Ripe or rotten? Proposed BIA and CCAA deemed trusts for perishable fruit and vegetable suppliers

Canadian insolvency law currently offers little protection to perishable fruits and vegetable suppliers (Produce Supplier) in the event of an insolvency or bankruptcy of a purchaser of such products. In response, the Canadian House of Commons, through a private members bill, Bill C 280, "An Act to amend the Bankruptcy and Insolvency Act and the Companies' Creditors Arrangement Act (deemed trust – perishable fruits and vegetables)" is fashioning a statutory deemed trust scheme that is intended to provide additional legal protections for unpaid suppliers of perishable fruits and vegetables.

The House of Commons completed its second reading of Bill C 280 on May 17, 2023, and it is currently in committee for consideration.

As Canadian insolvency legislation stands today, unpaid suppliers of any type of goods can recover delivered products after a bankruptcy or insolvency filing, including pursuant to Section 81.1(1) of the Bankruptcy and Insolvency Act (BIA)^[1] through the thirty day unpaid supplier recovery scheme (the Unpaid Supplier Scheme)^[2].

However, given the perishable nature of fruits and vegetables, which can rot quickly and/or be easily discarded, recovery using the Unpaid Supplier Scheme is often impossible for fruit and vegetable suppliers since produce can quickly become unidentifiable and/or change condition. Bill C 280 is intended to provide a statutory scheme for unpaid Produce Suppliers to be able to trigger a priority deemed trust in the fruits and vegetables they sold, and in the sale proceeds from any subsequent sale by the purchaser of those same fruits and vegetables.

The proposed amendments would be adopted into the BIA and the Companies' Creditors Arrangement Act (CCAA)^[3], and are designed to provide Produce Suppliers additional statutory protections without having to rely solely on the Unpaid Supplier Scheme. As the amendments are currently framed, if the deemed trust is triggered, any perishable fruits and vegetables, and the proceeds of subsequent sale therefrom, will not form part of a purchaser's insolvency estate, and a Produce Supplier's deemed trust claim will be elevated into a priority position above secured creditors.

Produce supplier perspective

For a Produce Supplier to rely upon and trigger the proposed deemed trust protections, it will be crucial for one to eventually understand the mechanics of the final legislation. The current draft of the amendments state that when a Produce Supplier has sold to a purchaser of perishable fruits or vegetables ("Produce Purchaser"), the perishable fruits or vegetable, as well as any of the proceeds of sale, are deemed to be held in trust by the Produce Purchaser for the benefit of Produce Supplier, but only if:

1. The Produce Supplier has included in their invoice a notice, or has otherwise given notice within 30 days of the receipt by the Produce Purchaser of the perishable fruits or vegetables, in a prescribed form and manner, informing the purchaser of the Produce Supplier's intention to avail themselves of their right as beneficial owner of the perishable fruits or vegetables and the proceeds of sale in case the Produce Purchaser becomes bankrupt or subject to a receivership.
2. The Produce Purchaser has 30 days or less to pay the entire balance owing to the Produce Supplier.
3. The Produce Purchaser, trustee or receiver does not pay to the Produce Supplier the entire balance owing when it becomes due as provided in the invoice.

It is notable that the definition of "proceeds of sale" under the proposed amendments means "the proceeds from the sale by the purchaser of the perishable fruits or vegetables that are subject to the trust, whether or not those proceeds have been kept by the purchaser in a separate account or have been combined with other funds ." This language supports the argument that the deemed trust triggered under the legislation will not be destroyed in the event sales proceeds from the sale of perishable produce are co-mingled with other funds of a Produce Purchaser. However, the definition does not create a general priority over all of assets of an insolvent Produce Purchaser, but merely creates a deemed trust over the perishable fruits and vegetables, and proceeds of sale therefrom. Accordingly, it would appear that a deemed trust under the amendments could be destroyed if all of the Produce Purchaser's funds become non-existent through their insolvency or otherwise.

