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Compliance With The Bulk Sales Act – A Consideration for Any Asset Sale in Ontario

July 15, 2013

The Purchase and Sale of the Assets of a Business: How to navigate the Bulk Sales Act

Background

An investor wishing to purchase all (or substantially all) of the assets of a business in Ontario must consider compliance with the Ontario Bulk Sales Act (the “Bulk Sales Act”). The Bulk Sales Act was originally developed to protect trade creditors from a vendor (or debtor) selling all of his or her assets over a very short period of time and leaving its trade creditors unpaid. In current times, several other techniques can be used to protect trade creditors which are far less onerous in their application than the Bulk Sales Act. However, as the legislation remains enacted in Ontario, the following shall provide an explanation of the operation of and compliance with the Bulk Sales Act.

The Bulk Sales Act applies to any sale of assets of all (or part) of a business, when the sale is not considered part of the ordinary course of business. Broad in application, the Bulk Sales Act defines “stock” as goods or inventory that a vendor disposes of out of the usual course of business; or goods, fixtures and chattels that the vendor uses to operate its business.

Upon concluding the application of the Bulk Sales Act, the purchaser will have to consider how to deal with compliance. The difficulty here is that responsibility is placed on the purchaser to ensure that the vendor’s trade creditors are either paid out in full or have waived compliance. By placing this onus on the purchaser, the Bulk Sales Act increases the scope of the purchaser’s obligations, risk and ultimately the cost of facilitating the transaction.

The risk of non-compliance with the Bulk Sales Act is that any creditor who has not been paid in full may apply to the court for an order against the purchaser. In this case, the court has several remedies open to it, including the power to unwind the transaction and impose personal liability on the purchaser. Furthermore, the Bulk Sales Act does not contain a restriction on the type of creditor who may bring an application or a time limit restricting the period whereby an application may be brought. In consideration of the foregoing, a purchaser entering into an asset transaction will want to either comply, obtain a waiver of compliance or apply for an exemption under the Bulk Sales Act, each of which shall be discussed in turn below. 

Compliance with the Bulk Sales Act

The Bulk Sales Act sets out a procedure for compliance, which involves a series of steps:

1) The Bulk Sales Act requires that the purchaser request a list of all the vendor’s secured and unsecured trade creditors, subsequently verified by an affidavit of the vendor. When dealing with unsecured trade creditors, the vendor must provide the names, addresses and amount of indebtedness. This same information must be provided for secured trade creditors, along with the nature of the security and whether the claims are due at closing.

This is likely the most time-consuming step in the process, as the Bulk Sales Act has its own definitions of “secured” and “unsecured” trade creditors, which can result in ambiguity as not all trade creditors fall clearly within the ambit of either definition. An example of this is the treatment of a lessor of real property as a secured trade creditor. As a result, an examination of each trade creditor must take place to determine who should be listed and in what category.

2) The second step requires that the purchaser ensure all trade creditors that have been listed, are paid. This can be done in one of two ways. The purchaser can either:

(i) verify that the vendor has paid the trade creditors or made the appropriate arrangements to pay them either through affidavit or by including a provision for immediate payment in full; or

(ii) deliver the proceeds of sale to a trustee; however the trade creditors must provide consent to this alternative.

A purchaser will not be required to complete this step if the vendor’s statement shows that the claims of the unsecured trade creditors do not exceed $2,500.00 and also that the claims of the secured trade creditors do not exceed $2,500.00.

3) Finally, within five days of the completion of the asset acquisition, the purchaser must swear an affidavit attesting compliance with the Bulk Sales Act. The affidavit must set out the particulars of the sale and attach the vendor’s trade creditor list as an exhibit.

Waiving Compliance with the Bulk Sales Act

Should the asset sale occur in a scenario where little risk exists that trade creditors may not be paid, the parties can agree to waive compliance with the Bulk Sales Act. However, the purchaser should consider the consequences of this alternative as the risk of a trade creditor not being paid falls squarely on the purchaser. At a minimum, an indemnity from the vendor should be obtained prior to closing. Therefore, in the event that a trade creditor is not paid, the purchaser should be indemnified of any and all liability. However, the waiver of compliance may not be a recommended solution depending on the creditworthiness of the vendor, as the indemnity will provide very little protection in this scenario.

Exemptions

Compliance with the Bulk Sales Act can further be avoided by way of application to the court requesting an order to exempt the transaction from compliance with the Bulk Sales Act. However, the Bulk Sales Act only permits a court to grant such an order in the case where unequivocal evidence is presented to the court which results in a conclusion that the transaction will be advantageous to the vendor and that it will not impede the vendor’s ability to settle its debts with any of its trade creditors.

This option presents a number of cumbersome difficulties from the outset – courts are expensive and time consuming. Not only will this delay closing the deal but also will inevitably increase legal fees as more time is spent on the file. Furthermore, situations where the vendor’s solvency is in question will bring unpredictability to the court’s decision. It is recommended in all but the most extreme examples that one of the two abovementioned options (compliance or waiver thereof) be pursued.

Conclusion:

As mentioned, Ontario is one of the only remaining provinces in Canada to have bulk sales legislation in place. Nevertheless, until the Bulk Sales Act is repealed, it is important to either comply, obtain a waiver or apply for judicial exemption from the Bulk Sales Act. As mentioned, ultimate responsibility to ensure compliance with the Bulk Sales Act is on the purchaser and the treatment of overlooking compliance with the Bulk Sales Act can be both harsh and costly. Perhaps further consideration should given to a share sale to avoid application of this expensive and cumbersome legislation.

Tags: Private Company