By: Robert Dunford & Aaron Goldstein
Nearly 100 years after coming into force in Ontario, the Bulk Sales Act (the "BSA") will soon be repealed. However, as a result of the Ontario Superior Court's precedent setting decision in Cieslok Media Ltd v Clarity Outdoor Media Inc, 129 OR (3d) 589 ("Cieslok Media"), it has arguably never been more important for business owners to be familiar with, and ensure that their business dealings comply with, the BSA while it is still in force.
What is the BSA?
The purpose of the BSA is to protect creditors of a seller against the sale of assets without the seller first satisfying outstanding debts to its creditors. The BSA outlines a number of requirements that must be satisfied in order to proceed with a transaction involving all, or nearly all, of the assets of a business. The scope of the BSA is broad as it applies to any sale of stock in bulk, which occurs outside the usual course of business. Stock is defined broadly by the BSA and includes goods, wares, fixtures and even real estate. If you are a business owner looking to purchase the assets of another business, there is a good chance the BSA will apply to your purchase.
Industry practice of waiving compliance
In an age that places a premium on expediency, the BSA is viewed by many as an outdated obstacle to efficient business practice. For example, section 4 of the BSA requires that, prior to a sale of stock in bulk, a buyer must request a list of all of the seller's creditors as well as details relating to any amounts owing. This often requires a significant expenditure of both time and money. In order to facilitate a more expedient transaction, for years it has been regular industry practice for parties to a sale of stock in bulk to waive BSA compliance and for the seller to indemnify the buyer against consequences of non-compliance.
Waiver of compliance no longer available
Following a landmark decision in Cieslok Media, it is no longer possible for parties to waive compliance with the BSA. In Cieslok Media, a buyer agreed to purchase the assets of a seller. In order to "facilitate timely completion" of the sale, the parties agreed to waive compliance with section 4 of the BSA. An action was brought by a creditor of the seller to have the transaction set aside due to non-compliance with the BSA.
In the face of regular industry practice, Justice Ahktar held that it is impermissible for parties to waive compliance, particularly when the BSA purports to protect not just the interests of the buyer but the interests of the seller's creditors who have no say in any purported waiver. The court observed that the BSA does not contain a mechanism for waiving the statutory requirements of section 4. Moreover, the legislature chose to use the word "shall" in describing the conduct of parties to a sale of stock in bulk, which means that the legislature intended that parties must comply with section 4.
How do I comply with the BSA?
Generally speaking, compliance with the BSA is satisfied where:
- The buyer requests a list of the seller's secured and unsecured trade creditors, verified by affidavit. Included in the list of creditors must be names, addresses, amount of indebtedness and where appropriate, nature of any security and whether claims are due at closing.
- The buyer ensures that listed secured and unsecured creditors are paid. However, a buyer must only ensure that secured creditors are paid if the seller is indebted in an amount greater than $2,500.00. The same is true of unsecured creditors.
- Within five days of completing the transaction, the buyer swears an affidavit attesting compliance with the BSA.
Alternatively, a seller may apply to the court for an order exempting the transaction from compliance. However, a court may only grant such an order where unequivocal evidence is presented that results in a conclusion that the transaction will be advantageous to the seller and will not impede its ability to settle its debts with its trade creditors.
Severe consequences for non-compliance
Failure to satisfy requirements of the BSA may render the transaction voidable and allow for creditors of the seller to apply to the court to have the transaction set aside. It has the further effect of making the buyer liable to the seller's creditors for any outstanding debts.
Conclusion
Following the Cieslok Media decision, it has never been more important for business owners to both understand and comply with the BSA while it remains in force. If you are looking to buy or sell business assets in Ontario, consult with counsel to determine: (i) whether the BSA applies to your transaction, and (ii) how you can satisfy the various requirements of the BSA.