Purchaser and secured lending perspective

Although the proposed amendments will be welcomed by some Produce Suppliers, it's expected that purchasers in the perishable fruit and vegetable industry may face new challenges as their access to funding from secured lenders could be diminished if Produce Suppliers can trigger deemed trusts in the sale proceeds of fruits and vegetables. Since deemed trusts in sales proceeds would have priority over secured lenders who take security in all present and after acquired personal property of a Produce Producer (which includes those same sale proceeds), the amendments may cause secured lenders to consider reducing the amount of credit made available to Produce Purchasers.

Given that perishable fruits and vegetables, and the proceeds therefrom, could be deemed trust property based on invoice or notice terms issued by the Produce Supplier, secured lenders will likely want to know the contractual arrangements between a Produce Supplier and Produce Purchaser to be able to include potential deemed trust amounts into their financial covenants and calculations. Such terms to consider would include how & when invoices are issued, and the historical amounts which are invoiced by a Produce Supplier.

A further question arises for secured lenders and Produce Purchasers where a revolving operating line has been extended to a Produce Purchaser. Since the definition of "proceeds of sale" includes proceeds "combined with other funds", a dilemma exists whether sales proceeds, which could become trust property, can/should be placed into an account which automatically pays down an operating line once funds are placed into it. Secured lenders will want to consider this question as part of their continuing risk assessment to avoid any potential deemed trust issues.

Additionally, a question exists whether the deemed trust will be destroyed if sale proceeds are in fact placed into an operating line account and the sale proceeds are automatically debited to pay down the line. In other words, if the sales proceeds are automatically debited by the secured lender, then are the funds to be considered as being "combined with other funds"?

The above questions undoubtedly raise new considerations for secured lenders and Produce Purchasers in their extension and use of operating line accounts.

Breach of trust questions

The amendments leave further unanswered questions whether they only create a priority deemed trust claim in the event of bankruptcy under the BIA, or compromise or arrangement under the CCAA, or whether they also provide a statutory mechanism to argue a breach of trust claim within an insolvency proceeding. It is further uncertain whether the provisions only apply to bankruptcies under the BIA (and not receiverships), and compromises or arrangements under the CCAA (and not CCAA liquidations).

The current draft of the BIA amendments state that:

1. A purchaser, trustee or receiver may apply to the court for directions in relation to any matter relating to this section, and the court shall give, in writing, the directions, if any, that it considers proper in the circumstances.^[4]
2. If a supplier is aggrieved by any act, omission or decision of the purchaser, trustee or receiver, the supplier may apply to the court and the court may make any order that it considers proper in the circumstances^[5].
3. The laws of general application in relation to trusts and trustees in force in the province in which the purchaser resided or carried on business when the purchaser became bankrupt apply to the trust.^[6]

The draft BIA language appears to entail that the general law of trusts, including claims for breach of trust, can apply to a deemed trust for perishable fruits and vegetables, and their sale proceeds, and a BIA court can make broad orders relating to breach of trust claims. It further appears that any theoretical breach of trust claim may potentially only be asserted in a bankruptcy as the current language for proposed s. 81.7(6) BIA only references a purchaser that becomes bankrupt. This specific language may arguably preclude a breach of trust claim in a receivership or BIA proposal proceeding, and appears contrary to other draft language referencing receivers and trustees generally (which would include a BIA proposal trustee)

Meanwhile, the amendments to the CCAA state that the laws of general application in relation to trusts and trustees in force in the province in which the purchaser resided or carried on business when the purchaser applied to the court to sanction a compromise or an arrangement apply to the trust.^[7] This entails that a theoretical breach of trust claim could be asserted in a CCAA scenario under the amendments but only if a compromise or arrangement has been sought by an insolvent Produce Purchaser. A breach of trust claim would arguably not be available in a liquidating CCAA in the amendments current form.

Based on the foregoing, it appears that the language of the statute will require additional massaging in order to provide appropriate legal clarity, in particular whether claims for breach of trust will exist within BIA and CCAA insolvency proceedings and in what types of insolvency proceedings.

Conclusion

The additional BIA and CCAA deemed trust provisions for the benefit of Produce Suppliers will create new protections for them. At the same time, the amendments will produce new considerations & challenges for stakeholders in the perishable fruits and vegetable industry, including Produce Purchasers and secured lenders. It appears that gaps still exist in the proposed amendments which should be addressed before the legislation is proclaimed and comes into force.