid can proceed under Act to repossess goods.
• Goods must have been delivered within 30 days of bankruptcy/
receivership
Rights of Unpaid Suppliers
Additional Conditions Relating to the Goods:
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Must be in possession of purchaser, trustee or receiver
Must be identifiable
Must be in same state as at delivery
Must not have been re-sold at arms length
Must not be subject to agreement for sale at arms length
Rights of Unpaid Suppliers
What if there was part payment prior to bankruptcy?
Two possible remedies:
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2.
Can repossess proportion of goods up to unpaid amount
Repay amount paid by purchaser and repossess all goods
Purchase Money Security
Interests
(“PMSI”)
PURCHASE MONEY
SECURITY INTERESTS
Two Ways for PMSI to Arise
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2.
Vendor sells goods to the debtor on credit
Lender finances debtors purchase of goods from third party
PURCHASE MONEY
SECURITY INTERESTS
Two Types of PMSIs
1.
2.
PMSI in collateral which is inventory
PMSI in collateral which is not inventory
PURCHASE MONEY
SECURITY INTERESTS
Conditions For Obtaining PMSI in Inventory
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Must receive signed security agreement
Must register financing statement prior to possession
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Errors in registration may invalidate entire security
Prior to possession must provide written notice to other secured
creditors who have inventory as collateral
General rule: Inventory = collateral held by debtor for sale or lease
to third parties.
PURCHASE MONEY
SECURITY INTERESTS
Non-Inventory PMSI
• No Notice requirement
• For tangible collateral must register financing statement before or
within 15 days of possession by debtor (recently increased from 10
days)
• For intangible collateral must register before or within 15 days of
attachment (i.e. value is given, the debtor has rights in the collateral
and the debtor has signed the security agreement)
PURCHASE MONEY
SECURITY INTERESTS
Practical Considerations
• Consider the impact of notice on the bank or other secured creditors
(e.g. does a PMSI constitute a default of pre-existing security
arrangements)
• Obtain waivers
• Description of goods in security agreement should match description
in purchase order, invoices, etc.
• Ensure debtor acknowledges receipt and date of receipt of goods
PURCHASE MONEY
SECURITY INTERESTS
Recent PPSA Amendments
Open for Business Act (Ontario)
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Increased time period time period for non-inventory PMSI
Re-exclusion of sale-leaseback transactions from PMSI definition
Description of collateral on financing statement will limit scope of
check-box classification
PURCHASE MONEY
SECURITY INTERESTS
Responding To A Trustee In Bankruptcy Or Receiver
of the Purchaser
• Trustee and receiver must provide notice of appointment
• Supplier should assert PMSI interest upon receipt of notice
• Get confirmation that collateral will be segregated until claim is confirmed
or agree to sell goods and keep proceeds in trust
• PMSI holder can bring application to determine priority/entitlement and for
order to ensure protection of their interests.
PURCHASE MONEY
SECURITY INTERESTS
Enforcing The PMSI
Making demand and BIA notice
• Prior to enforcement must deliver notice of intention to
enforce (BIA s.244 (1))
– Notice must state:
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Type of security Agreement
Description of collateral
Amount owing to supplier
Statement that supplier may not realize security until expiration of
10 day period after receipt of notice by purchaser unless
purchaser consents in writing after having received notice.
PURCHASE MONEY
SECURITY INTERESTS
Making demand and BIA notice
• When making demand must provide reasonable time for repayment
• Regardless if less than 10 days still cannot enforce until expiration of
10 day period under BIA
• If secured creditor is concerned about collateral it can bring
application under BIA for appointment of interim receiver
PURCHASE MONEY
SECURITY INTERESTS
Selling The Collateral
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Upon default part V of PPSA (rights and remedies) becomes operative
Secured party has right to dispose of collateral
Must take reasonable care of collateral
Must act in commercially reasonable manner when disposing
PURCHASE MONEY
SECURITY INTERESTS
Selling The Collateral
Must provide notice of intention to dispose to:
– The debtor
– Every known owner and obligor of the collateral i.e. guarantor
– Every person with a security interest perfected by possession
which was disturbed by the supplier taking possession
– Every person with a security interest perfected by registration
prior to date of notice
– Every person who delivered written notice of interest in the
collateral prior to debtors notice
 Must provide not less than 15 days notice prior to disposition
PURCHASE MONEY
SECURITY INTERESTS
Selling The Collateral
Content of notice to dispose:
– Description of collateral
– Amount required to satisfy obligation
– Amount of expenses or rough estimate of expenses
– Statement that upon payment payor will get credited for any
rebates or allowances
– Statement that upon payment of amount due and expenses any
person entitled to notice may redeem the collateral
– Statement that unless debt is paid collateral will be sold and
debtor will be liable for deficiencies
– Date, time and place of public sale or date of private disposition
PURCHASE MONEY
SECURITY INTERESTS
Foreclosure On Collateral
• Secured creditor can foreclose on collateral in satisfaction of debt
owing
• Must provide notice to same people as with power of sale
• Notice recipients may object within 15 days
• If an objection is served, the secured creditor can either:
– Sell the collateral
– Require that the person objecting provide proof of interest in the
collateral within 10 days.
PURCHASE MONEY
SECURITY INTERESTS
Foreclosure On Collateral
• Secured creditor can apply for court order allowing foreclosure
notwithstanding objection, if:
– The objection was not made for the protection of the objectors
interests
– The fair market value of the collateral is less than the amount
owing and estimated expenses
• Be sure to get an appraisal(s) to prove fair market value
PURCHASE MONEY
SECURITY INTERESTS
Foreclosure On Collateral
If no objection is made, the secured creditor:
– Is deemed to have irrevocably elected to accept collateral in full
satisfaction of amount owing
– Is entitled to the collateral free of any and all rights an interest of
any other person that was entitled to notice.
– Becomes the owner and can do as it sees fit
Bankruptcy Application
BANKRUPTCY
APPLICATION
Ways In Which A Debtor Can Go Bankrupt
1.
Voluntarily, via assignment
2.
Involuntarily, via court order following an application by secured
creditor
3.
As a result of a failed proposal. Deemed bankruptcy
BANKRUPTCY
APPLICATION
• Debtor must receive notice of application at least 10 days prior to
hearing
• Debtor can contest the application by filing notice at least 2 days prior
to hearing
– If debtor does not contest = bankruptcy
– If debtor does contest a trial will be held with onus on creditor
• Creditor must prove:
– Debtor owes at least $1,000
– Debtor committed an act of bankruptcy within 6 months of
application
BANKRUPTCY
APPLICATION
Acts of Bankruptcy
• Fraudulent conveyance
• If debtor admits or financial statements show inability to pay debts
• Giving notice to any creditors of suspension or plans to suspend
payment of debts
• Ceasing to meet liabilities as they generally come due
BANKRUPTCY
APPLICATION
Other Factors
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The amount of creditors who join the petition
The secured creditors must obtain consent of a trustee to act
The trustee acts for the unsecured creditors
Secured creditors are not affected by a bankruptcy
Government claims as unsecured creditor (other than source deductions)
May be more cost effective for unsecured creditors if trustee also represents
the secured creditors as receiver
• If debts are large, creditor should become inspector
Consignment Arrangements
CONSIGNMENT
ARRANGEMENTS
• Prudent method of protection in event of bankruptcy/ receivership
• Agency relationship
True Consignment vs. Disguised Sale
• True consignment – does not create a security interest thus does not fall
within the scope of the PPSA
• Disguised sale – intended to look like a consignment but creates a security
interest which is subject to the PPSA priorities
CONSIGNMENT
ARRANGEMENTS
Indicia Of A True Consignment
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Title to good remains with consignor;
Keep separate accounts for consigned goods and true sale goods;
Keep consigned inventory separate or easily identifiable;
Keep proceeds of sale from consigned goods separate;
Should account to consignor after each sale;
CONSIGNMENT
ARRANGEMENTS
Indicia Of True Consignment
• Consignee should not have to pay consignor unless consigned goods sell;
• Stating “on consignment” not enough to constitute a consignment;
• Consignee should have right to return and consignor should have right to
demand return of goods at any time;
• Written consignment agreement alone is not enough”
• Ultimately onus on consignor to prove true consignment
CONSIGNMENT
ARRANGEMENTS
Advantages of Consignment Arrangement
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Advantages arise upon bankruptcy or receivership
Supplier can repossess goods even in bankruptcy
Can repossess goods without reliance on BIA or PPSA
Does not fall within scope of PPSA thus not subject to notice of sale
or foreclosure requirements (discussed earlier)
CONSIGNMENT
ARRANGEMENTS
Disadvantages Of A Consignment Arrangement
• Does not work where goods or accounts are not easily segregated
• PPSA secured creditor may be able to follow proceeds where
comingling occurs
• Onus on consignor to prove true consignment exists
Contact Us
Timothy Dunn, Partner
Minden Gross LLP
(416) 369-4335
tdunn@mindengross.com
Ryan Gelbart, Associate
Minden Gross LLP
(416) 369-4172
rgelbart@mindengross.com